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S. HRG. 114–450 

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE WORK AND AGENDA OF THE U.S. SECURITIES 

EXCHANGE COMMISSION 

JUNE 14, 2016 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

DAVID VITTER, Louisiana 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

WILLIAM D. DUHNKE III, Staff Director and Counsel 

MARK POWDEN, Democratic Staff Director 

DANA WADE, Deputy Staff Director 

JELENA MCWILLIAMS, Chief Counsel 

ELAD ROISMAN, Securities Counsel 

SHELBY BEGANY, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

GRAHAM STEELE, Democratic Chief Counsel 

ELISHA TUKU, Democratic Senior Counsel 

DAWN RATLIFF, Chief Clerk 

TROY CORNELL, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, JUNE 14, 2016 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

Mary Jo White, Chair, Securities and Exchange Commission ............................ 4 

Prepared statement .......................................................................................... 38 

Responses to written questions of: 

Chairman Shelby ....................................................................................... 68 

Senator Brown ........................................................................................... 78 

Senator Crapo ............................................................................................ 83 

Senator Kirk .............................................................................................. 84 

Senator Heller ........................................................................................... 86 

Senator Scott ............................................................................................. 89 

Senator Sasse ............................................................................................ 91 

Senator Rounds ......................................................................................... 96 

Senator Warner ......................................................................................... 98 

Senator Merkley ........................................................................................ 103 

(III)

(1) 

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION 

TUESDAY, JUNE 14, 2016 

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Committee met at 9 a.m., in room SD–538, Dirksen Senate 

Office Building, Hon. Richard C. Shelby, Chairman of the Committee, presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY 

Chairman SHELBY. The Committee will come to order. 

This morning we will receive testimony from Securities and Exchange Commission Chair Mary Jo White. Oversight of the Commission is an important part of this Committee’s jurisdiction. 

The SEC is an independent agency tasked with protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. 

The SEC is responsible for ensuring transparency so that investors have adequate information to make investment decisions and 

to mitigate conflicts of interest, fraud, and manipulation. 

This regulatory paradigm is one reason why our capital markets 

have long been the envy of the world and the lifeblood of our economy. Excessive and unnecessary regulation, however, may endanger America’s status as the world’s preferred financial center. 

First and foremost, I believe the SEC should focus on its core 

mission. This has become more difficult as the Commission has 

come under increased pressure to expand its mission and cater to 

special interests. 

Examples of such efforts include attempts to force the SEC to 

mandate disclosure on climate change and political contributions. 

These efforts are not new, and the SEC has withstood political 

pressure in the past. It is my expectation that it will continue to 

do so in the future. 

Chair White, as you pointed out in a 2013 speech, and I will 

quote you, ‘‘ . . . we make our decisions based on an impartial assessment of the law and the facts and what we believe will further 

our mission—and never in response to political pressure, lobbying, 

or even public clamor.’’ 

The SEC must, I believe, continue to adhere to those principles 

and uphold its fundamental mission. It should also periodically review the appropriateness of its existing rules. 

For example, while the Commission has undertaken work to review equity market structure, it has not engaged in a comprehenVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
2 

sive review of its rules, even in light of the so-called Flash Crash, 

which happened over 6 years ago. 

I also hope that the SEC will continue to take very seriously the 

importance of strong economic analysis when promulgating rules. 

As we have seen, agencies that fail to undertake such an analysis in their rulemakings are vulnerable to legal challenges, as well 

they should be. 

An agency with thousands of employees like the SEC should be 

able to analyze in detail the impact of its rules on the markets, investors, financial products, and the broader economy. 

This is especially true today, given the cumulative impact and 

unintended consequences of the myriad new rules stemming from 

the financial crisis. 

If the cost of a rule outweighs its benefit, then the rule should 

be eliminated. If a rule passes cost/benefit muster, it should then 

be implemented by the appropriate agency. 

The SEC has the primary expertise in capital markets and 

should be the lead agency in regulating them. Specifically, I am 

concerned that attempts by other Federal agencies to erode, 

Madam Chair, the SEC’s jurisdiction could undermine the integrity 

and functioning of these markets. 

Recent examples of this include the Department of Labor’s fiduciary duty rule, the FSOC’s continued focus on asset managers, and 

the Federal Reserve’s targeting of broker-dealers under the guise 

of reining in what it calls ‘‘shadow banking.’’ 

The SEC has eight decades of specific expertise in these matters. 

This should outweigh the desires of other regulators to expand 

their powers at the expense of investors and the markets. 

Chair White, I look forward to hearing your thoughts on these 

issues and the future agenda of the SEC. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, and welcome, 

Madam Chair. Good to see you again. 

Over 3 years ago, you were confirmed as Chair of the SEC and 

assumed the task of guiding the Commission’s significant rulemaking agenda under the Wall Street Reform Act and the JOBS 

Act. At that time the destruction of $13 trillion in household 

wealth from the financial crisis was still fresh in our minds. The 

SEC and other financial regulators had completed many of the 

Wall Street reform rulemakings and were evaluating how to finish 

the implementation of the rest. 

When you last appeared before this Committee in September 

2014, you said the staff was proceeding on the outstanding rules, 

we could expect to see additional rules shortly. Although several 

rules have been proposed and some finalized, many are still incomplete. In particular, the Commission has not finished the derivatives rules under Title VII of the Wall Street Reform Act, and the 

path to their completion seems unclear. These rules are important 

because Title VII is a key part of reform to the financial markets. 

By increasing transparency, by enhancing oversight, by moving 

to more resilient and stable trading platforms, Congress wanted to 

make sure that future crises could be detected sooner and would 

3 

do less damage. This is not entirely on your shoulders, on the 

SEC’s shoulders, but there are certain markets, such as credit default swaps, that depend on SEC. Until the rules are completed, 

the SEC and other regulators will not have the benefit of a framework that provides transparency and access to market data. 

Another Wall Street Reform Act rule that remains outstanding 

would prohibit incentive compensation that could lead to excessive 

risk taking or significant losses at financial firms. We know what 

happened during the financial crisis in that regard. 

The multiagency rule was proposed in 2011 and reproposed last 

month. Six years after Wall Street reform became law, this rules 

still is not finished. 

The final rule would provide the market and the public with 

some assurance that senior executives at financial institutions will 

not be rewarded for taking inappropriate risks that could harm the 

markets, could harm their employees, or could harm the economy. 

I urge you and other regulators to finish that rule as quickly as 

possible. 

During your confirmation hearing, you stated that you would 

make strengthening enforcement a high priority throughout your 

tenure. You said then, and I agree, that ‘‘investors and market participants need to know that the playing field of our markets is level 

and that wrongdoers, individual and institutional, of whatever position or size, will be aggressively and successfully called to account 

by the SEC.’’ Yet time and again, we see repeat offenders enter 

into settlement after settlement that seem to have no effect on 

stopping the problem in the first place. 

As the cop on the beat, the question is: At what point is the SEC 

going to stop handing out warnings and start giving tickets? 

This is evidence in the waiver process. SEC has routinely granted waivers to banks following a variety of violations that could 

have resulted in the loss of certain privileges under security laws. 

Unfortunately, granting those waivers eliminates the significant 

consequences that could promote better overall compliance at those 

institutions. 

Finally, I would like to return to an issue that has been discussed many times in this Committee. Democrats in the Senate 

have repeatedly asked you to begin work on a corporate political 

spending disclosure rule. This is not a plea from a special interest, 

as some on the other side of the aisle might say. This is good Government policy. When you were last here, you acknowledged the 

‘‘intense interest of investors and others’’ on this issue, but you 

pointed to the low priority of mandatory rulemaking. I realize this 

year’s appropriations bill limits the SEC’s work on that rule, but 

it should not prevent you from doing anything at all. 

I sincerely hope you begin work on a corporate political spending 

disclosure rule. The interest in it has only become more intense. I 

am interested in hearing your update, Madam Chair. 

Thank you. 

Chairman SHELBY. Madam Chair, your written testimony in its 

entirety will be made part of the hearing record. You have been 

here many times. You proceed as you wish. 

4 

STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND 

EXCHANGE COMMISSION 

Ms. WHITE. Thank you, Mr. Chairman, Ranking Member Brown, 

and other Members of the Committee. Let me, before I start, just 

express—I am sure I speak for everyone—that my thoughts and 

prayers are with the victims of the Orlando shootings and their 

families. 

