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OVERSIGHT OF THE SEC’S DIVISION 

OF INVESTMENT MANAGEMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS AND 

GOVERNMENT SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 23, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–58 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

October 23, 2015 ............................................................................................... 1 

Appendix: 

October 23, 2015 ............................................................................................... 39 

WITNESSES 

FRIDAY, OCTOBER 23, 2015 

Grim, David W., Director, Division of Investment Management, U.S. Securities and Exchange Commission .......................................................................... 4 

APPENDIX 

Prepared statements: 

Grim, David W. ................................................................................................. 40 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Grim, David W.: 

Written responses to questions for the record submitted by Representatives Poliquin and Hultgren ......................................................................... 48 

(1) 

OVERSIGHT OF THE SEC’S DIVISION 

OF INVESTMENT MANAGEMENT 

Friday, October 23, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS AND

GOVERNMENT SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:15 a.m., in room 

2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. 

Members present: Representatives Garrett, Hurt, Royce, Neugebauer, Huizenga, Duffy, Stivers, Hultgren, Ross, Messer, 

Schweikert, Poliquin, Hill; Maloney, Sherman, Lynch, Perlmutter, 

Scott, Himes, Foster, Carney, Sewell, and Murphy. 

Also present: Representative Velazquez. 

Chairman GARRETT. Good morning, everyone. The Subcommittee 

on Capital Markets and Government Sponsored Enterprises will 

now 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 

Investment Management.’’ I welcome our witness, the Director of 

the Division, Mr. David Grim. 

Without objection, members of the Full Financial Services Committee who are not members of the subcommittee will be recognized for the purpose of questioning the witness. 

I will now recognize myself for 3 minutes for an opening statement. 

Today’s hearing will focus on the oversight of the SEC’s Division 

of Investment Management. This will actually be the fourth oversight hearing that this subcommittee has held in just this last 

year-and-a-half with regard to various divisions within the SEC. 

Mr. Grim, thank you for joining us today for this hearing. And 

also congratulations to you, and some would also say condolences 

to you as well, on your recent appointment to head up the Division. 

Thank you also, of course, for your hard work at the Commission 

for 2 decades, 20 years. 

The Division of Investment Management has broad regulatory 

responsibility over registered investment companies, ICIs, investment advisers, asset managers, and other entities that manage 

money basically on behalf of investors. And this year actually 

marks the 75th anniversary of the Investment Company Act and 

the Investment Advisers Act as well, two statutes that the SEC has 

2 

administered for years as an independent—I note that—agency 

with expertise over our capital markets. 

Though many on this committee, myself included, often disagree 

with some of the actions of the SEC, I believe that there is broad 

bipartisan agreement that the Commission should remain the primary regulator of investment funds and our capital markets, and 

that the Commission’s independence should never be compromised. 

However, recently the SEC’s independence has come under increasing threat from unaccountable and secretive regulatory bodies— 

namely, the FSOC, the Federal Reserve, and the Financial Stability Board—that appear to be on a mission to eliminate risk from 

our capital markets by imposing bank-like regulations on asset 

managers and others that have been deemed part of the so-called 

shadow banking system. 

The FSOC, in particular, has not been shy in the past about 

using its bully pulpit, if you will, to influence or to threaten or cajole other regulators into carrying out its agenda, this despite the 

fact that expertise over the asset management industry and registered investment companies resides not with the prudential regulators, but with the SEC, and specifically with the Division of Investment Management. 

And so to that end, I am encouraged that the SEC is finally beginning to assert its jurisdiction in this area. Last year, Chair 

White laid out a rulemaking agenda for asset managers that so far 

includes proposals for enhanced disclosure, as well as rules for liquidity management by investment funds. Now, I would prefer that 

the SEC draft such new rules as opposed to the FSOC or the Federal Reserve. I do remain concerned that part of the SEC’s agenda 

is still subject to an inappropriate influence by the prudential regulators. 

And so, today, as part of our oversight responsibility, this subcommittee will be closely monitoring the SEC’s actions in this area 

to ensure that they actually reflect the SEC’s threefold mission and 

are not simply an ad hoc response to threats from other regulatory 

bodies. 

Additionally, I am eager to hear today about the Division’s work 

regarding Section 913 of the Dodd-Frank Act, and the Department 

of Labor’s Fiduciary Rule, as well as the efforts that the Division 

is undertaking to just generally to promote capital formation. 

And so with that, Director Grim, thank you again for being with 

us here. And I now yield 5 minutes to the ranking member of the 

subcommittee, Mrs. Maloney. 

Mrs. MALONEY. Thank you so much, Mr. Chairman, for this continuing oversight hearing that you have arranged. And I welcome 

Mr. Grim to our hearing today. 

The SEC’s Division of Investment Management is one of the 

agency’s most important divisions because it regulates the asset 

management industry including investment advisers, mutual 

funds, and exchange traded funds (ETFs). 

Mutual funds and ETFs have been growing at an incredibly rapid pace in recent years. Mutual funds have grown from $4.4 trillion in assets in 2000 to a whopping $12.7 trillion in assets presently. And ETFs have grown from $151 billion in assets in 2003 to 

nearly $2 trillion today. 

3 

There are nearly 12,000 registered investment advisers overseen 

by the Investment Management Division, and these investment advisers report over $62 trillion in assets under management. So it 

is fair to say that the Investment Management Division has its 

work cut out for it. When an industry is growing and innovating 

as rapidly as the asset management industry, it is critical that the 

regulator not get left behind. 

So has the growth come from new products that pose excessive 

risks or that investors don’t fully understand? Has the industry’s 

core infrastructure kept pace with the rapid growth? 

On this score, the Investment Management Division is beginning 

to catch up with the industry. For instance, the Division is working 

on three critical new rules on liquidity management for mutual 

funds, which is an area that some regulators have argued poses a 

risk to the markets. The Financial Stability Oversight Council, or 

FSOC, has expressed concern that without proper liquidity management there is a risk that funds could be forced into a fire sale 

of illiquid assets which would send prices plummeting and harm 

the broader markets. 

It is not entirely clear how big this risk is. But after the financial 

crisis of 2008, prudence is the best course. So the SEC has responded by embarking on a series of rulemakings, led by the Investment Management Division, that are designed to protect investors by requiring mutual funds to bolster their liquidity management practices. And I think the SEC should be praised for these 

rulemakings. Thank you. 

In May, the SEC proposed to enhance disclosures about mutual 

funds’ liquidity which will allow investors to make more informed 

choices and potentially avoid investing in funds that are riskier 

than an investor wants. And just last month, the SEC proposed a 

new rule that would allow mutual funds to use something called 

swing pricing, which would force investors who are withdrawing 

their money from mutual funds to internalize the cost of their withdrawals and thus protect the remaining investors. 

I think that this is a sensible proposal to the extent that the liquidity issues in mutual funds could create a real first-mover advantage, in other words, an incentive for investors to withdraw 

their money first, like on a bank run. Swing pricing has the potential to eliminate that first-mover advantage entirely. 

This latest proposed rule also formalizes and enhances the SEC’s 

longstanding liquidity guidelines for mutual funds, which will provide more consistent and robust liquidity practices across the entire 

mutual fund industry. 

So I am encouraged by the Investment Management Division’s 

work in this area, and I hope that they will continue to press ahead 

with the proposals that Chair Mary Jo White outlined before this 

committee earlier. I look forward to hearing more from Mr. Grim 

about his work on these proposals. And I yield back. 

Thank you very much for coming. 

Chairman GARRETT. The gentlelady yields back. 

I now turn to the vice chairman of the subcommittee, the gentleman from Virginia, Mr. Hurt, for 2 minutes. 

Mr. HURT. Thank you, Mr. Chairman. I thank you for holding today’s hearing. 

4 

Welcome, Mr. Grim. Thank you for joining us today. 

I am pleased that this subcommittee is continuing to focus on 

vigorous oversight and accountability within the SEC. Today’s 

hearing is an important reminder of the critical functions that the 

SEC’s Division of Investment Management plays in our economy as 

the SEC’s mission includes the critical component of facilitating 

capital formation. 

Capital formation is crucial to the success of our economy, and 

as I travel across Virginia’s Fifth congressional district, my district, 

I am regularly reminded of how our Nation’s small businesses and 

startups depend on access to private capital to be successful. 

I am also regularly reminded that well-intended Federal regulation often results in creating unnecessary costs and barriers to capital formation. As you may know, I have been a proponent of legislative initiatives that would encourage economic growth and job 

creation by increasing the flow of private capital to small businesses that are found on Main Streets all across America. Unfortunately, the Dodd-Frank Act, in many instances, has placed a costly 

and unnecessary regulatory burden of SEC registration, specifically 

SEC registration on advisers to private equity funds, while exempting advisers to other similar funds. 

A bill that Representative Jim Himes and I sponsored last Congress passed the House on a bipartisan basis and, if enacted, would 

have eliminated this unnecessary burden and would have put private equity funds on a similar playing field as that of other similar 

advisers. 

The reality is simple: private equity funds and their advisers did 

not cause the financial crisis, and I believe there is general consensus that they are not a source of systemic risk. In my district, 

there are literally thousands of jobs that exist because of the investment by private equity funds. I believe that the treatment in 

Dodd-Frank of advisers to private equity funds suggests that this 

committee review the overall Investment Advisers Act registration 

regime and look for ways to make sure that the laws in this area 

are, in fact, protecting investors and are, in fact, facilitating capital 

formation at a time when capital formation is desperately needed 

in places like my congressional district. 

I look forward to your testimony, Mr. Grim, and I thank you for 

your appearance. 

Mr. Chairman, I thank you. And I yield back the balance of my 

time. 

Chairman GARRETT. Thank you. The gentleman yields back. And 

now, we turn to our witness. Mr. David Grim is the Director of the 

Division of Investment Management at the SEC. 

Again, thank you for being with us today. You will be recognized 

for 5 minutes. And you know, the protocol here: without objection, 

your entire written statement will be made a part of the record. 

Again, thank you. You are now recognized. 

STATEMENT OF DAVID W. GRIM, DIRECTOR, DIVISION OF INVESTMENT MANAGEMENT, U.S. SECURITIES AND EXCHANGE 

COMMISSION 

Mr. GRIM. Good morning, Chairman Garrett, Ranking Member 

Maloney, and members of the subcommittee. Thank you for invitVerDate Nov 24 2008 17:27 Oct 06, 2016 Jkt 099777 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\99777.TXT TERI
5 

ing me to testify about the U.S. Securities and Exchange Commission, and about the Division of Investment Management’s activities 

and responsibilities. 

The mission of the Commission is to protect investors, maintain 

fair, orderly, and efficient markets, and facilitate capital formation. 

The Division promotes this mission through regulating the asset 

management industry. 

A primary function of the Division is to administer the Investment Company Act of 1940 and the Investment Advisers Act of 

1940, and to develop regulatory policy for both investment companies and investment advisers, which play a major role in the lives 

of Americans and our national economy. 

The four core activities of the Division are: one, crafting rulemaking recommendations to the Commission; two, revealing fund 

filings; three, providing interpretive and other advice to the asset 

management industry and the public; and four, monitoring risks in 

the assessment management industry. 

With respect to rulemaking, in 2014 the Commission adopted significant reforms to the rules governing money market mutual 

funds. The amendments are intended to reduce the risk of runs on 

money market funds, provide important tools to help further protect investors and the financial system in a crisis, and enhance the 

transparency and fairness of these products for America’s investors. 

In September 2015, the Commission also adopted amendments 

related to the removal of credit ratings references in the primary 

rule that governs money market funds and in the money market 

fund portfolio disclosure form. 

These amendments give effect to Section 939A of the Dodd-Frank 

Act. 

In May 2015, the Commission proposed new rules and forms, as 

well as amendments to its rules and forms, to modernize the reporting and disclosure of information by registered investment companies. The proposed rules, if adopted, would require registered 

funds to provide portfolio-wide and position-level holdings data to 

the Commission on a monthly basis, and annually report certain 

streamlined and updated census-type information. If adopted, 

funds would report portfolio and census information in a structured 

data format. 