Thank you for inviting me to testify today on the current work 

and initiatives of the SEC, which are, as the Chairman indicated, 

summarized in some detail in my written testimony. 

As you know, the SEC is a critical agency that is charged with 

protecting millions of investors and safeguarding the most vibrant 

markets in the world. And the Commission has been very busy 

since I last testified before the Committee in 2014. The last 3 years 

have each been marked by a vigorous enforcement and examination 

program, empowered with new tools and methods to protect investors and hold wrongdoers accountable. In fiscal year 2015 alone, 

the Commission brought over 800 enforcement actions, an unprecedented number; secured over $4 billion in orders directing the payment of penalties and disgorgement, an all-time high; performed 

approximately 2,000 exams, a 4-year high; and, even more importantly, continued to develop cutting-edge cases and smarter, more 

efficient exams. 

The strength of our enforcement program can also be seen in the 

kinds, complexity, and importance of the cases we bring that span 

the securities industry, include numerous first-of-their-kind actions, and focus heightened attention on market gatekeepers like 

ATSs, exchanges, accountants, and lawyers. 

Significantly, approximately two-thirds of our substantive actions 

in fiscal year 2015 also involved charges against individuals, and 

we continue to obtain admissions in certain cases, which we have 

now done in over 50 instances since we changed our settlement 

protocol. 

The Commission over the last 3 years has also pursued very consequential rules and other initiatives to protect investors, strengthen markets, and open new avenues for capital raising. Since I last 

testified, we, for example, advanced major rules addressing key equity market structure issues—including controls on the technology 

used by key market participants, the transparency of alternative 

trading systems, and the consolidated audit trail—while moving 

forward with a broader assessment of other fundamental changes. 

We issued a series of proposals to address the increasingly complex 

portfolios and operations of mutual funds and exchange-traded 

funds. We adopted new rules for crowdfunding and smaller securities offerings under Regulation A, while also proposing additional 

avenues for small businesses to raise capital. We finalized major 

components of the regulatory regime for security-based swaps, and 

we continued to execute a comprehensive review of the effectiveness of our disclosure regime. 

This work marks the latest phase of extraordinary regulatory efforts by the agency both before and after I became Chair, enlisting 

all of our policy divisions and offices. Beyond our discretionary initiatives, the Commission has now adopted final rules for 66 of the 

mandatory rulemakings of the Dodd-Frank Act, the majority of 

5 

them since I became Chair. And, Senator Brown, Title VII is a 

major priority for 2016, which I am sure we will get into. We have 

also now completed all of the rulemakings directed by the JOBS 

Act, and we have made significant progress on the rulemakings required of us late last year under the FAST Act. 

While our work in enforcement and rulemaking are perhaps the 

most prominent examples of the agency’s achievements, the imperatives of our mission are also carried forward each day by the 

dedicated staff of our divisions and offices. 

The Division of Corporation Finance reviews the annual and 

periodic reports of thousands of issuers each year, helping to ensure that investors receive full and fair disclosure about the public 

companies in which they invest. 

Last year, the Division of Trading and Markets reviewed more 

than 2,100 filings from exchanges and other self-regulatory organizations to preserve a fair and orderly marketplace for all investors. 

The Division of Investment Management reviewed filings last 

year covering more than 12,500 mutual funds and other investment 

companies, where many individuals, as you know, invest their 

hard-earned money to save for retirement, college, and other important goals. 

Our economists in the Division of Economic and Risk Analysis 

produced more than 30 incisive papers and publications in 2015, 

including two major analyses to help inform our work on asset 

management. 

This afternoon, I will actually have the privilege to participate in 

our annual awards ceremony at the Commission where we recognize some of the tremendous work of some of our staff. 

The Commission today is a stronger and more effective agency, 

and I am honored to lead the agency during this time. Nevertheless, significant challenges remain if we are to address the growing 

size and complexity of the securities markets. It is critical that the 

SEC has the resources required to discharge our responsibilities, 

the new ones and the many others we have long held, in the face 

of a growing and ever more sophisticated financial services industry. 

I deeply appreciate that we must be prudent stewards of the 

funds we are appropriated, and we strive to demonstrate how seriously we take that obligation by the work that we do. At the same 

time, our resources are insufficient, and the cuts and limitations to 

the SEC’s budget that the House bill proposes would seriously imperil the progress we have made and diminish our ability to fulfill 

our mission. 

While more remains to be done and achieved, I am very proud 

of the agency’s impressive accomplishments across the range of its 

responsibilities. For that I want to again thank, first and foremost, 

the exceptional staff of the SEC as well as my fellow Commissioners, present and past. And I want to thank the Chairman, the 

Ranking Member, and this Committee as a whole for your support. 

Your continued support will allow us to better protect investors and 

facilitate capital formation, more effectively oversee the markets 

and entities we regulate, and build on the significant work we are 

doing. 

Thank you very much. I am happy to take your questions. 

6 

Chairman SHELBY. Thank you. 

Madam Chairman, I understand that the Commission can vote 

to delegate certain of its authorities to the SEC staff, including enforcement proceedings. Once the Commission has voted to delegate, 

how are you and your fellow Commissioners at the Securities and 

Exchange Commission made aware of the staff’s use of that authority? And if the Chair is recused on a specific matter, who is accountable for the staff’s use of the delegated authority? 

Ms. WHITE. The Exchange Act actually is explicit on this, Mr. 

Chairman, that the Commission as a commission has the authority 

to delegate many of its day-to-day functions. It does not have the 

power, for example, to delegate rulemaking to the staff or—— 

Chairman SHELBY. That is set out statutorily? 

Ms. WHITE. Yes, it is statutorily done. 

Chairman SHELBY. OK. 

Ms. WHITE. There are hundreds and hundreds of day-to-day 

things that we must do at the Commission, so it is very important 

that the staff have delegated authority to act. 

As safeguards, however, on that delegated authority, the Commission can review any of those actions. The staff itself can decide 

to refer something to the Commission even though it may have delegated authority from the Commission to decide. And the review of 

the Commission can be precipitated by any one Commissioner’s desire to do so. 

Chairman SHELBY. Once the Commission votes to delegate its 

authority to the staff, it is my understanding that such delegation 

remains in place under future Commissions, and new Commissioners do not have a chance to approve existing delegations of authority. Is that correct? 

Ms. WHITE. Yes, it is, Mr. Chairman. I think essentially the way 

it works is that if one wanted to review or change a delegation, it 

would be up to the Chairman to put that on the agenda, whoever 

the Chairman is. 

Chairman SHELBY. Madam Chair, would you support an SEC review of existing delegations, including an analysis of their appropriateness? In other words, you look back—you do oversight, I 

hope, in your agency, like we do here. Is it not important to look 

back and see what—— 

Ms. WHITE. Since I have been there, it is certainly something 

that I have discussed with various of my fellow Commissioners, 

and we all have the list of delegations that exist. I have urged my 

fellow Commissioners, if they have an issue with any particular 

delegation, to bring that to my attention, and we will certainly look 

at it. 

Chairman SHELBY. You have often stated, Madam Chair, that 

the Securities and Exchange Commission is an independent agency. That is the way we want it to be. It was set up that way. And 

while one can expect some split votes because of the way the Commission is set up, there have been many party-line 3–2 and 2–1 

votes under your chairmanship. By comparison, according to the 

press, former Chairman Richard Breeden never had a 3–2 vote, 

and former Chairman Levitt rarely would take a matter to a vote 

unless he knew he had a 5–0 vote. 

7 

Are there any areas that you can work on cooperatively with the 

other two Commissioners to reach a unanimous decision? And if so, 

could you give us some examples? 

Ms. WHITE. I think we certainly strive for consensus—— 

Chairman SHELBY. We know everything is not unanimous. 

Ms. WHITE. Everything is definitely not unanimous. I think 

somebody gave me a figure the other day that about 65 to 70 percent of our votes are actually unanimous. But, obviously, that is 

still a percentage that have not been unanimous. I think I have 

discussed with you, Mr. Chairman, and I think Senator Brown and 

probably some of the other Members of the Committee as well, that 

one thing that I have found as Chair, even though we strive for 

that consensus—unanimity, indeed—on all of our rulemakings, so 

many of our mandated rulemakings have been under the DoddFrank Act, and the controversies surrounding the act at the time 

it was adopted have continued into the implementation of those 

rules. So we have ended up with an extra challenge reaching consensus because of that. 