Also in May 2015, the Commission proposed amendments to obtain additional information regarding advisers, including information about their separately managed account business. On September 22, 2015, the Commission proposed a new rule that would 

require open-end funds to adopt and implement liquidity management programs. The proposed amendments also would permit mutual funds to use swing pricing and would enhance disclosure regarding fund liquidity and redemption practices. 

At the direction of the Chair, the Division also is working on 

other asset management-related potential new rules concerning use 

of derivatives by investment companies, transition plans for investment advisers, stress testing for large advisers and large investment companies, third-party compliance reviews for investment advisers, and a uniform fiduciary standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. 

6 

In addition to rulemaking, Division staff responsibilities include: 

reviewing and commenting on the numerous prospectuses, proxy 

statements, and other disclosure documents filed by funds each 

year; continuing to fulfill the Sarbanes-Oxley Act requirement to 

review investment company issuer accounting statements at least 

once every 3 years; issuing no-action letters, interpretive letters, 

and other guidance under both the Investment Company Act and 

the Investment Advisers Act; reviewing enforcement matters that 

concern investment companies and investment advisers; and reviewing applications from entities that request exemptions from 

provisions of the Investment Company Act and the Investment Advisers Act. 

Finally, pursuant to Section 965 of the Dodd-Frank Act, the Division also established a new Risk and Examinations Office. Division 

staff assigned to this office monitor trends in the asset management industry and carry out the Division’s limited inspection and 

examination program. 

In conclusion, thank you again for inviting me to discuss the Division’s activities and responsibilities. I am happy to answer your 

questions. 

[The prepared statement of Director Grim can be found on page 

40 of the appendix.] 

Chairman GARRETT. Thank you. And, again, I appreciate you 

being here. 

So the SEC, in short, would you call it a prudential regulator? 

Is that its mission? 

Mr. GRIM. The SEC has a three-part mission: protect investors; 

facilitate capital formation; and maintain fair and orderly markets. 

It is not a prudential regulator. 

Chairman GARRETT. Okay. So back in January, Fed Governor 

Dan Tarullo said in a speech, ‘‘Both the short-term wholesale funding and asset management examples point to the broader objective 

of developing what we might call or term prudential market regulation.’’ You know Governor Tarullo, and he is one of the more outspoken governors out there. 

Have you ever heard—you have been there for 20 years at the 

SEC or just shy of 20 years—the term ‘‘prudential market regulation’’ before? 

Mr. GRIM. No. 

Chairman GARRETT. No. So my next question was going to be, 

can you explain to me what prudential market regulation is? I 

guess that is a hard question to answer. 

Mr. GRIM. I think that I would say that there has been—as you 

know, FSOC has been looking at the asset management industry 

for potential systemic risks in the asset management industry. As 

part of that look, there has been a focus on how to best approach 

any potential systemic risk. 

Chairman GARRETT. Systemic risk. Let’s bring it to a close on 

this last point. So the rules that have come out from the SEC, 

would you call them prudential market regulation? 

Mr. GRIM. I would call them rules that we think advance the 

SEC’s three-part mission. 

Chairman GARRETT. Three-part mission, okay. 

7 

When we invited you to come here, we sent you a whole list of 

questions or things we wanted to talk about. One of those things 

is your dealings with the FSOC. And I guess to that point, we 

asked exactly what is your involvement with the divisions and so 

on and so forth. And I think you only really gave one—well, maybe 

it was two sentences back on December 18th, basically saying that 

you met with them, Division staff has reviewed comments received 

on its notice, so on and so forth, dealing with their public comments of potential risk to financial stability. You really didn’t flesh 

that out too much in your written statement. 

So can you provide us briefly with a little more detail on how the 

Division is working with the FSOC on the review of asset management products and activities? And specifically, who are you meeting with over there, are they just from the Treasury, is there just 

one group or other groups, who are you meeting with over there, 

answer that as well? 

Mr. GRIM. With respect to FSOC, I think the first point I would 

make is that at the SEC, it is the Chair who is the member of 

FSOC. So in terms of me and my Division’s role, when there are 

asset management issues on the table, we are assisting her in providing our subject matter expertise. 

Chairman GARRETT. So is your staff—I am not talking about her 

now—specifically meeting with them at that point? 

Mr. GRIM. As part of the SEC’s engagement with FSOC, yes, our 

staff meets with the staff of— 

Chairman GARRETT. Okay. And when you are doing that, whom 

are you meeting with? Are you meeting just with folks from over 

in Treasury? Or are you meeting with all of the various agencies 

that are under— 

Mr. GRIM. All of the various agencies and their members. 

Chairman GARRETT. Okay. And lastly on this, I am trying to get 

a picture of how this actually works, is this on a regular basis? Is 

this weekly, monthly? How does that all play out? 

Mr. GRIM. It is sort of as needed. I don’t know that there is a 

regularity to it. But I would say it is as needed on the— 

Chairman GARRETT. I said that was my last question, but I have 

one more question. Are they soliciting input from you on these 

things or is it a two-way street? How does that work? 

Mr. GRIM. We are offering our subject matter expertise on any 

of these issues that are asset management. 

Chairman GARRETT. But are they asking you? Because when I 

talk to some of these folks over there, some of them readily admit 

that this is not their forte, this is not their area of expertise. When 

we delve into it, that becomes very evident. And so we are trying 

to figure out where they are getting their information from. If it 

is not from you, then where is it coming from? 

Mr. GRIM. Yes, I would say they have solicited our views on these 

matters. 

Chairman GARRETT. Okay. I will just go a little bit over my time. 

Proxy advisers, very quickly, earlier on, the Division issued a 

Staff Legal Bulletin 20 regarding proxy advisers voting responsibilities which clarified that investment managers are not obligated to 

vote for every proxy issue for the shares that they manage and 

they have an ongoing fiduciary responsibility. We have gone 

8 

through one proxy season. Can you briefly tell us, have you looked 

at the results on that? And how is that all playing out now? 

Mr. GRIM. You are absolutely right. As you know, we had a Commission roundtable on proxy advisory firms that addressed a number of issues. One of the issues was investment adviser use of 

proxy adviser firms. Part of the response to that was the staff legal 

bulletin that you referenced. 

Chairman GARRETT. Right. Is it having the intended effect or not 

really? 

Mr. GRIM. We are still studying that. The first proxy season just 

ended. My colleagues in the examination unit are doing some 

exams around how it is going. But anecdotally, we think it has 

been having a positive effect. 

Chairman GARRETT. Okay. My time is way over. I will yield to 

the ranking member with some leniency there. 

Mrs. MALONEY. Thank you so much. 

Mr. Grim, I would like to ask you about the assessment management rulemakings. As you know, last December Chair White appeared before this committee and she outlined a three-part pan to 

update the regulatory regime for assessment managers due to the 

significant changes in the industry in recent years. And the SEC 

has now proposed two of the three rules that she promised: enhanced disclosures; and liquidity management rules. But we still 

haven’t seen the third rule yet, which will require transition plans 

for winding down asset managers. 

Can you give us an update on this third rule? When do you expect the staff to be ready to present the Commission with a set of 

recommendations for this rule? 

Mr. GRIM. On stress testing and transition plans, I think one of 

the things the crisis showed us was the importance of planning for 

stress, the importance of planning for transitions. And as a result, 

as you point out, that is an important initiative on our list of priorities. 

With respect to stress testing, it is actually a Dodd-Frank-mandated requirement that we develop stress testing rules for large 

nonbank entities, some of which are the registrants in our world. 

And we have made terrific progress on both. With respect to 

stress testing, as a matter of fact, we have stress testing rules already in existence on money market funds. They were part of the 

money market fund rules that I mentioned in my opening statement. These rules are now looking to develop the right kind of 

stress testing approach for other kinds of large investment companies. We are making great progress on our recommendation to the 

Commission. In terms of timing, obviously that is up to the Commission when they are ready to vote on it. 

Mrs. MALONEY. Do you have a general sense? In a year? Six 

months? Whatever. A general— 

Mr. GRIM. It is hard to know. All I can say is that we have made 

great progress on the recommendations and I am hoping it is going 

to be in the near term. 

Mrs. MALONEY. Okay. I mentioned in my opening remarks the 

SEC’s proposal on swing pricing in my statement, but I want to 

drill down on that a little bit. I understand that other countries, 

particularly in Europe, already use the swing pricing, but I underVerDate Nov 24 2008 17:27 Oct 06, 2016 Jkt 099777 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\99777.TXT TERI
9 

stand that there might be some operational challenges to adopting 

it in the United States. Can you tell us what the SEC found as you 

were developing this proposal, and why did the SEC make swing 

pricing voluntary in its proposed rule? Why not make it mandatory 

as they do in Europe? 

Mr. GRIM. With respect to swing pricing, the Commission unanimously proposed it as part of our liquidity rule. And I think what 

we were trying to accomplish with it is, it is really an intent to 

make fund pricing more fair for all investors. So it is the investors 

getting out, out of the fund through redemptions, they are paying 

the cost that their activity generates for the funds. That makes it 

fair for those investors. It also makes it fair for the remaining investors in the fund. It allocates the cost more fairly. That is what 

we were trying to accomplish. 

You are correct to point out that there are potentially some operational challenges with the swing pricing. We spent a lot of time 

in our release asking questions about those. It is out for public 

comment right now and we are very much looking forward to getting the public reaction to those questions, as well as others around 

swing pricing. 

Mrs. MALONEY. Are there situations where swing pricing could 

harm certain investors? 

Mr. GRIM. We hope not. That is obviously not what we want, investor protection being part of our mandate, and we hope not. But 

that is part of the public comment process. We will hear from all 

sides of the issue and develop our recommendation for the Commission in light of the public comment. 

Mrs. MALONEY. If swing pricing had been in effect, would it have 

changed in any way the economic crisis and the response that took 

place in 2008 where there was a run on the mutual funds and a 

run on a lot of equity products? 

Mr. GRIM. The focus of the most harmful runs during the crisis 

was in the money market fund space in particular. The money 

market fund rules have already been adopted by the Commission 

in response to that. It is hard to say whether taking it to the sort 

of other kinds of funds that are under our—how it would have 

changed behavior or the results of the crisis. But I think I would 

say, again, what we are trying to promote is a fair thing that is 

better for all investors within the fund. So we will see what the 

public thinks of our proposal. 

Mrs. MALONEY. My time has expired. Thank you. 

Chairman GARRETT. Thank you. The gentlelady yields back. 

The gentleman from Virginia is now recognized. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Grim, we know that two of the three components of the 

SEC’s mission, obviously, are to protect investors and to facilitate 

capital formation. So I had a couple of questions as it relates to private equity funds and the registration requirements for their advisers. 

Do you think it is fair to say that private equity funds did not 

contribute to or cause the crisis of 2008? Do you think that is a fair 

statement? 

Mr. GRIM. Sure. 

10 

Mr. HURT. Do you agree that there is a general consensus that 

those funds do not present systemic risk? Is that a fair statement? 

Mr. GRIM. I think with respect to the SEC’s focus on private equity funds, in the Dodd-Frank Act, Congress determined to have 

private equity fund managers register with the Commission. My 

Division sort of did the rules implementing that registration. And 

I think that we think that is a good thing. We think it is good that 

they are registered with us. The protections that come from being 

registered with us are important. 

Mr. HURT. But would you agree that they don’t present systemic 

risk? There is no evidence that the private equity funds present 

systemic risk. 

Mr. GRIM. I guess the ultimate people to determine that would 

be the FSOC. As I mentioned before, I am not the FSOC. So they 

would determine whether they are. I think, with respect, our focus 

has been on investor protection. 

Mr. HURT. But there is generally a different model that they follow that would not lead to cascading losses. And we are talking 

about pretty sophisticated investors. So you can’t say whether you 

think that they present systemic risk or not in your opinion as a 

regulator? 