Chairman SHELBY. Madam Chair, in 2013, you posed for comment a study on assessment management by the Office of Financial 

Research that was requested by FSOC. This allowed the public a 

meaningful opportunity to provide feedback on the study and highlighted significant flaws. 

Given the benefit of public comments on that study, will you 

commit to posting other FSOC-requested studies affecting SEC-regulated entities? And if not, why not? 

Ms. WHITE. Well, I think certainly at the SEC, and I think at 

other agencies as well, the benefit of the notice and comment process and even just a comment process if you are not in an APA rulemaking, is enormous. So I think getting that feedback is important. 

The report that you referenced, Mr. Chairman, was actually the report of OFR. They publicized it. But we did open a comment window because we thought it was important to gather public input in 

one place. If we were in another situation like that and OFR or 

FSOC itself did not post its studies to make it easier for the public 

to comment, certainly we would seriously consider that again. 

Chairman SHELBY. My last question is in the area of repeated 

violations. There have been concerns raised by the public as well 

as Members of this Committee about repeated violations by SECregistered entities. Two years ago, a former SEC Commissioner 

stated with respect to the most egregious and repeated violations 

of our securities laws and regulations, and I will quote, ‘‘We need 

to ask ourselves a fundamental question: Should the violating entity retain the privilege of participating in our capital markets?’’ 

My question to you is this: In your opinion, when is it appropriate for the SEC to exercise its ability to deregister an entity? 

And if you could give us an example, that would help. 

Ms. WHITE. I think it is an enormously important power that we 

have and should wield in appropriate circumstances to police the 

markets—— 

Chairman SHELBY. It goes to the integrity of the market. 

Ms. WHITE. Absolutely right. Absolutely right. I think you have 

to look very carefully at what the violations have been over what 

period of time, and who was involved in them. You want an aggresVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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sive enforcement program to bring cases when they are there to 

bring. I am certainly quite open in the interest of strong protection 

of our markets that there comes a point where one of our regulated 

entities should no longer be registered, and I would not hesitate to 

bring a proceeding to revoke the license. 

Chairman SHELBY. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

Some of my colleagues—there seems to be a sort of collective amnesia on this panel in some cases and in this body about what happened with the financial crisis since some of my colleagues as a result, particularly in the House but some here, continue to push for 

the repeal of the Wall Street Reform Act, insisting it has created 

more problems in the financial system than it has prevented. A 

couple of questions to start with. 

Are you concerned by efforts to repeal Wall Street reform? Do 

you think it has been effective in improving our financial stability? 

Ms. WHITE. I think the reforms under the Dodd-Frank Act have 

been enormously important in strengthening our financial system. 

Collectively, I think our financial system is much stronger and resilient now, certainly in part because of the actions undertaken by 

Dodd-Frank. So I certainly would not want to see those reforms repealed. 

Senator BROWN. OK. Thank you. Despite the improvements to 

date that you have mentioned and that are self-evident with a 

stronger, more stable financial system, this reform, of course, is 

still a work in progress. In my opening statement, I mentioned the 

derivatives rules that are still outstanding. I am not just concerned 

that it is taking the SEC so long to finish its rules, but also that 

SEC is far behind other agencies implementing rules in similar 

issue areas. Let me give two examples. 

The CFTC covers a much larger portion of the derivatives market and has made significantly more progress than has SEC, even 

accounting for a few hiccups along the way, with far fewer resources than you have. 

Second, the Department of Labor was able to propose and repropose and finalize its fiduciary rule while the SEC only produced a 

study called for by the Wall Street Reform Act. 

In neither of those cases was the process perfect, of course, nor 

is our final rules perfect, but both agencies were able to adapt 

along the way and move forward. Why is the SEC slower than 

those agencies? What is not working? 

Ms. WHITE. I think considering what the SEC was given between 

the Dodd-Frank Act and the JOBS Act, plus obviously all of our 

various ‘‘discretionary responsibilities,’’ which are vast, we have 

undertaken in the last few years a historic level of regulatory activity of great complexity. And I think I have said this before about 

Dodd-Frank and the JOBS Act in particular, and I have said it 

from the day I arrived, I am deeply committed to getting the congressional mandates under both of those statutes, and now the 

FAST Act, done as promptly as I can, but they need to be done 

well, and they need to last, and they need to be adaptable to how 

our markets change. 

9 

I think with respect to the other issue you mentioned—the Department of Labor fiduciary duty rule—that is an authority that 

Dodd-Frank gave the Commission to decide whether to exercise or 

not. It is not a statutory mandate. 

Now, I have said myself, speaking for myself, about a year ago 

after extensive study that I think there should be a uniform fiduciary duty rule coming from the SEC under Section 913 of the 

Dodd-Frank Act. That is speaking for myself. The staff has proceeded to develop outlines of recommendations, but it is up to the 

Commission as a whole to decide whether to advance that rule and 

then what its parameters should be. 

In terms of Title VII and the derivatives markets, you are right, 

our share of that market is a little less than 5 percent, but it is 

an important part of those markets. Again, before I arrived—and 

this is not meant by way of criticism at all; I see how it made 

sense—what the SEC decided to do with its Title VII rulemakings 

is essentially publish a policy statement that set forth a sequence 

of when the SEC would adopt proposals first and then finalize 

those rules before they become effective. So we have been following 

that road map. 

I think there could not be a higher priority among all of the 

Commissioners, the three of us there now and the other two that 

left us last year, than completing those Title VII rulemakings. And 

I think in terms of this regulatory year, that is a very high priority 

certainly to finalize. We have finalized a number of those rules 

since I was last here, but in terms of the reporting and the registration and regulatory mechanisms for dealers, I am hoping we 

are done with those by the end of this year. 

Senator BROWN. Thank you. We know from during the financial 

crisis how important it is that regulators work together. Industry 

is good at shifting its business model to find gaps, to find areas of 

weakness in the regulatory structure. Congress for whatever reasons chose not to combine any of the financial agencies 6 years ago, 

obviously did FSOC, but beyond that not really combining these 

agencies, and it makes your cooperation with other agencies all 

that much more important. 

Let me ask one other question. Democratic Members, Madam 

Chair, of this Committee and others have taken a close look at the 

policies and the practices and the decisions surrounding the waiver 

applications the SEC receives from financial institutions. I thank 

you and your staff for the information you have provided to us, to 

the Banking staff so far. I hope we can count on you and your team 

for additional assistance when needed as they make more requests. 

Ms. WHITE. Absolutely. I think it is an enormously important 

area. As you know, Senator, it is an area that I focused on right 

at the outset of my tenure as Chair. We have made a number of 

changes to enhance the robustness of the process and the transparency of the process. Obviously, we continue to look at that for 

whether there are other enhancements that would make sense, 

particularly in the area of when we do not grant the waivers because we want to make certain that the public knows that there 

are many cases, including those involving financial institutions, 

where the waivers are not granted. But because of the nature of 

our process, that is not as transparent for reasons that are historVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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ical and good. You want to encourage people to come in and talk 

to the staff about whether they qualify or they do not, and often 

what they submit is nonpublic information. But I continue to look 

at that aspect of our process. I have certainly, since I became 

Chair, directed the staff to keep track of those instances that do 

come in and are not granted, assuming they are not anonymous, 

and, obviously, a number of people just will not apply for waivers 

because they know under our guidelines that they would be denied 

or would not be granted a waiver because of what the guidelines 

specify. 

Senator BROWN. Thank you. We have particular concern about 

the lack of transparency in those waivers that are granted. The 

public sees an institution violates the law, asks for a waiver; the 

SEC issues a short notice approving the waiver. What do you do 

to—how can you assure us that the public and this Committee and 

everybody in our society will be able to understand more what has 

happened in how you bring more transparency when these waivers 

are granted? 

Ms. WHITE. Well, again, on those that are granted, which I think 

are the ones you are addressing now, not those that are not granted, they are publicized on our Web site. They also are subject—in 

the case of the so-called WKSI waivers and the bad-actor waivers 

and some of the other waivers as well to the public criteria that 

the staff or the Commission considers when reviewing those requests. And then what is published on our Web site really does 

march right through what those criteria are and the facts under 

each one. 

Again, if there is some enhancement that would make sense, I 

am certainly open to considering it. 

Senator BROWN. OK. We will come to you about that. Thank you. 

Chairman SHELBY. Senator Crapo. 

Senator CRAPO. Thank you, Mr. Chairman. 

Chair White, modernizing our market structure is a complicated 

but necessary task, and I appreciate all the work that has been 

done by the SEC as well as by the market participants, investors, 

and academics on this issue. 

Senator Warner and I held a subcommittee hearing on this topic 

in March, and one of the takeaways was that while there has been 

a lot of positive input and work done in this area, there is concern 

about the pace of reform efforts and what will be accomplished. 

What are the top market structure objectives that you want to 

achieve this year? And how will this strengthen our markets and 

benefit investors? 

Ms. WHITE. It is an enormously important area and, as you 

know, a very high priority for me personally, both in terms of some 

specific short-term reforms as well as a comprehensive review, 

soup-to-nuts, of the entire regulatory regime. We are building on, 

fortunately, I think the strongest, most reliable markets in the 

world, but that does not mean that they cannot be enhanced and 

optimized. So I have been pleased with the staff’s work—but I always want things to be done sooner. That is my personality, among 

other things, and we certainly are concentrating a lot of resources 

on it. I have also been pleased to date with the work of the 

EMSAC—the Equity Market Structure Advisory Committee—that 

11 

we formed early in 2015. They are tackling the core issues. As you 

know, Senator, the committee has received a recommendation from 

one of its subcommittees about the possibility of doing a makertaker pilot. That is obviously one of the core issues. We are expecting a telephonic meeting where the subcommittee is expected to 

make a specific recommendation on July 8th, so I look forward to 

that. I think that is a very important area. 

A lot of things have actually already been done in the market 

structure arena. One is obviously in the area of resiliency of the 

markets. Shortly after I testified here in 2014, we adopted Regulation SCI, which is the Systems Compliance and Integrity rulemaking that is aimed right at the critical market infrastructures 

and enhancing their resiliency and responses to incidents when 

they occur. That rule is now, in the last few months, subject to examination for compliance which is enormously important. That 

rulemaking is already done. 

I expect in this year rather imminently that we will also propose 

a rule to provide greater transparency of order routing for institutional orders as well as enhancing the existing disclosures that are 

made on the retail side. Again, that is very important information 

to our markets to ensure fairness, to see what your agents are 

doing as they execute your order. So those are examples. 

Senator CRAPO. You referenced the telephonic meeting on July 

8th. That is a report from EMSAC that you were referencing there? 

Ms. WHITE. Yes. That will be a further discussion by the full 

committee of their subcommittee’s recommendation on the makertaker pilot. We are also taking up some other issues at that meeting. 

Senator CRAPO. So following that meeting, do you expect that the 

Commission would be in a position to take the next action and 

move forward? Or when do you expect that this could get to a commission decision? 

Ms. WHITE. Well, the next step is indeed for the staff of the Commission and the Commission to take in the recommendation from 

the committee, but it will be up to the staff and the Commission 

as to what to do and what the parameters should be. I do think 

it is important to do this in a well-designed pilot because it really 

does touch on a very important issue where we need the data. 

Senator CRAPO. Do you have any feel for about when the Commission—— 

Ms. WHITE. I cannot give you a specific time, but it is a this-year 

priority to move that along as soon as we get the recommendation. 

Senator CRAPO. All right. Thank you. 

Ms. WHITE. And when I say ‘‘move it along,’’ I mean consider it 

at the staff and Commission level. 

Senator CRAPO. Thank you. I also want to thank you for your 

past efforts to improve the transparency of the Financial Stability 

Oversight Council process by seeking public comment on the report 

by the Office of Financial Research on the asset management industry. There have been several hearings on the Financial Stability 

Oversight Council that focused on ways to improve transparency, 

accountability, and communications. 

In the Subcommittee hearing that Senator Warner and I held 

last year, the witnesses agreed that FSOC needed to provide acVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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tionable guidance to designated systemically important financial 

institutions on how they could derisk and ultimately shed their 

designation label, what has been referred to as an ‘‘off ramp.’’ 

Do you agree that it would be appropriate to take additional 

steps to increase transparency, accountability, and communications 

in the FSOC process? 

Ms. WHITE. I think that is something that we have to be committed to doing as we go forward. That is not something that may 

be completed at any point in time, and I do think FSOC is committed to looking for ways to enhance the transparency of its process. The so-called off-ramp process is an existing process under the 

FSOC rules and guidance. It is an annual process. But I also take 

your point about greater transparency regarding what the factors 

are that may be involved in that. 

Senator CRAPO. Thank you. 

Chairman SHELBY. Senator Merkley. 

Senator MERKLEY. Thank you, Mr. Chairman. 

One of the most egregious things in the lead-up to the meltdown 

were firms that put together securities and then they sold them, 

saying, ‘‘These are the best things since sliced bread,’’ but while 

they were privately taking bets so securities would fail because of 

the details that they knew about the securities they had packaged. 

Carl Levin championed an end to this type of egregious conflict of 

interest at Section 621. Here we are now 6 years later, and we do 

not even have a draft rule. Why not? 

Ms. WHITE. I agree it is an enormously important rule, and I obviously know well the range of transactions that you are talking 

about that it was intended to address. 

As I know you know, Senator Merkley, there was a proposal 

issued in September of 2011, which is still outstanding, where we 

got tremendous comments. This was actually before the SEC had 

adopted its economic guidance. So, for some of the comments that 

we got, one was that we must really do very intense, good economic 

analysis. We also got comments that it was not tough enough, or 

it was too tough or it swept in too much or did not sweep in 

enough. 

It has proved to be much more complicated than certainly our experts in the agency envisioned. I think we asked in that proposal 

100 questions, and that is a very large number—for example, who 

is covered, what is covered, and all sorts of various interpretation 

issues, including with respect to what the exceptions should be. 

We had a recent comment come up as late as December 2015 as 

to whether certain Fannie-Freddie guarantees would be covered because of the concern that those securitizations could not continue, 

at least under the parameters of the proposal. So it is one where 

the staff is working very hard to get a reproposal done as soon as 

it can, but it has proven to be very, very difficult to draw the right 

lines. 

Senator MERKLEY. This is one of the most direct examples of unacceptable Wall Street behavior where Congress took a very clear 

stand. Wall Street desperately wants this to never happen. The 

SEC has gone year after year after year failing to get it done under 

the argument it is just too complex, it is just too difficult. I do not 

think anybody in America buys that this type of conflict of interest 

13 

is too difficult. The instructions have gone to the SEC. The SEC 

has failed the public on this issue and allowed this type of conflict 

of interest practice to continue, and I think it is absolutely unacceptable. And I would have said the same to your former Chair 

back in 2013, but here we are 3 years later, and now the responsibility rests with you. 

Let me turn now to the issue of political spending being disclosed 

by corporations. A million public comments have been received supporting disclosure because the owners of the company, the stockholders, feel like if the company is spending their money on political activity, they have a right to know. And under the concept of 

money is speech, if you do not get to know how your own money 

is being spent, it is really stolen speech. And that is bad enough, 

but it is certainly material to what investors understand about the 

future prospects for that company. What are they advocating for? 

What are they lobbying for? Who are they lobbying for? Who has 

which philosophies or which positions? 

And so both from the viewpoint of individuals getting to know 

how their own money is being spent on political speech and from 

the view of a material issue related to the future performance of 

the company, it is imperative that there be disclosure. 

There was such a plan on the agenda when you took the chairmanship, but in October of 2013, you took it off the agenda. Not 

even to hold the conversations, to prepare the way on this, this is 

an issue of freedom of speech. It is an issue of knowing how your 

own money is being spent. It is an issue material to the future of 

the company, and you took it off the agenda. Why would you do 

such a thing? 

Ms. WHITE. Well, let me say first that I do deeply respect and 

understand the very deep interest in this issue on all sides, and I 

think it is also important to note that if the spending is material 

in the context of a particular company as we sit here today, that 

would need to be disclosed under the Federal securities laws. And 

we also have through our shareholder proposal rule, Rule 14a-8, 

avenues for shareholders to raise this issue with their particular 

companies, and they make great use of that avenue. The average 

approval rate for such proposals last year was about 26 percent. In 

some companies over the years using that avenue, there have been 

a few majority votes by those shareholders, and those companies 

have generally gone ahead and made those disclosures voluntarily. 