Mr. GRIM. Again, I think our focus has been on the investor, potential investor protection issues that private equity funds raise. 

Our exam staff has done a number of exams recently. And while, 

of course, they see a range of practice, they have found some things 

in the fee area that have raised some investor protection concerns, 

and we have been particularly focused on those issues. 

Mr. HURT. And understanding full well that the regulations that 

you enforce have in many instances come from Dodd-Frank, this 

particular provision did, with that said, do you, in your role, do you 

feel like you have an ability to tailor the enforcement and rulemaking to reflect the fact that these funds are different than others? 

Mr. GRIM. Yes, we do, and in fact we have. 

Mr. HURT. Can you give us some examples of that? 

Mr. GRIM. Sure. One of the questions that the private equity industry had after these registration rules were adopted was about 

certain instruments that they invest in that raise—there are questions raised about how to custody those instruments. And our staff 

was able to provide some technical advice to them. It is sort of on 

how the custody rule works. And I think it is a good example of 

where us taking a fresh look at our rules, how they apply to a new 

set of— 

Mr. HURT. Do you see opportunities to continue to do that in the 

future? 

Mr. GRIM. Sure. 

Mr. HURT. Chair White recently gave a speech in which she 

talked about the tremendous amount of information that you all 

are now receiving because of this. How is that information helpful? 

Mr. GRIM. What it allows us to do, in addition to having the examination authority that I mentioned before, where we can go into 

a specific firm and look specifically at them, the other kind of information that we now get under the rules that we adopted pursuant 

to Dodd-Frank is broad, industry-wide, so we can look at trends, 

11 

we can look at risks to the extent that they exist, and we can be 

better informed regulators as we— 

Mr. HURT. Have they actually been useful? You say you can look 

broadly across the spectrum and look at risk. Are there examples 

of where that has been useful up to this point? 

Mr. GRIM. Absolutely. As a matter of fact, just the other day— 

Form PF is the form that a lot of these funds file extensive information with us on, and we published for the first time some sort 

of global industry data about the private fund industry. And we 

think it has been good for us. We think it is good for the public. 

And so we are very happy with it. 

Mr. HURT. I think my time has expired. Thank you, sir. 

Chairman GARRETT. The gentleman yields back. 

I now recognize the gentleman from Massachusetts, Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And thank you, Mr. Grim, for your willingness to help the committee with its work. 

Sometimes, this committee can be like a conveyor belt where we 

have a new issue every 7 seconds and we are on to the next rule 

or the next topic. I see in your remarks, your extended written remarks, you talk about the money market funds rule that we adopted back in July of 2014, where we allowed the NAV to float. There 

was a lot of debate here of what the impact of that might be. 

Now, I realize with that type of rule, it is sort of like you are trying to test the seaworthiness of a ship and it is not necessarily easy 

to do when things are calm. But do you have any data for us or 

any experience, complaints, progress reports, lack of progress reports from the adoption of that rule on how that might be going? 

Mr. GRIM. You correctly point out that one of the parts of the 

money market fund rule that the Commission adopted last year 

was the floating NAV provision which applies to a particular type 

of money market fund, institutional prime funds. And those rules 

were adopted by the Commission after— 

Mr. LYNCH. Right. There were a lot of concerns raised from—I 

have some big asset managers in my district, Fidelity among them. 

They do a great job. But there were some concerns raised by them. 

And I am just interested in hearing how things are going. 

Mr. GRIM. Subsequent to passing the rule, the Commission staff 

has put together a team, a sort of money market fund implementation team to monitor for just these kind of things that you are asking about. A number of fund complexes have announced changes to 

their lineups in response to the rules. Some will do the floating 

NAV funds. Some are not going to do the floating NAV funds. 

So there is a lot of work going on implementation-wise within the 

industry. I think that the compliance date isn’t until October of 

2016. So we are still a little way from knowing exactly how it is 

all going to shake out. But we are monitoring it. A lot of work 

being done to implement the rule. 

Mr. LYNCH. So is it too early to tell? Is that what you are saying? 

Mr. GRIM. I think that is fair to say. 

Mr. LYNCH. Okay. That is a fair answer. 

I wanted to ask you about the explosion in the number of funds that are out there. It has gone from I think $94 billion in 1979 to 

something like $17 trillion now. These mutual funds and ETFs are 

12 

a wonderful way for working people to prepare for their retirement 

and they can be a real blessing if they are run properly. 

While the number of funds and the amount of assets has exploded, the number of inspectors and folks on your side who monitor these funds has actually shrunk. I think it is down to one inspector for every, I don’t know, $5 trillion dollars or something like 

that. It is a ridiculous number. And I am just wondering about 

your ability at the SEC, within your department, within your Division, to do the job that you are required to do. Can you talk about 

that a little bit? 

Mr. GRIM. On the investment adviser exam question, the first 

thing I would say is that just about all of the examiners at the SEC 

who examine investment advisers are actually in our examination 

unit, which is not part of Investment Management. Investment 

Management does have a small exam unit which is set up a little 

bit differently which I can talk about in a minute. 

But I think—look, as the Chair has been very clear about, our 

ability to examine advisers in a frequent enough way is a huge— 

Mr. LYNCH. Right now, if I am not mistaken, it is once every 10 

years. That is because you only have so many people to conduct the 

exams. Is that right? 

Mr. GRIM. It is 10 percent of advisers per year. There are different ways to measure it of course. One, it is about a third of the 

assets in the industry that we get to every year. But regardless of 

what the numbers are, the bottom line is that it is a challenge for 

us. This is an issue that has been on our minds for a long time. 

Mr. LYNCH. So we need more people. Is that right? 

Mr. GRIM. That is part of what the Chair asked for in her most 

recent budget request. But there are other things that we are considering. After Dodd-Frank, there was a study that was required 

of the investment adviser exam issue, the SEC staff study, it was 

reported to Congress, and it had three potential options: user fees 

paid for by investment advisers; an SRO for investment advisers; 

and FINRA having sort of exam authority over dual registrants, 

broker-dealer investment advisers. 

That study was turned in. The conversation has continued. Chair 

White more recently has talked about the concept of third-party 

compliance exams as another potential way to create more touches 

on investment advisers. She has asked— 

Mr. LYNCH. My time has expired. I thank the gentleman. I yield 

back. 

Chairman GARRETT. I recognize the gentleman from Texas, Mr. 

Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Grim, thank you for being here this morning. Labor Secretary Perez testified that the Department of Labor has coordinated with the SEC in the development of their proposed fiduciary 

standard. What coordination have you had with the Department of 

Labor? 

Mr. GRIM. SEC staff in my Division and in other places in the 

building have provided our technical expertise to our colleagues at 

the Labor Department about the potential impact of certain choices 

that they are making or may make in their rule proposal. 

13 

Mr. NEUGEBAUER. That leads me to my next question, then. 

What kind of analysis has your Division done of the impact it 

would have on investment advisers who have registered with the 

SEC? 

Mr. GRIM. Chair White has directed the staff, including my staff, 

to develop a recommendation at the SEC for the SEC’s version of 

the uniform fiduciary duty that would apply to investment advisers 

and broker-dealers. As part of developing that recommendation, 

our staff has done extensive analysis around a number of impact 

questions. Going all the way back to following Dodd-Frank, the 

SEC staff did a study about the possibility of recommending a uniform fiduciary duty for investment advisers and broker-dealers. We 

got lots of comments on that study that we considered. 

Subsequent to that, we did a request for information, for further 

information, and got lots of comments on that. So I think it is fair 

to say that SEC staff has been studying this issue extensively. 

Mr. NEUGEBAUER. So you have done an analysis? 

Mr. GRIM. We are doing it right now. The Chair has asked us 

for a recommendation as part of our recommendation to her. But 

this is on the SEC. So I think maybe your question was about 

DOL. 

Mr. NEUGEBAUER. I want to make sure I understand. So you are 

doing the analysis and getting ready to make the recommendation? 

Or you have done the analysis and you are now prepared to do the 

recommendation? 

Mr. GRIM. We are doing the analysis as part of developing a recommendation for the Commission. 

Mr. NEUGEBAUER. I personally, and maybe other members of the 

committee, would like to see that analysis when it is complete because I think the impact it is going to have is going to be an important part of that. Obviously, we are going to want to see your recommendation as well, because this is an issue that has a huge impact, obviously, on investors and the industry as a whole. 

Are you concerned that the investment advisers are subject to 

two different fiduciary standards based on the products that they 

recommend, retirement or not? Is that confusing? And is that productive? 

Mr. GRIM. The way the law works right now—obviously, I am not 

an expert on the Employee Retirement Security Act( ERISA)—as I 

understand it, is that certain investment advisers who have ERISA 

clients are subject to ERISA standards and SEC standards for 

those clients and they are subject to SEC standards for other types 

of clients. 

With respect to, obviously, DOL, as you have referenced, has a 

proposal out that would add—not add—DOL’s—this is where I am 

getting a little bit out of my area of expertise obviously—DOL’s 

thing has a proposal around how its standard would work for 

broker, for example, for broker IRA advice and they are developing 

that. 

As I mentioned at the beginning, we are providing our technical 

expertise about impacts of those choices. But, ultimately, it is up 

to DOL. That is a DOL mandate, a DOL statute, ERISA is a separate statute, and it is going to be up to them what they decide to 

do. 

14 

Mr. NEUGEBAUER. Mr. Chairman, I yield back. 

Chairman GARRETT. Thank you. The gentleman yields back. 

Moving down the row, I recognize the gentleman from Colorado, 

Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. I have a couple of 

questions on business development companies. And then whatever 

time I have left, I am going to yield to Ms. Velazquez for whatever 

questions she has. 

Mr. Grim, thank you for your testimony today. Are you familiar 

with business development companies under the Investment Company Act? 

Mr. GRIM. Yes. 

Mr. PERLMUTTER. What are they quickly, just for the record? 

Mr. GRIM. Business development companies are a specific type of 

investment company that Congress, back in 1980, set up a similar 

but a little bit different regime for, as compared to other funds 

under the Investment Company Act, in recognition of their focus on 

investing in small and emerging businesses. 

Mr. PERLMUTTER. Is it one of the areas that you oversee or your 

Division does? 

Mr. GRIM. Yes. 

Mr. PERLMUTTER. Okay. So my question is, there has been a proposal or at least some conversation here in Congress to take a look 

at the eligible acquisitions of business development companies. 

Seventy percent are supposed to be in small public companies or 

the like. Thirty percent can be—there is more discretion with 30 

percent. And then also the leverage that business development 

companies have, right now it is 1 to 1, equity to lending. The request would be to go to 2 to 1 so that you could have a little more 

leverage. 

Are you familiar with that proposal that has been floated? 

Mr. GRIM. Yes, I am generally aware of some of the legislative 

efforts in this regard. 

Mr. PERLMUTTER. Have you thought about it? What is your reaction to it? 

Mr. GRIM. I would say a couple of things in response to that. 

First of all, one of the reasons that we are very focused on BDCs 

is because they are predominantly held by retail investors. And a 

second point I would make is that they have grown quite a bit, 

from $5 billion to $50 billion in net assets just from 2004 until 

today. 

So looking at it through that lens, there have been bills that 

have been discussed here on the Hill. There was actually one a couple of years ago where Chair White wrote a letter on behalf of it. 

And I think in terms of how she and we approach these things, 

when it comes to BDCs you have issuers that sort of touch on two 

key parts of our mission: the capital formation part of our mission; 

and the investor protection part of our mission. And I think what 

she said in her letter was, while BDCs have the ability to take on 

more leverage already than other types of funds based on the way 

Congress has drawn the lines previously, this bill would add to 

that leverage and that could potentially raise investor protection 

concerns. So that was the gist of the letter that she wrote previously on the bill. 

15 

Mr. PERLMUTTER. Okay. Thank you. 

I have 11⁄2 minutes. Ms. Velazquez, would you like my 11⁄2 minutes? Okay. I will yield back to the Chair. 

Chairman GARRETT. The gentleman yields back. 

Mr. Duffy is now recognized for questions. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Mr. Grim, thank you for coming in today. I believe this is your 

first time before the committee. You are doing a great job. Thank 

you. 

Obviously, you have been at the SEC for over 2 decades, so you 

are very smart, and very well-informed. You were in the bunker 

during the 2008 financial crisis. And since then, you have been able 

to see a concerted focus on systemic risk in the financial sector. 

Both the FSOC and the FSB have been focused in recent years on 

the asset management industry. 

While the SEC is the expert regulator in this segment, the FSOC 

seems to have a heightened interest in the risk that asset managers pose to the broader global economy. It has been speculated 

by some that FSOC has a designation of an asset manager as a 

SIFI at some point in the future. 

Now, we know that banks and asset managers operate under distinctly different business models. Do you feel like FSOC members 

sufficiently understand the asset management industry if they are 

going to be designating them potentially as a SIFI? 

Mr. GRIM. With respect to FSOC, I think that it is important 

that as Congress set up FSOC, it has all of the financial regulators 

together. And the SEC, with Chair White being the member, it is 

critical for her to be there offering her subject matter expertise on 

all issues under sort of SEC market issues, but including the asset 

management issue that, obviously, I am most familiar with. 

Mr. DUFFY. I know you are very familiar with it. But it goes back 

to my question, do you think the FSOC members sufficiently understand the asset management industry? It is kind of a yes-or-no 

question. You are doing a good job of not really answering the 

question. Kudos. Do you think they are well-suited? 

Mr. GRIM. It is hard for me to comment on their level of understanding. But I think the main thing I would emphasize is we 

are—Chair White is at the table. The SEC is involved in these conversations about asset management sharing. 

Mr. DUFFY. Do you think they have your kind of knowledge or 

the Division’s knowledge? Are they as well-versed on these issues 

as you are and your team is? 

Mr. GRIM. Well, no. 

Mr. DUFFY. I would agree with that. Good answer. 

Now, you had indicated, I think to Mr. Garrett, that you offer 

your subject matter expertise to FSOC. Do they actually take your 

advice? 

Mr. GRIM. When it comes to the asset management issues, we 

have been at the table. We have been offering our expertise. 

Mr. DUFFY. Do they take the advice? 

Mr. GRIM. I think it is fair to say that they— 

Mr. DUFFY. Kind of yes, kind of no? 

Mr. GRIM. Look, sometimes we agree, and sometimes we don’t 

agree. 

16 

Mr. DUFFY. Okay. Fair enough. 

Mr. Hurt asked you this question, and I want to come back to 

it. In all of your expertise, and you agreed and I would agree with 

you that you are kind of the guy in this space, do you believe that 

the asset management industry poses a systemic risk to the financial sector? 

Mr. GRIM. That is ultimately a determination that is up to 

FSOC. 

Mr. DUFFY. Do you think that is a good idea? As an SEC guy, 

being there for over 20 years, who knows this sector better than 

anybody else, is it the SEC’s position that you should cede this territory to FSOC and they are the ones best positioned to make this 

determination because you and the Division don’t know? Do you 

think that is the best—is that your position at FSOC? Is that Mary 

Jo White’s position? 

Mr. GRIM. Obviously, you would have to ask Mary Jo what her 

position is. I think that what I would say is, look, the crisis, in my 

view, showed the importance of the financial regulators having a 

mechanism to sit and share views and that is what Dodd-Frank set 

up for the— 

Mr. DUFFY. I know. 

Mr. GRIM. But obviously, as part of that, we view ourselves as 

the technical experts on market issues generally and on asset management issues. 

Mr. DUFFY. And I hope that the SEC would be a little concerned 

about mission creep and allowing decisions to be made with the 

technical experts, which is with you, as opposed to folks who do a 

lot of different things within FSOC but don’t have your technical 

knowledge. 

I would ask you, do you think there was some concern when the 

OFR came out with their report on asset management, how bad it 

was and how many people disagreed with the assessment? Does 

that give you some pause with regard to FSOC’s capabilities? 

Mr. GRIM. I think that the recent approach by FSOC where they 

have sort of shifted to a focus on activities and issued a request for 

comment on that focus, I think we view that as a shift consistent 

with how— 

Mr. DUFFY. Okay. Can I ask one more question, with a quick answer, yes or no? Do you think that Governor Tarullo fully understands the intricacies of the assessment management industry and 

is working to achieve the best outcome for U.S. companies? Yes or 

no or maybe? 

Mr. GRIM. I think I would say that the SEC with Governor 

Tarullo and the other—any of the FSOC members, so to speak, we 

are sharing our views with him, sharing our subject matter expertise with him. 

Mr. DUFFY. I will take that as a no. 

I yield back. 

Chairman GARRETT. The gentleman is recognized with a little bit 

of wiggle room on the end of it. 

Mr. SCOTT. Thank you, sir. 

Mr. Grim, you are the Director of the Division of Investment 

Management for the U.S. Securities and Exchange Commission, 

correct? 

17 

Mr. GRIM. Yes. 

Mr. SCOTT. And are you aware on the fiduciary issue, that we 

wrote into Dodd-Frank that it was the domain of the Securities and 

Exchange Commission to come up with a uniform definition, if 

need be, of ‘‘fiduciary?’’ 

Mr. GRIM. Yes. That is right. That is part of Dodd-Frank. 

Mr. SCOTT. Are you also aware that we wrote that and it is clearly written in Section 913 of Dodd-Frank? 

Mr. GRIM. Section 913 is the provision that gives the SEC the 

authority to adopt uniform fiduciary— 

Mr. SCOTT. So the issue becomes, why is the Labor Department 

getting into your bailiwick and doing what they are doing in such 

a disruptive manner when we clearly—I was here, I was intimately 

involved in that issue, very intimately involved in the writing of 

Dodd-Frank, and we expressly put that in. 

You regulate the financial advisers. Nobody knows more about 

investment management than the Securities and Exchange Commission; it is for that purpose. 

So, Mr. Grim, I put to you, why is the Labor Department dabbling in this issue and bringing about such great consternation and 

confusion and threatening the ability, particularly of low-income 

communities, low-income and low-income small businesses, from 

getting the kind of financial advice that they need? Why are they 

doing this? 

Mr. GRIM. The question of why DOL is doing it is obviously better directed at DOL. It is sort of up to them what they do. But I 

would say that we, pursuant to the Section 913 authority that you 

referenced, the Chair has announced her support for pursuing the 

uniform fiduciary duty. She has directed staff at the agency, which 

includes my staff, to develop a recommendation, and that is what 

we are doing. 

Mr. SCOTT. Yes, but you see why the people in this country are 

getting so fed up with what is happening up here in Washington 

where you have this kind of invasion of scope of practice and responsibility where we clearly put into one law. That is your responsibility. And then you have another agency coming out of the blue 

and putting in something else that has tremendous unintended 

consequences when we are working very hard to get wealth building and to get people to save and to be able to do that in a respectful way. 

So I would hope that you would take back words of encouragement from me to Chair Mary Jo White that she needs to press hard 

and fight for her responsibility and not have it taken away from 

her from where we gave it to her in this committee when we wrote 

Dodd-Frank and the President of the United States gave it to her 

when he signed Dodd-Frank. And the Labor Department is clearly 

out of bounds. Would you pass that word of encouragement to her? 

Thank you. 

Now, the other question I want to ask you is, you are proposing 

a rule that is requiring investment advisers to create and maintain 

transition plans for major disruptions in their businesses. I was 

wondering if you had any idea of what the overall impact of this 

would be, particularly on the smaller investment companies? 

18 

Mr. GRIM. The impact on the smaller advisers is obviously something that we are studying very carefully as we develop a recommendation for the Commission in the transition area. There are 

rules on the books right now for investment advisers that were developed post-9/11 about certain transition issues, and what we are 

trying to do as part of this new rulemaking is evaluate whether 

there are other types of transition events that those rules should 

be expanded to cover. And clearly, in so doing, one of the things 

that we need to understand and ask for public comment and advise 

the Commission on in recommending whether they propose a rule 

is the impact on small advisers. 

Chairman GARRETT. I thank the gentleman. 

Mr. Ross is now recognized for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. Grim, thank you for being here. It is refreshing to have your 

testimony because rarely do we have the ones who actually look 

under the hood and try to make it run on all cylinders and we have 

a chance to talk to them. 

Specifically, and following up on my colleague from Georgia’s 

questioning with regard to the Department of Labor’s fiduciary definition, we are giving rise to a whole new cause of action. We are 

creating a situation that will eliminate the possibility to have the 

small investors to have adequate and appropriate advice. 

My question to you is, to what degree has the SEC contacted you 

and advised you or you advised them as to what would be the appropriate response to that in terms of the rulemaking that the SEC 

is going through on a fiduciary rule? 

Mr. GRIM. So, the DOL— 

Mr. ROSS. They have reached out to you, right? They are looking 

to you? You are the technical expert here. 

Mr. GRIM. We have provided our subject matter expertise to 

them in conjunction with their development of the rule. I think 

that what we are doing as part of that is talking to them about our 

take on potential impacts on investors. 

Mr. ROSS. And the impact, for example, on fair compensation as 

opposed to reasonable compensation, and if the SEC comes down, 

has a different definition for fair compensation as opposed to the 

reasonable compensation that can be charged, there is going to be 

a conflict there, how do you resolve that between the two rules? 

Mr. GRIM. One of the issues in the fiduciary debate, whether it 

is the DOL side of it or the SEC side of it, is absolutely compensation and fee structure. Right now, investors have access to an investment adviser compensation structure, which is typically assets 

under management. On the broker side, it is typically Commissionbased. And as we have studied potential impacts of—as part of the 

SEC rulemaking process, we have been very focused on making— 

in developing a recommendation for the Commission, being very 

conscious of those compensation issues. 

Mr. ROSS. Reasonable compensation is important, and I think a 

lot of my friends in this industry have built a career, and they, of 

course, have a livelihood that is dependent upon their investors 

being successful. And so I would think that they are more 

incentivized to give the proper advice than would be some bureauVerDate Nov 24 2008 17:27 Oct 06, 2016 Jkt 099777 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 K:\DOCS\99777.TXT TERI
19 

crat in Washington, D.C., telling what they can charge or can’t 

charge and what advice they can and can’t give. 

Let’s talk briefly about FSOC’s review of asset managers, because I think that is important. I have listened to your testimony 

today, and I can’t really glean from the fact that you may believe 

that asset managers are really systemically important financial institutions. Am I wrong on that? 

Mr. GRIM. I think the way that FSOC— 

Mr. ROSS. Those are conduits. They are really conduits. They are 

managing money. They are managing assets. 

Mr. GRIM. Ultimately, the determination of whether an asset 

manager is systemic is up to FSOC. 

Mr. ROSS. But has FSOC reached out to you? Let’s face it, they 

need to be looking to where the best expertise is, and I am assuming from your testimony and your background that is you. Have 

they reached out to you and said, ‘‘Hey, what do you think is good 

criteria to determine whether an asset manager is a SIFI?’’ 

Mr. GRIM. Chair White has been very involved, as I understand 

it, in— 

Mr. ROSS. Let me ask you more directly: Do you have an opinion, 

based on your experience, as to what it would take, what criteria 

would need to be fulfilled in order to constitute an asset manager 

as a SIFI? 

Mr. GRIM. I think that I would say it is a little too early to say. 

I think right now the focus— 

Mr. ROSS. But if there is—there has to be some criteria. It can’t 

just be such a subjective labeling that you simply say, ‘‘Okay, this 

is what you are and we can’t justify it, but good luck getting out 

of it,’’ which is what the state of the law seems to be right now. 

So, again, you are the expert, would you have an opinion as to 

what it would take in order to justify the labeling of an asset manager as a SIFI? 

Mr. GRIM. I think it is fair to say that if that determination is 

going to be made, it would be important to have criteria in place. 

But right now, of course, the focus at FSOC has been on this activities and products. 