Certainly in large companies the number of them that voluntarily 

disclose political contributions has grown. I think more than half 

of the S&P 500 now provides that disclosure voluntarily, which I 

think is a good thing. 

In terms of the Reg Flex issue, which is what I think you are 

raising, I think there is some misunderstanding about what was on 

the SEC agenda and perhaps even, what I did in reviewing the Reg 

Flex Agenda as I found it. What has not been on the Reg Flex 

Agenda at the SEC before I arrived or after I arrived is to go forward with such a rule. What was on the Reg Flex Agenda, put on 

there in late 2012 and was there when I arrived, was an item reflecting that the Division of Corporation Finance would research 

and consider whether to recommend a rule proposal on this subject. 

My predecessor wrote to Congress in March 23 in response to a 

14 

congressional investigation on this issue that neither she nor the 

Commission nor the staff had reached any conclusion about that— 

whether to recommend a proposed rule—and that no one was actually working on a rule proposal at that time. 

Shortly after I arrived, the first Reg Flex Agenda was due, and 

so I basically carried forward for the most part what was on the 

previous agenda, including that item. In the fall, when I had been 

there a little longer, I had a chance for the staff to do a deep dive 

of all the items on the Reg Flex Agenda, many that had been there, 

by the way, for many years and were aspirational. And the Reg 

Flex Agenda instruction requires you to put on that agenda the 

items that you reasonably believe you can complete in the next 12 

months. 

And so as you know, I have prioritized since I arrived here completing the congressional mandates under the Dodd-Frank Act and 

the JOBS Act as well as, as we went forward, certain mission-critical initiatives like equity market—— 

Senator MERKLEY. I am way over my time, and so in courtesy to 

my colleagues, I will just stop you there because we cannot get a 

full history. But it was listed at the proposed rule stage in April 

2013 and was taken off in 2013. You have the sole power on the 

Commission to establish the agenda. This is an issue that goes to 

the core of who we are as a country that people cannot spend your 

money on political speech without telling you how the hell they are 

spending it or that you as an owner have a full right to know how 

your funds are being spent. I think for you to unilaterally remove 

it from the rulemaking agenda was an egregious affront to these 

core issues of our Republic. It came after pressure, political pressure. I think it is unacceptable. I think you should put it back on 

the agenda. 

Ms. WHITE. That item and about 20 other items that were on the 

previous agenda were removed for the reasons that I said, and it 

was never on there to advance a proposed rule. 

Chairman SHELBY. Senator Rounds. 

Senator ROUNDS. Thank you, Mr. Chairman. 

Good morning, Chair White. You have stated in the past that you 

believe there should be uniformity between the fiduciary rules 

issued by the Department of Labor and the SEC. The Committee 

on Homeland Security and Governmental Affairs recently released 

a staff report regarding the DOL’s fiduciary rule. The report found, 

among other things, that there was extensive disagreement between staff at the SEC and the DOL over the fiduciary rule. 

The report found that, in addition to the DOL refusing to conduct 

a quantitative analysis of the costs and benefits of alternative approaches to the rule, as recommended by the SEC and required by 

the Executive order, the staff economists from both agencies also 

had disagreements over the rule. In fact, the report found that the 

disagreements reached the point of the Labor Department staff 

writing, and I quote, ‘‘We have now gone far beyond the point 

where your input was helpful for me. If you have nothing new to 

bring up, please stop emailing me about this topic.’’ 

Chair White, how do you believe the SEC can structure a uniform fiduciary rule when it appears there are inherent disagreeVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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ments between the two agencies over the fundamental goals of the 

rule? 

Ms. WHITE. I think what I have said in the past is I believe that 

there should be a uniform fiduciary duty rule for broker-dealers 

and investment advisers when they are giving securities advice to 

at least retail investors. That is really under our rules. The Department of Labor and the SEC are separate agencies, and so our rules 

are not identical, including before the DOL rule was adopted in certain areas where our registrants may overlap with theirs. 

In terms of the Department of Labor/SEC staff interactions on 

their rule proposal, I think the comment you mentioned is from 

2012, actually, on the prior proposal, so I was not here then. But 

I will say that the SEC staff did give substantial technical assistance to the DOL staff on the current, now final but then proposed, 

rule, including technical assistance on our own rules and what they 

provided, but also the possible, impacts on the availability of reasonably priced advice by brokers and what the impact would be on 

the broker model itself. 

The nature of those exercises—and we have done it with other 

agencies, too, on other rules where we have that technical assistance to provide—was not really to reach agreement but to make 

sure that we were giving our best technical assistance and input 

to the Department of Labor, which then obviously made the decision as to what the proposal should be, and put it out for notice 

and comment. I think the notice and comment was focused on some 

of those same issues. 

Senator ROUNDS. Would it be fair to say that, based upon the 

rule which is in effect right now coming out of DOL, would it be 

fair—and I do not want to put words in your mouth, but would it 

be fair to suggest that there would be concerns yet as to the availability of investment advice being made available to the smaller investors and perhaps a limiting of some of that advice right now 

based upon the traditional ways that we provide investment services to some of your smaller investors in the United States today? 

Ms. WHITE. Again, I am very focused on that issue myself in connection with our work on a uniform fiduciary duty rule under Section 913. Certainly the Labor Department was focused on it, as reflected in their notice and comment period. I think certain changes 

were made in response to that concern and possible impact. But I 

think to some degree—and this would be true of our rules, too— 

you need to see what happens as the rules are implemented. Certainly we are available to provide whatever help and assistance we 

can to our registrants if they run into a conflict with our rules. Nobody has come to us yet for that, though. 

Senator ROUNDS. My concern is that sometimes as we try to protect individuals, we actually limit the availability to them of opportunities to invest. And I want to go into one other area here, and 

that is, one of the SEC’s goals is to facilitate capital formation. One 

recent trend along these lines is the increase in the issuance of private shares which can have significantly less disclosure requirements relative to public share offerings. Private offerings can only 

be sold to qualified high-net-worth investors. In 2014, more than $2 trillion was raised privately. Private stock 

issuances under the SEC’s Regulation D accounted for more than 

16 

$1.3 trillion of this amount. In comparison, registered public offerings amounted to approximately $1.35 trillion in 2014. 

Are you concerned by the fact that issuances of private stock 

have now outstripped public shares sold to all retail investors in 

terms of new issuance? I mean, doesn’t this kind of point to a trend 

here of kind of the guys who can afford the—the guys who are capable of investing large amounts of money are basically providing 

a lot of the new public issuances, they are receiving it, and the 

smaller retail folks seem to be not in that position? Isn’t there 

something going on here that maybe is not moving in the right direction? 

Ms. WHITE. I think what we have an obligation to do—and we 

do is monitor both the private and the public markets very closely 

and continuously. As you know, we have a tripartite mission, which 

is to protect investors, assure the fair and efficient functioning of 

the markets, and to facilitate capital formation. I do not see those 

three pieces to be in conflict, but they certainly need to be taken 

into consideration in terms of everything we do. 

I think the point you are also making is on who should be within 

the definition of ‘‘accredited investor,’’ which obviously drives a lot 

of what happens on the private side of the markets. Clearly, from, 

our inception, that concept is meant to protect investors who may 

not be able to protect themselves. That obviously hits the core of 

our investor protection mission, which we feel obviously very 

strongly about. 

In terms of the public markets, one thing I do think we have responsibility for and we certainly, are looking at this constantly is 

whether there is something about our rules for the public markets 

that is unnecessarily driving away, public offerings. So we look 

very closely at that. Obviously, we have had with the JOBS Act the 

IPO on ramp, which makes it somewhat easier to do that. Again, 

we are still focused on investor protection, but I think that whole 

range of issues deserves and is getting very close attention from 

the SEC. 

We recently published, as you may know, the staff’s accredited 

investor study with a series of recommendations on that, and that 

also touched on some of the issues you are mentioning. 

Senator ROUNDS. Madam Chair, thank you. 

Mr. Chairman, thank you for the time. 