Mr. ROSS. Would it not also be good, if there is such criteria, that 

it be allowed to be shared with the asset manager so that they can 

make corrective action to make sure that they either don’t become 

labeled as such or at least have an exit ramp so they can get out 

of that labeling over a period of time? In other words, transparency 

in the criteria application. 

Mr. GRIM. Again, I would say, obviously that is going to be up 

to FSOC. 

Mr. ROSS. Again, you are the expert, just in your opinion, 

wouldn’t that not be good? 

Mr. GRIM. I think in my— 

Mr. ROSS. In terms of due process, would it not be good? 

Mr. GRIM. In my opinion, I think that we just—right now the 

focus hasn’t been on designation. 

Mr. ROSS. Just say, yes, it is okay. 

Mr. GRIM. It has been activities. And I think that has been a 

shift consistent with how the SEC— 

Mr. ROSS. Thank you, Mr. Grim. My time is up. 

20 

Mr. GRIM. Thank you. 

Mr. ROSS. I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Carney? 

Mr. CARNEY. Thank you, Mr. Chairman. 

Thank you, Mr. Grim, for coming in today and for answering the 

questions that we have. 

I was part of a group of members of the committee on this side 

of the aisle, I think, obviously, I think it was also a bipartisan effort to encourage the Department of Labor and the SEC to develop 

the fiduciary standard, uniform fiduciary rule together in a consistent kind of way. That didn’t happen. That was several years 

ago. And the Department of Labor has proposed its rule and they 

are taking a lot of feedback. They are getting a lot of input. 

And you are in the process, I understand what you have said and 

the information that I have, in developing the standard from the 

SEC’s perspective. Is that right? We have had a lot of conversation 

about it over the last— 

Mr. GRIM. Yes, that is right. 

Mr. CARNEY. —hour or so. Could you give me a timetable for 

that? You mentioned you are doing a study now. What does that 

study look like, and what is your timetable? 

Mr. GRIM. I think the timetable will ultimately be up to the Commission to vote on the rule. I think that our direction from the 

Chair has been to develop a recommendation for the Commission’s 

consideration, and that is what we are doing. We are studying very 

hard some of these impact questions that we have been talking 

about here because we want to fashion the recommendation in the 

best way possible for investors and— 

Mr. CARNEY. Do you have a sense as to how long that is going 

to take before you will have a recommendation ready? 

Mr. GRIM. I don’t. 

Mr. CARNEY. The reason I ask the question is because the Department of Labor has its proposal out, and it is getting a lot of 

feedback. Have you looked at that? I guess you have because you 

are providing some technical advice and expertise for them, right? 

Mr. GRIM. Yes, I am aware of it. 

Mr. CARNEY. What do you think? What do you think of the best 

interest contract and some of the things that are in it? There has 

been some concern raised about process-wise, how it would all 

work. Have you looked at those? 

Mr. GRIM. I do know that the Labor Department has gotten a lot 

of comments on that issue and a number of other issues with its 

proposal. I think our focus, the SEC staff focus on providing its 

comment or expertise on the proposal has been around potential 

impacts of choices that they are making in— 

Mr. CARNEY. Is your sense that what they have proposed, and 

given the feedback they have gotten and their expressions of willingness to make certain changes, do you think they are heading in 

the same direction of where your recommendation will go to the 

SEC? 

Mr. GRIM. I honestly don’t know. 

Mr. CARNEY. Part of the reason for our letter in the first instances was that you didn’t have two widely differing approaches 

21 

to this really important uniform—the whole point of it was to get 

uniformity, right, not to have a separate set of rules apply to different groups of people. 

Mr. GRIM. I would point out that ERISA and the Investment Advisers Act, in terms of fiduciary, already have differing approaches— 

Mr. CARNEY. Right. 

Mr. GRIM. —to what our fiduciary duty does, so that is something that has to be considered as part of this whole thing. 

Mr. CARNEY. One of the concerns that has been raised is that 

small balance accounts will be orphaned because of the changes 

maybe in compensation allowances would mean that small accounts would be orphaned. Is that something that you are looking—the people who have those accounts wouldn’t get any advice, 

is that something that you are looking at as well in your analysis? 

Mr. GRIM. That is something that is very important to us for 

sure as part of our effort. 

Mr. CARNEY. You have the, potentially, the small IRAs under 

your jurisdiction, right? 

Mr. GRIM. What we did both as part of the study that the SEC 

staff provided to Congress 6 months after Dodd-Frank and in the 

request for information that we issued to the public a couple of 

years after that, we have been asking for all kinds of data on— 

well, a number of issues, but that issue in particular. And my staff, 

Division of Trading and Market staff, which is the broker-dealer 

experts, and our Division of Economic and Risk Analysis, our economic experts, we are all looking at that. 

Mr. CARNEY. One of the responses that we heard is that there 

will be new models will emerge in the marketplace. What is your 

view of that? And it is already happening, by the way. 

Mr. GRIM. Yes, I think it is a little too early to say. Obviously, 

we are just developing our recommendation. So, it is going to be 

a little too early to say since our recommendation hasn’t even been 

voted on by the Commission. 

Mr. CARNEY. Thank you. Good luck with it. 

I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Huizenga? 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Quickly, I want to talk about proxy advisory firms, but I do want 

a quick clarification. When asked by my colleague from Florida 

about the Department of Labor and the fiduciary standards and 

about your involvement and whether the Department of Labor had 

asked for help, you said, ‘‘We have shared the information.’’ Did the 

DOL actually ask you proactively for that help? 

Mr. GRIM. Yes, I think so. 

Mr. HUIZENGA. Okay. All right. Because I can share information 

with a lot of my constituents or share information with kind of anybody and that means I just sent the email or I sent it and I don’t 

where it went. Do we know who it actually went to at DOL? 

Mr. GRIM. I don’t know the details, but I do know that there has 

been— 

22 

Mr. HUIZENGA. Okay. I am going to do a follow-up written question on that because I would like to know who actually requested 

it and then who sent it and who received it. So thank you. 

The two largest proxy advisory firms together control about 90 

percent of the proxy advisory industry. In your opinion, do you believe the SEC’s rule adopted in 2003 which permits an institutional 

adviser to rely on an ‘‘independent third party’’ is still appropriate, 

given that statistic? 

Mr. GRIM. The Commission and the Division have been very focused on proxy advisory firms. In recent years we had a roundtable, not too long ago, where we brought in different stakeholders 

to share their views, and got a lot of good public comment. And 

subsequent to that, staff in my Division, as well as staff in the Division of Corporation Finance, sort of jointly put together a staff 

bulletin on some of the issues around proxy advisory firms. 

The focus of that guidance has been on a couple of different 

things. One is that the proxy advisory firms that you mentioned, 

how they disclose their conflicts. And then another piece of it is 

how investment advisers who use proxy advisory firms oversee 

those proxy advisers. 

Mr. HUIZENGA. Could you explain how? Because I got a quote in 

here, so from that bulletin, I believe, you are talking about in considering whether to obtain the assistance of a proxy advisory firm, 

an investor adviser should ascertain the proxy advisory firm’s ‘‘capacity and competence to adequately analyze proxy issues,’’ and 

‘‘identify and address any conflicts of interest?’’ 

Exactly what does that mean, though? What do you mean by 

that? 

Mr. GRIM. I think there have been concerns expressed about investment advisers completely outsourcing to these proxy advisory 

firms their proxy voting responsibility. And I think the point of 

that guidance is to provide SEC staff views on what advisers 

should be thinking about should they choose to employ a proxy advisory firm. 

Mr. HUIZENGA. Do you clearly do that, though, in that bulletin? 

That seems to have brought some question to that. 

Mr. GRIM. I think it is pretty clear. 

Mr. HUIZENGA. Clarity is in the eye of the beholder? All right. 

Mr. GRIM. Yes, right. 

Mr. HUIZENGA. And do you believe that the independence of a 

proxy adviser is also important for an investment adviser to consider when considering whether to obtain the assistance of a proxy 

advisory firm? There has been a lot of debate about these firms and 

their inherent conflicts of interest, as you have kind of been pointing out, and are you concerned that it is not appropriate for investment advisers to use these proxy firms as independent third parties when developing recommendations for their proxy voting? 

Mr. GRIM. Yes, I think it is, as that guidance that we are talking 

about pointed out, I think it is important that with respect to proxy 

advisory firms they provide good disclosure about material conflicts 

that they have. 

Mr. HUIZENGA. So do you believe the SEC needs to provide greater clarity on what it means to be an independent third party? 

23 

Mr. GRIM. That is something that we are studying. We just went 

through the first proxy season subsequent to the issuance of that 

guidance, so I think we are studying that and the impact of the 

guidance, and we will decide from there whether more needs to be 

done. 

Mr. HUIZENGA. What is sort of the timeframe then for that analysis? Because, again, that does get to the lack of clarity or clarity 

as to what an independent third-party proxy is and those definitions. So what sort of timeframe is that on? 

Mr. GRIM. It is something that people are focused on right now. 

Hard to predict when that analysis will be finished. 

Mr. HUIZENGA. Is that weeks or months or years? 

Mr. GRIM. It is hard to say. I would hope not years. But beyond 

that, it is hard to say. 

Mr. HUIZENGA. Okay. Mr. Chairman, my time has expired. 

Thank you. 

Chairman GARRETT. Thank you. 

The gentleman from Connecticut has rejoined us and is recognized for 5 minutes. 

Mr. HIMES. Thank you, Mr. Chairman. 

And thank you, Mr. Grim, for being with us. I have two categories or two questions, really. 

The first is, you note in your testimony that in December of 

2014, the FSOC released a notice seeking public comment on risks 

to financial stability from asset managers, and you further note 

that the staff has reviewed the comments received. It is a topic of 

some interest to a lot of us about systemic risk that may or may 

not be associated with asset managers. 

I know you have sort of addressed this a little bit, but I wonder 

if I could get you to characterize these comments and any initial 

conclusions or preliminary conclusions or thoughts that you might 

have on the comments as a whole and whether there is a sense 

that there is systemic risk emergent from asset managers. 

Mr. GRIM. I think as a general matter the comments focused— 

well, the request for comment asks for comment on sort of a number of different specified activities in the asset management industry, so leverage, liquidity, operational risk, those kind of things. So 

I think the comments, we got them from a wide—or I should say 

FSOC got them from a wide range of commenters. And I think that 

in terms of the work that is ongoing right now at FSOC, they are 

kind of assessing those comments and figuring out what is the appropriate next step in light of those comments. 

Mr. HIMES. Okay. Thank you. 

My other question concerns private funds. I worked with Congressman Hurt on some concerns we had in Dodd-Frank about the 

registration requirement for relatively small funds, and I think 

Congressman Hurt and I were concerned about two things. 

One, those funds obviously are, by definition, held by institutional or other very sophisticated investors. I think we are also concerned about the sheer amount of data that the SEC would receive. 

Legislation we put forward ultimately didn’t go anywhere, but I 

was saddened to see, subsequently to that, that the SEC really focused in on the issue of fees, and in particular transparency of fees 

in that particular community. And I commend the work you have 

24 

done in highlighting some absence of transparency, to put it that 

way, in that community. 

So I am wondering—I am very interested in the question of these 

are obviously fairly complicated partnership agreements. There is 

an opportunity to hide fees and cash flows and to be less than 

transparent about what investors are and are not getting back. So 

I am wondering if I can get you to talk a little bit about whether 

the issues that have emerged in the private fund arena with respect to transparency on fees, are we talking about a few bad actors? Are we talking about behavior that is systematic in that community, is it common? How concerned is the staff that there is an 

absence of transparency in those investment vehicles? 

Mr. GRIM. As you point out, Dodd-Frank had us, had the SEC 

develop some rules to implement the registration of a number of 

private fund advisers, including private equity advisers subsequent 

to that. So we did those rules, and now our exam staff—that is not 

me; that is the exam office—have been examining a number of 

these firms. 