Chairman SHELBY. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Chair White, I would like to bring you to the plight of the 3.5 

million United States citizens on the island of Puerto Rico. This is 

a situation where Puerto Rico finds itself paying 33 cents of every 

dollar that it has toward its debts. The Government has been 

forced to make excruciating decisions to shut down schools, scale 

back essential services. Hospitals with no access to power are closing the doors. The island is losing at least one doctor each day, and 

we have one of the most significant migrations out of the island to 

the mainland in quite some time, which underlines the critical importance of a congressional solution that will allow the Government 

to restructure its debts and protect the people. 

But beyond those reasonable and necessary solutions that should 

come from the Congress, the people of Puerto Rico deserve to know 

17 

whether illegal activity by advisers to Puerto Rico and its municipal entities controlled and contributed to the current debt crisis. 

Dodd-Frank explicitly mandated that the SEC and the Municipal 

Securities Rulemaking Board protect municipal entities, and yet, 

despite the widely acknowledged problems on the island, neither 

the SEC nor the MSRB has held one hearing, Commission meeting 

initiative, or given any particular attention to Puerto Rico’s debt 

crisis, at least not to my knowledge. 

So what I want to know is whether municipal advisers, underwriters, and broker-dealers—all of whom are subject to the SEC 

and MSRB regulations—that operated in Puerto Rico have done so 

free of conflicts of interest, whether they packaged and sold bonds 

worthy of the savings of hardworking investors, and, most importantly, whether they have acted in the best interests of the Puerto 

Rican Government and people. How will the SEC pursue this element of their crisis? 

Ms. WHITE. I could not agree more about the state of that crisis 

and that what our Government—collectively in my view—needs to 

do to address that in a positive way. But in terms of the SEC’s jurisdiction there, we have actually very closely attended to investments in various funds with bonds that may be at risk in terms 

of investor protection. We put out guidance on some of that from 

our Division of Investment Management. 

We also have brought two public enforcement actions that have 

dealt with brokers who have misled investors about the riskiness 

of those bonds. And while I cannot—— 

Senator MENENDEZ. In Puerto Rico? 

Ms. WHITE. Yes. Yes, both of them—one I think in this year and 

one in 2014. I can give your staff the details of those. And, again, 

I cannot comment on specifics of anything ongoing that we are 

looking at now, but I think I can say that we are very focused on 

the issues that you raise in some of the other work we are doing. 

Senator MENENDEZ. So you know, several colleagues of this Committee and others have joined me in a letter to you and to the Commission urging you to be not just the cop on the street in Wall 

Street but also in San Juan, and to make sure that those who may 

have contributed to this crisis are fully prosecuted, because at the 

end of the day, if that can take place there, it can take place anywhere. And sending a strong message that it is not acceptable is 

critical. So I look forward to your continuing work in that regard, 

and I would like to be advised of what is happening when it is 

available to be public. 

Second, I would like to go back to the question of corporate political spending. I continue to believe that transparency and disclosure to shareholders is of the utmost importance, both as a matter 

of corporate governance and investor protection. And it is not just 

me; 1.2 million Americans have implored the SEC to act by virtue 

of their commentary during the rulemaking. 

So it has been nearly 6 months since I, along with 96 Members 

of Congress, wrote to you asserting that the SEC retains the authority to take critical steps to prepare for a possible rule on the 

issue of corporate political spending. And as we indicated in the letter, we expected and continue to expect the agency to move forward 

with plans to prepare for a rulemaking. 

18 

Now, I know that the 2016 Omnibus Act is seen by the Commission as preventing them from taking the type of action, but that 

action specifically talks about issuing, implementing, or finalizing 

a rule. It does not speak to preparing a rule for that moment, because I can assure you that that provision will die. That provision 

will die. And we need not wait for it to die when 1.2 million Americans have said to you, probably an unprecedented number, that 

they want to see a rule in this regard. 

So I hope that—and I would like to get from you a sense of 

whether or not—I mean, we have pending nominees to the SEC. I 

did not care for the way either of them answered me on this question. I would like to know, Are you going to at least prepare and 

respond to those 1.2 million Americans and nearly 100 Members of 

Congress who believe that you should move forward in this regard? 

Ms. WHITE. Senator, again—and you may have heard some of my 

answers to Senator Merkley’s questions—I deeply respect the 

strong views of those that you have mentioned. There are very 

strong views on both sides of this issue, and I have also mentioned 

how the disclosure is developing, both voluntarily and through our 

shareholder proposal process. But the issue of the SEC doing a 

rulemaking to mandate political disclosures by all public companies 

is not on our Reg Flex Agenda. So with or without the appropriations language the priorities that we are pursuing, and pursuing as 

hard and as fast and as well as we can, are really the ones that 

I have outlined since my early days here, which are the mandated 

congressional rulemakings and certain of the mission-critical initiatives. I have talked about asset management and equity structure. 

So I think that is the status now, and I say that with a full appreciation of the deeply held views on this, on all sides, including 

by 2,000-plus unique comment letters that we have gotten on the 

petition that you reference. 

Senator MENENDEZ. I will just close, Chairman: 1.2 million 

Americans, I think very rarely has the SEC seen that extent of 

commentary, tells you the incredible importance that people believe 

in the nature of limited corporate spending at a time in our national politics that determines decisions in every asset of our life. 

And so I think that should be a far greater level of consideration 

by the SEC than it presently is. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Madam Chair, before I recognize our next 

Senator, we have over 300 million people in this country, so 1.6 

million would be about a third of 1 percent and self-generated. I 

hope you as Chairman of the SEC or any agency would not react 

to generated mail from Republicans or Democrats but would do 

what is best for the country and also under your jurisdiction. It is 

my understanding that this is under the basic jurisdiction of the 

Federal Election Commission, for what it is worth. 

Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Chair White, welcome back. You observed a few moments ago 

that one of the responsibilities of the SEC is to facilitate capital 

formation. There is legislation that I think would be very constructive to that end. It was introduced in the House by Congressman 

Mulvaney, and what it would do is streamline some of the regulaVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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tions affecting business development companies, BDCs, and included in that is a modest increase in the leverage they would be 

permitted to use from a 1:1 ratio to a 1:2 ratio. 

If this were adopted, it seems to me, BDCs would be better able 

to provide loans that they do provide to small- and medium-sized 

companies, which, by the way, are finding it more difficult to access 

bank loans given the regulations of Dodd-Frank. It would also 

allow better returns for investors, potentially, with some added risk 

that would be fully disclosed to those investors. And it has demonstrated extremely broad bipartisan support in the House. I think 

his bill passed the House Financial Services Committee 53–4, and 

it was included in legislation that passed the House floor overwhelmingly. 

We have not taken this up yet, but my understanding, Chair 

White, is that you have some concerns about the leverage component in this, and I am wondering if you could briefly, because I 

have got limited time, tell me why you are concerned about increasing the leverage of BDCs. 

Ms. WHITE. Yes. First, let me just say that I think BDCs have 

been very good vehicles for growth. They were designed to be that 

for developing companies that might not otherwise be financed. I 

think the original statute was passed in 1980. 

The current reality is that retail investors hold the majority of 

those shares, so that always raises our investor protection antennae. We have worked over the years—the staff has to try to facilitate BDCs’ operations because they have a patchwork quilt of regulations because of their exemptions from some of the Investment 

Company Act provisions. 

I have written about this. I think when I first got here in October 

of 2013, there were some changes made in the bill, which I think 

improved it. I appreciate those. I also wrote a letter late last year 

to Chairman Hensarling and Ranking Member Waters. I still have 

investor protection concerns, or I would not have written the letter—— 

Senator TOOMEY. What is—— 

Ms. WHITE. One is leverage. 

Senator TOOMEY. What is the concern about the leverage? 

Ms. WHITE. One is leverage. 

Senator TOOMEY. What about the leverage? 

Ms. WHITE. It doubles the leverage, which means that your upside and downside potential are multiplied or are multiple, and it 

is a higher level of leverage than any sort of its counterpart kinds 

of funds have—— 

Senator TOOMEY. So—— 

Ms. WHITE. Second, I think it allows more investment in financial institutions than was originally conceived and allows investments in registered investment advisers, so—— 

Senator TOOMEY. Right, so let me—I have got very limited time 

here. So it is true that it increases the risk profile, it increases the 

exposure. But so does investing in a bank. A bank is a highly leveraged entity. Retail investors are allowed to buy securities on margin. Do you support allowing retail investors to continue to buy securities on margin? 

20 

Ms. WHITE. I am certainly not opposed to that, but I think there 

are more issues with respect to this bill and risks with respect to 

this bill than just that. 

Senator TOOMEY. Well, but that is what—— 

Ms. WHITE. That is one of them. 

Senator TOOMEY. ——leverage is about, right? 

Ms. WHITE. That is one of them. 

Senator TOOMEY. OK. I thought leverage was the main concern. 

I would simply observe that there are many, many opportunities 

for an investor to take on leverage if an investor sees fit to do so. 

Buying options, for instance, can create the equivalent of enormous 

leverage, much, much more than this very limited increase that 

would be, after all, managed by a professionally managed company. 

So I would really urge you to consider that among the various ways 

a retail investor can achieve leverage, this would be a very modest—it is heavily regulated. It is run by professionals. And the upside benefit I think is very significant. 

Let me touch on another item here. I think the SEC has a proposed rule that would govern the use of derivatives by registered 

investment companies, and, of course, derivatives are used for a variety of reasons to achieve fund objectives. They are all disclosed. 

It is articulated. If the SEC were merely consolidating previous 

guidance letters, then I rather doubt we would have seen the volume of comments that have resulted. In fact, I think there are 

some things new. One that I am concerned about is that the exposure that is used to cap the amount of derivatives is based simply 

on the aggregate notional amount of those derivatives when, in 

fact, notional amounts are a terrible proxy for risk. They do not 

measure risk at all. So why are we using the notional amount to 

determine the limit on these investment companies’ derivative 

holdings? 

Ms. WHITE. That is one among several important issues that we 

teed up in the rule proposal, and one, as you point out, we have 

gotten a lot of comments on, which the staff is very thoroughly 

going through as they consider what their recommendation will be 

for the final rule. That is probably one of the most frequently commented on aspects of it—not all comments are critical, mind you, 

but a number are for the reasons you state. 

Senator TOOMEY. So is it your intention that there will be some 

modification here and that there will be a measure other than simply the really meaningless notional principal amount? 

Ms. WHITE. Again, I cannot get ahead of the process, but I can 

say that we are very focused on that issue, and the nature of our 

notice and comment process is that we very seriously consider all 

of the comments and try to basically propose a final rule that is 

optimal and better than our proposals. 

Senator TOOMEY. OK. Thank you, Mr. Chairman. Thank you. 

Chairman SHELBY. Senator Donnelly. 

Senator DONNELLY. Thank you, Mr. Chairman. Good morning. 

Thank you so much for being here. 

In 1982, the SEC adopted Rule 10b-18 to provide a safe harbor 

from market manipulation liability on certain stock buybacks. 

Buybacks could have been considered market manipulation back 

then. Recently, in my home State of Indiana, 2,100 workers were 

21 

let go by a highly profitable company in order to get $3-an-hour 

jobs to Mexico. The CEO said returning cash to shareholders continues to be a top priority. We are targeting $22 billion of total 

shareholder returns through share repurchases and dividends 

through 2017. Of that $22 billion, $16 billion will come in the form 

of stock buybacks—$16 billion in stock buybacks, while firing 2,100 

workers in Indiana in order to get $3-an-hour jobs in Mexico to 

help fund the stock buyback. 

I will also note that the savings they get from this are less than 

one-half of 1 percent of the amount of the stock buyback. 

So my question is: You know, in 1982, this could have been considered market manipulation. What does the SEC think of actions 

like this now? 

Ms. WHITE. Well, the safe harbor rule that you mention does not 

immunize companies from liability for market manipulation if it occurs. It is basically designed to impose some rules to at least try 

to prevent market manipulation. For example, if the buyback is 

done on the basis of material nonpublic information a fraud action 

can be brought. The safe harbor does not deal with that at all. I 

am acutely aware of the whole set of issues with buybacks. They 

have gotten a lot of attention in a lot of situations, and so we are 

focused on it. 

But the SEC does not—— 

Senator DONNELLY. Well, let me ask you this—— 

Ms. WHITE. ——dictate how—OK. 

Senator DONNELLY. Should the SEC play a larger oversight role 

in overseeing stock buybacks as this has been funded by firing 

American workers? 

Ms. WHITE. I take your point completely. I do not think the SEC 

has the authority to tell a company how to spend its money. What 

we do have, though, are disclosure rules with respect to buybacks 

that provide transparency to investors and the public of companies 

that buy back at least shares registered with the SEC under Section 12(g), and we are addressing that issue in our disclosure effectiveness review and our recent SK—— 

Senator DONNELLY. Let me ask you this—— 

Ms. WHITE. ——constantly to see whether we should—— 

Senator DONNELLY. ——do you think this—— 

Ms. WHITE. ——and make that disclosure more—— 

Senator DONNELLY. Do you think this was the conduct envisioned when the rule was changed back in the 1980s? 

Ms. WHITE. I am not sure about the conduct that you are describing. Obviously, the way you are describing it—and I am not doubting it at all—it is a horrible set of events and had obviously very 

significant and unfortunate negative consequences. But, again, I 

think what we have designed with our rulemakings—and we are 

looking at it again to see if we cannot do more—is to avoid market 

manipulation, which is within our jurisdiction. 

Senator DONNELLY. Well, in the SEC’s eyes, who is the corporate 

responsibility to? Is it to just the shareholders? Or do they owe a 

duty to the entire corporate enterprise, including workers? You 

know, what is the corporation’s responsibility in the eyes of the 

SEC? Who is it to? 

22 

Ms. WHITE. The fiduciary duty of the board, for example, and the 

officers is to their shareholders. But by my saying that, I do not 

want to imply that I think there are not duties and responsibilities—— 

Senator DONNELLY. Well, does the SEC assume that they have 

any responsibility to their workers, or can they just fire them willynilly? 

Ms. WHITE. That is not a subject that is within the jurisdiction 

of the SEC unless it is something that has an impact on what is 

within our authority. 

Senator DONNELLY. When you look at this, I think a big part of 

this is corporate short-termism, if you want to—you know, I do not 

know that that is a very technical term, but it is the reality of life. 

I met with these workers this morning. They were making $13 an 

hour. Their CEO made 11. The CEO before him took over $150 million out on his last day. And they are making 13 bucks an hour 

on a very, very, very profitable plant, and they are fired so their 

jobs could go to $3 an hour in Mexico to help fund a stock buyback. 

Do you inherently see something wrong with this business model? 

Is the American dream that we all fight for? Is this what the SEC 

expects on conduct from the corporations that you regulate? 

Ms. WHITE. What we expect from the corporations we regulate— 

and certainly as citizens expect from those we do not regulate—is 

fairness to not only their shareholders and the fiduciary duty they 

owe to shareholders, which is within our direct bailiwick, but also 

to their employees as well. There are studies out there on the 

buybacks and the benefits and the detriments that go both ways 

depending upon the context of the particular company when they 

are buying back, what they are doing with their funds, what they 

have to do with their funds and so forth. But I take your point. 

Senator DONNELLY. Thank you, Mr. Chairman. 

Senator COTTON. Thank you. Thank you, Mr. Chair. 

I want to talk a little bit about FINRA and its structure. FINRA 

is defined as a self-regulatory organization. Is that correct? 

Ms. WHITE. Yes. 

Senator COTTON. Does FINRA operate with a mandate from the 

Federal Government? 

Ms. WHITE. FINRA is, as you point out, a self-regulatory organization that is a membership organization, but it is certainly an organization that is primarily responsible for the surveillance and 

regulation of broker-dealers. 

Senator COTTON. Does it use tools that are similar to or typical 

of those of an independent Government regulatory agency? 

Ms. WHITE. Certainly on its exam and enforcement side. They 

have tools we do not have, frankly, because it is a membership organization. There are things they can do that we cannot do under 

our own authorities, but they certainly use surveillance tools, they 

use enforcement, and they use exams, which are similar. 

Senator COTTON. And they make rules that will govern the conduct of their members? 

Ms. WHITE. They certainly make rules. Many of them are subject 

to SEC approval, but yes. 

23 

Senator COTTON. Are there any other private organizations that 

are similarly structured and oriented within the securities law 

space? 

Ms. WHITE. Not at the present time. 