And one of the reasons that they are doing so is that although 

private equity funds are generally sold to sophisticated investors, 

a number of those investors are pension plans that have your average retail investor worker in them. So there is a retail investor 

component to them. 

In terms of what they have found, I think it is fair to say they 

found a range of practice. They found on the sort of concerning side 

of things, they have been very focused on, as you point out, fees, 

transparency of fees, and they have been—my colleagues in OC 

have been very public about some of the concerns that they have 

seen and in certain cases have referred those cases to our Enforcement Division where enforcement has taken action. 

Mr. HIMES. I don’t have that much time left, but, again, you 

watch this pretty closely. How concerned should we be that these 

complicated vehicles, private funds in particular, that an absence 

of transparency is a structural problem rather than a problem with 

a number of bad actors? 

Mr. GRIM. I think we at the SEC generally, and me specifically, 

see the benefits of registration under the Advisers Act, the transparency that comes with it, the examination authority that comes 

with it, and we think that is very important. 

Mr. HIMES. Okay. Thank you. 

And I yield back the balance of my time. 

Chairman GARRETT. The gentleman yields back. 

The gentleman from Arizona, Mr. Schweikert, is recognized. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Mr. Grim, let me make sort of a circle back just because you 

have seen in a lot of the conversations here a concern about the 

harmonization of who regulates whom, but the impact of it. And if 

I continue to look at the goals or the mission statement of the 

SEC—protecting investors, maintaining fairness, orderly markets— 

so when you are actually looking at what many of us believe is a 

crisis in the retirement world, the number of our brothers and sisters who are heading towards retirement with almost no savings, 

no assets set aside, when you are promulgating rules, when you are 

25 

providing information to the Department of Labor, is there at least 

the discussion of, hey, accessibility? 

This is going to go back to the conversation you and I had before 

the hearing of other platforms to provide information to get more 

of our public into the investor class. Do you take into consideration 

saying, here is the rule sets because we are trying to make everyone safe, but now we have just created another barrier, whether 

that be cost or bureaucracy, for the population to participate as investors? 

Mr. GRIM. Investor access to investment advice is a cornerstone 

of what we are trying to accomplish with both our SEC work on 

fiduciary duty, uniform fiduciary duty, and in our sharing of expertise with the Labor Department, a lot of it is around exactly that 

point. 

And we have been very fortunate by publishing our study for 

Congress, pursuant to Dodd-Frank on the fiduciary duty, and then 

doing the additional request for information that we did on the uniform fiduciary duty, we have gotten a lot of input about just that 

point, and we are looking very carefully at it. It is not just the experts in Investment Management on advisers and Trading and 

Markets on broker-dealers, but our economics, our Division of Economic and Risk Analysis. 

Mr. SCHWEIKERT. Mr. Grim, let’s sort of do a sidestep, because 

it is off in a class. Let’s say I have someone who is out there working their heart out and they are only setting aside $25 a week, or 

$50 a week, how do they get advice? We are seeing a number of 

the investment adviser organizations out there try to bifurcate, 

saying, ‘‘Hey, we are going to give you advice and you can log in 

using your pocket supercomputer to get information.’’ 

Are you working to harmonize that? Is there at least a discussion 

of, how do we make this information very egalitarian, but not also 

a cascade of legal events because you didn’t put a period in the 

right place? I have a real concern that as we do more and more 

of this, one of the outcomes of Dodd-Frank is we have cut off so 

many people from being able to access advice. 

Share with me, does it at least come up in conversation? 

Mr. GRIM. Absolutely. So as an example, some of the feedback 

that is relevant in the fiduciary duty, sort of developing a recommendation for the Commission there is, right, investor testing, 

investors—there was a study that the SEC had done even prior to 

Dodd-Frank, I think, that talked about investors and their preferences for the individual who provides them advice, or the type of 

account that they have, the type of fee structure that they want. 

All those things are critical to getting at exactly what you are you 

talking about, which is trying to do what we can to ensure that as 

many people as possible have— 

Mr. SCHWEIKERT. But to that goal, should we as policymakers 

say, hey, we need to consolidate, we need to harmonize this concept 

of, the Department of Labor is going to be doing something over 

here that may create liability in cost structure, the SEC is over 

here doing things that may change liability in cost structure, SIFI 

or others, whoever else may be playing, CFPB may even? 

Am I creating an environment where our layers of attempting to 

protect the world are going to lock a lot of our brothers and sisters 

26 

away from being able to have even the most basic access to investment retirement information? 

Mr. GRIM. I certainly hope not. 

Mr. SCHWEIKERT. But it is sort of happening, isn’t it? 

Mr. GRIM. I think that as we develop our recommendation for 

what we are going to try to do— 

Mr. SCHWEIKERT. As you are building—and I know we are out 

of time, Mr. Chairman—those, please consider, are we actually creating more barriers to entry than we are actually taking down? 

And with that, Mr. Chairman, I yield back. 

Chairman GARRETT. The gentleman yields back. 

Mr. Hill is now recognized for 5 minutes. 

Mr. HILL. Thank you, Mr. Chairman, and Ranking Member 

Maloney, for this series of hearings. 

Mr. Grim, thank you for your public service. And having been a 

member of the Executive Branch before and testified before Congress before, it is a great opportunity, and I appreciate you doing 

it. But I also urge you to, while you work for the SEC, to also be 

free to express your personal view by prefacing it as a personal 

view because we do want to learn what you think about many of 

these topics. 

And on the subject of the Department of Labor, has the SEC 

written its fiduciary proposal? Do you have in your office a draft 

proposal on fiduciary based on all the work you have done for the 

past 4 years? 

Mr. GRIM. We are in the process of developing a recommendation. 

Mr. HILL. Would you say you are in the ninth inning of that recommendation or the first inning? Tell me where you are in the 

process. 

Mr. GRIM. I’m sorry, could you say it again? 

Mr. HILL. Are you in the ninth inning of developing the recommendation or the first inning? Where are you exactly? It reports 

to you, so I am sure you have a good feel for where it stands. 

Mr. GRIM. I think, I forget exactly the words that Chair White 

used in announcing her support for and asking the staff for us to 

develop a recommendation for the Commission. I don’t think she 

used a baseball analogy, which inning it was in— 

Mr. HILL. Pick one. I don’t care. Tell me where you are in the 

process. 

Mr. GRIM. I think front burner, is what— 

Mr. HILL. No, no, no, no, not that it is important. I am asking 

you, where are you in the development of the process? Are we almost through with it, through with it, waiting on your desk to send 

it to the Commission for their review? Where are we in the process? 

Mr. GRIM. We are developing it for the Commission’s consideration. 

Mr. HILL. When will it go to the Commission? 

Mr. GRIM. As soon as it is ready. 

Mr. HILL. When did you start the process? 

Mr. GRIM. This issue of uniform duty for brokers and advisers 

even predates Dodd-Frank. There was discussion about kind of the 

morphing of the broker-dealer and investment adviser business 

27 

even before that. But clearly since Dodd-Frank, the staff, with its 

SEC staff study that it was required to provide to Congress within 

6 months after Dodd-Frank, we did that, so we have been working 

on it certainly since then. 

Mr. HILL. But isn’t this—excuse me for interrupting—exactly to 

Mr. Scott’s point, that this is ridiculous that it takes this long? This 

is an important topic, but we have studied it for 4 years, and now 

the Department of Labor is preempting your work? Aren’t they preempting your work, Mr. Grim, in your personal opinion, not the 

opinion of the Commission or the Chair? 

Mr. GRIM. It is absolutely an important topic but it is complicated, right? 

Mr. HILL. Oh, I don’t—I have been in this industry for 35 years. 

I understand the complication. I understand the importance of your 

work. I am just simply asking you, is the Department of Labor preempting the important work the Commission has done, ordered by 

the statute of Dodd-Frank? In your view? 

Mr. GRIM. DOL and the SEC have different statutes, different 

mandates. I think that it is up to DOL what to do with ERISA and 

its statutes. 

Mr. HILL. But won’t that be confusing for investment advisers 

and their clients to have these two different competing standards 

that are actually in conflict with each other in sales practice 

issues? 

Mr. GRIM. That confusion issue is certainly something that we 

are very focused on and continue to focus on in developing our recommendation. 

Mr. HILL. So you are just advocating to the Department of Labor, 

you are just going to adopt their proposal, because shouldn’t you 

have the preeminent view in this, your expertise? 

Mr. GRIM. Labor is— 

Mr. HILL. But it will be conflicting, won’t it? How could you not 

have a conflicting standard? Because it is not in keeping with the 

1940 Act and all the years. We talked about 70 years of oversight 

of investment advisers. Won’t this be in conflict, the DOL rule and 

create a lot of confusion? 

Mr. GRIM. That is clearly something that we at the SEC are focused on as we develop our recommendation. I don’t know. I assume that DOL would be— 

Mr. HILL. I will take that as it is confusing, because obviously 

I think you are confused by that. Let me switch subjects. 

Securities receive safe harbors for SEC research purposes. Isn’t 

that right, generally? 

Mr. GRIM. Yes. 

Mr. HILL. So is there any reason why those same safe harbors 

shouldn’t be extended to exchange traded funds on research for exchange traded funds, in your view? 

Mr. GRIM. I would say in response to that, that of course we are 

very supportive of good research about all kinds of securities. 

Mr. HILL. I know you are. I think that goes back to the 1933 and 

1934 Acts. But do you agree that those same safe harbors for research on an individual company should be extended to independent research on an exchange traded fund, yes or no? 

28 

Mr. GRIM. Because the Act 1933 and the 1934 Act are a little 

bit— 

Mr. HILL. Or the 1940 Act, pick an Act. Don’t get—let’s not talk 

about the Acts. Do you believe that the SEC research safe harbor 

should be afforded to exchange independent research on exchange 

traded funds? 

Mr. GRIM. In looking at research about ETFs, I think we would 

look at it to encourage it to be good, subject to adequate investor 

protections. I don’t know the details of how taking the 1933 and 

the 1934 Acts’ safe harbors and applying it to our world, I just— 

I don’t know how it would work or not. 

Mr. HILL. Thank you, Mr. Chairman, I think. 

And I yield back. 

Chairman GARRETT. Thank you. 

Mr. Hultgren is recognized then for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you, Director Grim. I appreciate you being here, and 

I appreciate you helping us on these issues. 

As I believe all of us know, the Department of Labor clearly is 

aggressively pushing a new fiduciary standard based upon the Employee Retirement Income Security Act (ERISA). While I heard concerns early on, every day it has become more evident that the Department of Labor has little understanding of the market that it 

is seeking to regulate or really any perception of the negative implications its proposal have on retail investors, and my sense is 

they are not willing to listen. 

On July 29, 2015, I sent two separate letters to Secretary Perez. 

It has now been almost 3 months, and he has not responded to me 

and has done nothing to address the serious concerns of my constituents. 

Since Secretary Perez has chosen not to respond to these letters, 

I wanted to see if I could ask your opinion on these issues. Should 

the exclusive sale of proprietary products or services be viewed as 

a violation of a best interest standard? 

As you know, this has been proposed by the Department of 

Labor, but it would be inconsistent with the congressional directive 

of Section 913 of Dodd-Frank. Labor has proposed that options not 

be permissible in retirement accounts, but they would continue to 

be permissible in nonretirement accounts. What are your thoughts 

on the concept of limiting the types of investments that can be held 

in retirement accounts? 

Mr. GRIM. I would say that with respect to the questions that 

you directed to Secretary Perez and DOL, I don’t know the answers 

to those. I can tell you that under Section 913, which is directed 

to the SEC, you are absolutely right, one of the provisions in there 

involves the issue of sales of proprietary products, and that is one 

of the considerations that we are looking at very carefully. 

We got a lot of public comment around that issue in response to 

the study that we did subsequent to Dodd-Frank, as well as a further request for information that we did a couple of years later. 

That has been a very important issue, and that is part of the thing 

that we are trying to sort out as part of our recommendation. 

Mr. HULTGREN. Let me follow up on that then with Section 913 

of Dodd-Frank. It provides that the SEC has the authority to adopt 

29 

a uniform fiduciary standard for broker-dealers and investment advisers for advice provided to retail investors. In March, Chair 

White stated the SEC should act to implement such a standard. 

Since the statement from Chair White, what action has your office 

taken, and what is the status of your recommendation to the Commission? 

Mr. GRIM. After Chair White directed the staff to develop that 

recommendation, that is essentially directed to at least three parts 

of the Commission. So it is Investment Management with our expertise about investment advisers; the Division of Trading and 

Markets, who has expertise on broker dealers; and then our Division of Economic and Risk Analysis, who is sort of integrally involved in all the rulemakings that we do at the Commission now, 

including on this one, because this one has a number of challenging 

issues in terms of impacts on investors, impacts on markets, and 

impacts on products. 

We are working very closely. The three divisions are working 

very closely on the recommendation. 

Mr. HULTGREN. It is my opinion, and I think many would share 

this, certainly my constituents would share this, that politically biased and less informed rulemaking by the Department of Labor, I 

don’t believe, should be putting in place flawed rules. I think it 

makes much more sense for the SEC, they could do a better job of 

balancing access to retirement advice and products with consumer 

protection. 

On Friday, March 6th, Secretary Perez told CNBC that, ‘‘I have 

personally met a number of times with Chair White, and our staffs 

have been working together closely throughout.’’ 

I wonder, what are some specific examples of input from the SEC 

that Labor has used in its public proposals? 

Mr. GRIM. I think that in terms of the SEC staff sharing of expertise with Labor Department folks, a lot of what we have been 

talking about with them has been on impacts, impacts of choices 

that they are making on investors, on registrants, SEC registrants, 

on access to products. 

Mr. HULTGREN. Let me ask you this really quick. I just have a 

few seconds left. Do you believe the Department of Labor should 

suspend its rulemaking until the SEC finalizes its rule? Why or 

why not? 

Mr. GRIM. What DOL does with their rule is up to DOL. My 

focus at the SEC has been on developing the recommendation on 

the SEC’s fiduciary duty proposal for consideration by our Commission. 

Mr. HULTGREN. Thank you for your time. 

My time has expired. I yield back. 

Chairman GARRETT. I recognize the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you very much, Mr. Chairman. I appreciate 

it. 

And thank you, Mr. Grim, for being here. I understand this is 

your first time doing it, and you are doing a great job, and I appreciate it very much. 

I don’t know if you are familiar with Maine, but not only is it 

the greatest State in the country and the most beautiful State in 

30 

the country, it is also the oldest State in the country. We have the 

oldest average age in America. And we only have two congressional 

districts. I represent one, the real Maine, not northern Massachusetts, the real Maine, which is western, central, northern, and 

down east Maine, and it is highly rural, Mr. Grim. We have folks 

who are off the grid, we have folks who go through power outages 

on a regular basis, and a lot of folks who are just not online. 

Now, at the SEC, you folks have a proposed rule 30e-3 which 

would allow investment management firms, primarily mutual 

funds, I believe, to no longer send out quarterly reports and annual 

reports to mutual fund investors, instead trying to get folks to log 

on and print that out or see it online. 

Now, here is the problem with that, sir. First of all, 71 percent 

of investors around the country want to receive paper reports, and 

this is a study done by you folks, subcontracted by you folks in 

2012. Forty-one percent of the seniors have no Internet. My mother 

is 87. She can barely use a cell phone. She doesn’t use the Internet. 

Seniors also own about one-half, roughly, of all mutual fund assets. 

So I am very concerned about making sure the SEC does its job, 

as you said here several times, of making sure small investors are 

protected. And the best way to protect them, Mr. Grim, and I think 

we can agree, is to make sure we continue to allow easy access to 

financial information in paper form, which our seniors want. Can 

we agree to that? 

Mr. GRIM. The rule that you are referencing was part of a unanimous proposal by the Commission, and I guess I would make a couple of points about it. One is that what the Commission and what 

we were trying to do with that rule proposal is allow investors to 

get their disclosure in the way that they prefer it. 

Mr. POLIQUIN. Great. And you know something, I agree with you, 

Mr. Grim. And I want to move on to another topic. And so all I 

am saying is, let’s make it really easy for our seniors who don’t 

want to get it through the Internet to continue to receive it in 

paper form instead of forcing them to opt in by filling out a form 

that they lose, they never receive in the mail, and folks have a 

hard time reading. 

So I know you have a lot of influence at the SEC, and I would 

really appreciate you advocating for that option to make sure our 

investors get the information they need. 

I would like to move on a little bit here. I bet I spend in my congressional office, Mr. Grim, 25 percent of my time talking to taxpayers who want money from the Federal Government. And I always remind them of the same thing: We are borrowing to pay our 

bills, and we are $18 trillion in debt. Now, on top of that, we have 

a Social Security system that deals with retirement, of course, that 

has promised about $15 trillion more than the IOUs that are sitting right now in the trust fund. 

This morning I talked to a mom with 3 kids up in Skowhegan, 

Maine, in the middle of our district. She is working two jobs, her 

husband probably is also, and I bet, like the rest of our seniors in 

Maine and across the country, they are scared that Social Security 

might not be there for them when they need it. So, they are trying 

to put aside a little bit of money to save. 

31 

We have about $24 trillion in retirement savings across the country, as you know. You are in this space. And a lot of this money 

is being managed in mutual funds and also in 401(k) plans and 

IRAs, and these asset managers are trying to help out the little investor. 

Now, you have probably seen the study that was done not long 

ago by a fellow by the name of Douglas Holtz-Eakin, who used to 

be at the CBO, saying that long term, if asset managers are designated as too-big-to-fail, if they have the SIFI designation, that 

long term, because the cost will be so expensive for them, these 

rates of return will be about 25 percent less on these retirement 

savings. 

So where is the compassion for the little investor? We are supposed to help these folks. 

I want to hear from you, if I may, Mr. Grim, don’t you think it 

is a good idea to expand upon the discussion we have already had 

here today, that asset managers who are trying to help small investors save for their retirement, knowing that Social Security is in 

trouble, to not penalize them, so if they don’t have any assets on 

their balance sheet but they are managing money for other small 

investors, there is no systemic risk to the market? 

Would you agree with that? And wouldn’t you also agree that it 

makes sense for asset managers not to be listed as SIFIs? 

Mr. GRIM. One of the great things about my job and one of the— 

just the awesome responsibility of it is some of this stuff that you 

are talking about, right. There is over $18 trillion in— 

Mr. POLIQUIN. Yes. 

Mr. GRIM. —registered investment companies. We have over 

11,000 advisers with— 

Mr. POLIQUIN. Mr. Grim, I am just about out of time. I don’t 

mean to be rude, but when Chair Yellen came here, and Chair 

White came here, and Secretary Lew came here, I asked them the 

same question that I am asking you, and they all said, ‘‘We are 

looking at this.’’ 

Now, what I heard you saying earlier—I believe I heard this correctly—is that you think it is a good idea and it makes sense— 

Mr. GARRETT. If the gentleman could— 

Mr. POLIQUIN. —for asset managers not to be list as SIFIs, therefore not penalizing our smaller investor with lower rates of return. 

Did I hear you correctly, sir? 

Mr. GRIM. I think, being that those folks you just mentioned are 

the members of FSOC, that is kind of where—because they are the 

ones that—they were the ones that make that determination. 

Mr. POLIQUIN. I bet you have an office right next door to Chair 

White and I bet you can influence her. 

Chairman GARRETT. The gentleman’s time— 

Mr. POLIQUIN. Thank you very much, Mr. Chairman. 

And thank you, Mr. Grim. 

Chairman GARRETT. Thank you. 

I recognize the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. I would like to defer to the gentlelady from New 

York. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

32 

Let me take this opportunity to thank my colleague, Mr. Sherman, for yielding. And I want to take this opportunity also to 

thank the ranking member and the chairman for allowing me to 

participate in this subcommittee hearing, an important one. 

I want to raise an issue with you, Mr. Grim, that is very important to hard-working Americans in the U.S. territories, including 

Puerto Rico. As you may know, Puerto Rico and all U.S. territories 

are exempted from the Investment Company Act of 1940. And 

when you look at the history and the Congressional Record, the argument at the time was that these territories were far away and 

that it will imply more resources. 

Recently, it was reported that UBS was underwriting bonds for 

Puerto Rico’s retirement system and then placing these same bonds 

into mutual funds that were sold to customers on the island. Would 

this practice be permitted in the 50 States? 

Mr. GRIM. You correctly point out that the way the Investment 

Company Act works right now, there is an exclusion from registration for Puerto Rico and the other territories of the United States. 

And what that means is that they are exempt from a number of 

the important investor protections that are in the act, registration, 

disclosure, examination, and affiliated transaction provisions that 

apply to your standard mutual fund in the United States. 

On your question of the UBS situation, I think it is a little hard 

to—I don’t know the facts well enough to know whether—how 

those provisions would apply—if they had applied, how they would 

apply to the UBS facts, but I guess ultimately I would say those 

affiliated transactions— 

Ms. VELAZQUEZ. If UBS in the United States would be allowed 

to incur in the reckless, abusive behavior that they have done in 

Puerto Rico? 

Mr. GRIM. What is prohibited by the affiliated transaction provisions for investment companies in the United States is purchases 

and sales between affiliates and the funds, purchases of bonds from 

affiliated underwriters. So again, I don’t know the specifics of the 

UBS case, but that is the way the provisions work here in the 

United States for those that are registered under the Investment 

Company Act. 

Ms. VELAZQUEZ. Do you believe that American citizens in Puerto 

Rico are at a disadvantage because they lack the investor protections of the Investment Act as afforded to those in the 50 States? 

Mr. GRIM. My understanding is that funds in Puerto Rico are 

subject to some kind of an investment company law. I don’t know 

the details of it, so therefore it is hard for me to compare the two 

laws. But I would say— 

Ms. VELAZQUEZ. But the question is simple. In Puerto Rico and 

the U.S. territories, American citizens who reside on the island of 

Puerto Rico are exempted from this law, the Investment Act of 

1940. My question to you is, do you believe that this loophole 

should be closed? Since, as you can see, in the Congressional 

Record it shows that there was not a principal issue at the time, 

but just the fact of the distance, the cost, the resources. 

Do you think we should close that loophole and grant the same 

investor protections that we afford to every American citizen? Do 

33 

you think that veterans in Puerto Rico who go and fight for this 

country should be afforded the same protections? 

Mr. GRIM. I think that the investor protections of the Investment 

Company Act are critical to all kinds of investors, disclosure, transparency, affiliated transactions. All that stuff is—it is the bedrock 

of what I do every day, so I believe it in very much. 

Ms. VELAZQUEZ. And so that means you believe that we should 

close this loophole? 

Mr. GRIM. I understand that there is some legislative discussion 

about just that question, whether to close that loophole. My understanding is that the Commission hasn’t offered a view on that legislation. But obviously, I am happy to provide our technical expertise 

on it. 

Ms. VELAZQUEZ. I introduced legislation to close that loophole, 

and I just ask the chairman and the ranking member that we work 

together so that we can afford the same protection that is provided 

to every American citizen in the United States and the 50 States 

to the people of Puerto Rico and the U.S. territories. 

I yield back. 

Chairman GARRETT. Thank you. The gentlelady yields back. 

Mr. Stivers is now recognized. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you holding 

this very important hearing. 

And, Mr. Grim, I appreciate you being here. I just wanted to ask 

you first if it is lonely down there all by yourself? 

Mr. GRIM. I have some folks behind me. It makes me feel a little 

less lonely. 

Mr. STIVERS. Okay. I am glad you brought a few friends. 

I want to talk about an issue I don’t think anybody has talked 

about. Has anybody talked to you about the potential coming liquidity crisis? 

Mr. GRIM. We have touched a bit on the SEC’s liquidity proposal. 

Mr. STIVERS. Great. 

Mr. GRIM. Not more generally. 

Mr. STIVERS. So it appears to me that there are multiple forces, 

business simplification among many of the people you regulate, 

compliance with the Volcker Rule, and also the fiduciary standard 

moving a lot of folks who have been market makers out of the 

space, which could ultimately result in much wider price swings on 

the same amount of deal flow. And I am curious how much discussion you have had at the SEC around this coming problem that is 

created when you are focused on the stability of every single company, but not truly market stability. 

And you can just tell me you have had a lot of discussion, a little 

discussion, not much discussion, because they are talking about it 

in the market. 

Mr. GRIM. A lot of discussion. 

Mr. STIVERS. Okay. Thank you. 

I hope you will take a look at it. I have written a letter to the 

Office of Financial Research (OFR), asking them to do a study on 

this, because this is the coming crisis in our capital markets. And 

whether it is the small investor that is in a 401(k), a large investor, 

corporations, banks that enter their investments through the capital markets, you are the front door of regulation for a lot of people, 

34 

and you need to take a look at this coming crisis because you have 

the power to solve it, and I hope you are taking it very seriously. 

Mr. GRIM. Liquidity is a very important issue to a lot of people 

for a lot of different reasons. I think with respect to investment 

management, we have done a couple of different things recently 

that I would highlight. One, last year there has been— 

Mr. STIVERS. I appreciate what you have done, and I have limited time. You haven’t done enough. You have not solved the crisis. 

The crisis is getting worse, not better. I would ask you to take a 

serious look at it, get the OFR to do a study, do a study of your 

own, continue to look at this. You are having market makers continue to leave the space. The potential of a coming crisis is there. 

You have the ability to solve it. I hope you will. 

I am going to talk about the DOL fiduciary rule, and one of my 

fellow Members asked about harmonization efforts. So I wanted to 

ask you, have you had conversations with the Department of Labor 

about holding off or suspending its rulemaking until you complete 

your 913 rulemaking? Because you couldn’t tell the gentleman from 

Arkansas when that would be done. Are you coordinating with the 

Department of Labor on release dates, yes or no? It is a yes-or-no 

question. That is all I need. 

Mr. GRIM. We have provided our subject matter expertise to DOL 

on some of the things that are going on in their rule. 

Mr. STIVERS. Are you coordinating release dates? Have you asked 

them to slow down until you can finish your 913 rulemaking so you 

can release them together, yes or no? 

Mr. GRIM. I— 

Mr. STIVERS. Would you please take a look at that? 

Mr. GRIM. Yes, I can look at it. I don’t know the details of— 

Mr. STIVERS. And you don’t have power over the Department of 

Labor, but you can ask them. If you haven’t asked them—I learned 

a long time ago, nobody does anything until you ask them. So 

maybe you should ask them, and then we might not have rules 

that conflict with each other, because they can be done together, 

harmonized, and put together. That is what people need and demand of their government, an efficient, effective government. 

So I would ask you to go back to the Department of Labor and 

see if you can coordinate. It is clear to me it has not happened. You 

don’t want to say it has not happened. I understand that. I am not 

looking to place blame here. There is still time to fix it. Let’s try 

to fix it. 

I am curious if what you believe about imposing a fiduciary 

standard of care, what that will mean to investors with regard to 

fewer choices and higher costs. Are you willing to acknowledge that 

investors will have less choices because of the due diligence required of every investment at a fiduciary standard level and the 

legal liability and all at higher cost because of the cost of that due 

diligence, yes or no? 

Mr. GRIM. I think that is something that is important for us to 

study, that we have asked for a— 

Mr. STIVERS. You don’t believe it is true, necessarily? You are 

studying it. 

Mr. GRIM. We haven’t finished with our recommendation. The 

Commission hasn’t adopted its— 

35 

Mr. STIVERS. It happened in the United Kingdom. Did you see 

what happened there? 

Mr. GRIM. I didn’t hear. 

Mr. STIVERS. Have you studied what happened when the United 

Kingdom opposed this standard? Did it result in fewer choices and 

higher costs? It did. Please look at that. I hope you will continue 

to study it. 

These aren’t hard questions. I am sorry you don’t know the answers to them. But I hope you will look at it. I hope you will coordinate and try to harmonize these rules and do what is right for the 

American people. 

I appreciate that you have a hard job. I know you have competing interests. You have a lot of information that you have to 

look at. But please do what is right for small investors in this country and try to harmonize these rules— 

Mr. HURT [presiding]. The gentleman’s time has expired. 

Mr. STIVERS. —and make them not as painful with costs and 

fewer choices. Let’s not hurt mom and pop all across this country. 

I yield back the balance of my time, Mr. Chairman. 

Mr. HURT. The gentleman’s time has expired. 

The Chair now recognizes Mr. Sherman for a period of 5 minutes. 

Mr. SHERMAN. I want to pick up on the brilliant comments of Mr. 

Stivers. You have to work to harmonize these rules. It is absolutely 

absurd to think that we would have one set of rules applying to me 

because I have my money in an IRA and no rules, perhaps, or another set of rules applying to my mother who inherited some money 

from my father. 

And, in fact, what you have is a circumstance where you are 

going to have greater restrictions or greater protections on baby 

boomers who have their money in IRAs, and weaker restrictions 

and more freedom for people in their eighties and nineties who 

never know from IRAs and 401(k)s. 

So it ought to be the same rule or, if anything, the stricter rule 

ought to apply to the non-IRA accounts. And it is the SEC that has 

the expertise so I hope you will talk to your friends in the Department of Labor. 

In your prepared testimony, you mentioned the proposed rule to 

permit asset managers to provide shareholder reports electronically 

instead of on paper. On behalf of America’s trees, I want to commend you for that and push it forward. I think it will be better for 

the investor because, speaking as an investor, I am constantly losing my reports. If they are electronic, I will have them forever, and 

I can switch back at them. I will never do that during a hearing, 

but at other times when I have my iPad, they are right there. 

As to a SIFI designation, you also mentioned that in your report, 

do you think you have enough tools to determine whether an asset 

manager is systemically important, Mr. Grim? 

Mr. GRIM. Dodd-Frank set up the tools. The tools are for FSOC 

to determine whether something is systemic as opposed to the SEC. 

But I think that is where the tools are. 

Mr. SHERMAN. Going to the liquidity rules, you are going to have 

six buckets. Is there going to be a requirement that the fund have 

36 

at least 50 percent of its assets in bucket one or bucket two, or is 

this just a disclosure, or is this a requirement? 

Mr. GRIM. On the liquidity proposal that you reference, you are 

right to note that one of the elements of the rule is it proposes that 

there would be six buckets. Those buckets would be disclosed and 

transparent, so that is an essential part of the rule. There is another part of the rule that codifies some guidance that has been in 

existence for a while that would cap the amount of illiquid assets 

that a fund could hold. 

Mr. SHERMAN. Is illiquid bucket six or bucket five and six or 

buckets two through—or are these rules just separate? Do the 

buckets have anything to do with the 15 percent requirement? 

Mr. GRIM. It is a separate requirement. 

Mr. SHERMAN. A separate requirement. 

I am a bit concerned about the idea of using third parties because I have seen what happened in the bond rating area, where 

they basically created the greatest economic catastrophe of our lifetimes, because the bond rating agency is selected by the issuer. 

If we are going to have these outside firms come in, are they 

going to be selected by the fund or would the SEC have a panel 

and assign the way, say, bankruptcy trustees are assigned from a 

panel? And wouldn’t my grades have been much better if I could 

have determined which professor graded my paper and paid him? 

Mr. GRIM. With respect to third-party compliance reviews, Chair 

White has directed us, the staff, to come up with a recommendation 

on that point. One of the— 

Mr. SHERMAN. I recommend that when you do that, look at the 

Frank and Sherman amendment to Dodd-Frank as originally proposed. We had a good system for assigning credit rating agencies. 

The SEC board ignored it there. But it is a system you may want 

to pick up. I am not saying this will please your board. Since they 

ignored it when they were required to follow it, they may not want 

you to follow it voluntarily. 

But the idea that you are going to have an outside grader who 

is paid and selected by the people that they are grading didn’t work 

out so well in 2008. And you ought to take a look at a system by 

which those doing the grading can’t become more profitable by putting out the word that they are easy graders. 

Mr. HURT. The gentleman’s time has expired. I thank the gentleman. 

The Chair now recognizes the chairman of the House Foreign Affairs Committee, Mr. Royce, for a period of 5 minutes. 

Mr. ROYCE. Thank you. 

And thank you, Director Grim. 

The OFR’s asset management report included a number of factual errors. For example, the report listed an incorrect name for Fidelity’s highest-level asset management entity and misreported the 

amount of its assets under management. The report improperly described Vanguard’s structure. The report misrepresented the 

amount of assets under management for PIMCO. 

Thankfully here, the SEC provided stakeholders an opportunity 

in this situation to point out these mistakes, along with substantive concerns that the SEC had about the report. Do you think 

some of these mistakes could have been avoided if the OFR worked 

37 

more closely with the financial supervisors and regulators, those, 

after all, with the expertise in these areas, and maybe also opened 

up their work for public comment? 

Mr. GRIM. With respect to the OFR report, SEC staff provided 

some comments to the OFR on it. It was the OFR report. They 

chose to take some of our comments. They chose not to take some 

other comments. I think, ultimately, it was up to OFR to decide 

how the final report looked. 

Mr. ROYCE. You may know that Congressman Patrick Murphy 

and I have introduced a bipartisan bill, the Office of Financial Research Accountability Act, to address these issues, and the bill requires the OFR to submit for public notice and comment an annual 

report that details the Office’s work for the upcoming year. Additionally, this bill requires the OFR to coordinate with financial regulators when they conduct future studies. 

While the OFR opposes this extra, what I would call transparency, I am hopeful we will see widespread support for these balanced changes going forward. 

Let me ask you another question, Director Grim, and this follows 

up on the staff legal bulletin on proxy voting that Chairman Garrett and Mr. Huizenga raised earlier. Should proxy advisory firms 

not be held to the same sort of accountability on corporate reporting and transparency as the SEC requires of the publicly traded 

companies that they advise on? 

Mr. GRIM. With respect to proxy advisory firms and the guidance 

that the staff did issue, I think it was focused on addressing two 

important issues as a general matter. One is, with respect to the 

proxy advisory firms themselves, doing what we can to encourage 

good disclosure of material conflicts of interest by those proxy advisory firms. The second focus of the guidance was on investment advisers and how they use proxy advisory firms, making sure that 

their oversight of the proxy advisers is robust and appropriate. 

Mr. ROYCE. I saw the bulletin. One of the things it brought to 

mind was whether or not we shouldn’t instead be having the Commission have a formal rulemaking on this. And I say it for these 

reasons. First, when we get to this question of what are the standards of performance, we have a situation where you have two entities and they dominate here, clearly, over 90 percent of the market. 

And we, on top of it, have a situation where there are reports I 

would think would be subject to public scrutiny after those reports 

are prepared. But we don’t have that. 

So I think taking it higher than a staff legal bulletin and taking 

it to basically a question of rulemaking on this by the Commission, 

is something I would suggest and just sort of get your feedback on 

that. 

Mr. GRIM. I think where we are right now is, after the staff 

issued that guidance, we have had a proxy season run. And we 

have, my colleagues in the examination unit have been doing or are 

planning to do some exams. And so we are trying to gather some 

more feedback on the status, and then we will decide whether further action, including potential rulemaking, is necessary. 

Mr. ROYCE. The rules of the road seem to change when someone 

has an interest. And I guarantee you, when you have a situation 

where you have two entities with 90 percent of the market and the 

38 

kinds of questions that have been called up over this performance, 

I think at the end of the day we are going to need rulemaking on 

it. 

But thank you very much. I appreciate your testimony today. 

Mr. HURT. The gentleman’s time has expired. 

Mr. Grim, thank you very much for appearing before this committee today. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his 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. 

The hearing is adjourned. 

[Whereupon, at 11:23 a.m., the hearing was adjourned.] 

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