Senator COTTON. What sort of input, to your knowledge, do 

FINRA members have into FINRA’s regulatory policy agenda? 

Ms. WHITE. I do not know the specifics of that. Obviously, they 

have a board structure, and they are a membership organization. 

Senator COTTON. What authority does the SEC have over the 

FINRA Board? 

Ms. WHITE. We certainly oversee FINRA. We inspect FINRA, our 

exam staff does, on various issues, and some of their programs. We 

have some authority over their rules as well. Some of their rules. 

Senator COTTON. Do you have the power to appoint board members? 

Ms. WHITE. No. 

Senator COTTON. To remove board members? 

Ms. WHITE. No. 

Senator COTTON. So FINRA exercises investigative and prosecutorial functions related to SEC rules, Federal securities laws, and 

its own rules? 

Ms. WHITE. Yes. Generally speaking, yes. There are some exceptions to that, but yes. 

Senator COTTON. Are those functions executive power, in your 

opinion? 

Ms. WHITE. They are not. I know this is an issue that people talk 

about all the time, but they are not a Government entity. But the 

answers I gave are accurate, I believe, in terms of their powers. 

Senator COTTON. To your knowledge, does FINRA employ paid 

lobbyists? 

Ms. WHITE. I do not know. 

Senator COTTON. OK. Thank you. 

I would like to turn to a separate topic—‘‘shareholder activism,’’ 

as it is sometimes called. On a number of occasions, you have commented on the role that economically motivated investors play in 

the capital markets. In a speech last year in New Orleans, you 

noted that, ‘‘An intense debate is taking place in the business, 

legal, and academic communities as to whether activism by hedge 

funds and others is a positive or negative force for U.S. companies 

and the economy.’’ In that speech you also said that the SEC’s role 

in any given contest between shareholders and boards of public 

companies ‘‘is not to determine whether activist campaigns are beneficial or detrimental but, rather, to ensure that shareholders are 

provided with the information they need and that all play by the 

rules.’’ 

So putting aside the question of any particular dispute, any particular company, any particular investor, do you believe that, on 

balance, engaged shareholders provide critical market-drive checks 

and balances to provide greater corporate productivity and management accountability? 

Ms. WHITE. That is a very broad question. I certainly think they 

can. 

Senator COTTON. OK. You have also spoken favorably in the past 

about the role of cost/benefit analysis at the Commission. Given 

24 

your views on the importance of a data-driven approach to developing public policy, are you concerned about some appeals to emotion that we see from some involved in the debate about so-called 

activist investing, which is sometimes also portrayed as short-term 

investing? 

Ms. WHITE. The SEC is an independent agency and has always 

been. I am an independent head of that agency, and so I think it 

is very important for us to keep our eye on the ball and make decisions based on the merits, which I think we do. 

Senator COTTON. So in this space, you are committed to developing rigorous econometric data on the marketplace impact of potential disclosure rules changes or any other limitations on marketplace participants where rules changes would be proposed and 

adopted? 

Ms. WHITE. Certainly any of our rules are subject to that economic analysis. 

Senator COTTON. OK. Thank you for that. Thank you for your appearance today. 

Chairman SHELBY. Senator Tester. 

Senator TESTER. Thank you, Mr. Chairman. And thank you for 

being here, Mary Jo. I appreciate the work that you do. 

I want to talk a little bit—because I appreciate you taking the 

blame for a lot of stuff, but I want to talk to you about the Commission right now. How many members are active on your Commission? How many members do you have on the Commission? 

Ms. WHITE. We have three. 

Senator TESTER. OK. And it is my understanding—and correct 

me if I am wrong—it has been that way for about the last 8 

months, right? 

Ms. WHITE. Do you want me to give you the hours and the minutes? The last 6 months. 

Senator TESTER. Six months. And is it true that since you have 

only got three, any one of those three can say if they do not like 

a potential vote that might be coming up, just stay away, and then 

you do not have a quorum and you cannot work? 

Ms. WHITE. Well, as a Commission of three, we have to have all 

three Commissioners to do a rulemaking. 

Senator TESTER. Yes, so any one of them can walk away from the 

table and you are sunk, right? That is pretty good power. 

Ms. WHITE. They could, but I think we are very focused, all three 

of us, on getting the work done, too. 

Senator TESTER. Well, that is good. What about your staffing? 

How are you staffed up? Do you have adequate staff? 

Ms. WHITE. I think the SEC is a significantly underresourced 

agency for our responsibilities. 

Senator TESTER. Would that change if you became a self-funded 

agency? 

Ms. WHITE. It would. 

Senator TESTER. Could you give me sort of—I mean, have you 

run any—are you 20 percent down, 30 percent down on staffing 

measures? 

Ms. WHITE. I have certainly talked mainly in the context of our 

ability to cover on the examination side investment advisers, which 

are obviously enormously important to investors, particularly retail 

25 

investors. I have also talked about how we are so outspent on the 

IT side by those we regulate that in those areas we have done some 

analyses. But, again, I respect the appropriations process, the congressional oversight process, and try to make the best case I can 

for more and adequate resources. 

Senator TESTER. Well, I think that—and, look, I mean, there has 

been ten people speak ahead of me, and some of them have been 

very critical. Some on my side of the aisle have been very critical 

about you not doing some of the work that is assigned. And I can 

be critical, too. And, by the way, I am. But the fact is that you have 

got to play the hand that is dealt to you, and the hand that is dealt 

to you is a pretty weak hand right now, in my opinion. Would you 

agree that if you were fully staffed up and you had five Commissioners you would be much more effective and would get more work 

done? 

Ms. WHITE. I think the answer to that is yes. Certainly being 

staffed up would accomplish that. 

Senator TESTER. So we had a fiduciary rule that several have 

talked about, Senator Rounds and others, that got put out by the 

DOL, and I was critical because I thought this was a job you 

should have done, and I think if you had been fully up, you would 

have got it done. But, unfortunately, it did not happen. Are there 

any plans to get that fiduciary rule happening from the SEC’s 

standpoint? 

Ms. WHITE. I am certainly committed to getting it done because 

I think it is of enormous importance. But I have also made clear 

how difficult and long a road that is under Section 913 of the DoddFrank Act and that I am one vote. 

Senator TESTER. Yes, and so fair point. And it has been documented there were some differences between the SEC and the DOL 

when that rule was put out. And I do not hear you saying it is 

going to be done before this Administration is out the door. 

Ms. WHITE. Well, I am committed to moving it as fast and as 

well as I can, but I cannot give you that commitment now. 

Senator TESTER. In all practicality—— 

Ms. WHITE. It is a longer route than that. 

Senator TESTER. OK. So we have got the DOL rule. So the question occurred to me: Do you have to enforce the DOL rule? 

Ms. WHITE. We do not. 

Senator TESTER. So who enforces it on investment advisers and 

broker-dealers? 

Ms. WHITE. Enforcing their rules is their responsibility. 

Senator TESTER. So the DOL will enforce the rules on investment 

advisers and broker-dealers. 

Ms. WHITE. They would enforce their own rules with respect to 

whoever is subject to them. 

Senator TESTER. Traditionally, wasn’t that a job for the SEC? 

Ms. WHITE. Not as to their rules, no. 

Senator TESTER. No, but as far as investment advisers and 

broker-dealers go? 

Ms. WHITE. And still is. Except not with respect to their rules, 

but with respect to our rules. 

Senator TESTER. So tell me how this is going to work. I mean, 

practically, how is it going to work? 

26 

Ms. WHITE. Well, I think it is independent agencies, independent 

rules. We have had before this rule rules by DOL and rules by the 

SEC that overlap, so to speak, and we have managed our way 

through that pretty well. We clearly will watch this as it goes forward. And if issues arise we will certainly be available, and I am 

sure DOL will be available, to coordinate if a conflict should develop. 

Senator TESTER. OK. 

Ms. WHITE. And if and when—I hope we go forward with our 

own rulemaking—obviously, we will coordinate with them about 

any new issues that might arise with respect to that. 

Senator TESTER. I appreciate it. 

Mr. Chairman, I will put a few more questions in the record, but 

thank you very much. 

Ms. WHITE. Thank you. 

Chairman SHELBY. Senator Moran. 

Senator MORAN. Mr. Chairman, thank you. Chairwoman, thank 

you very much for your presence today. We have had a conversation in the appropriations process I want to continue to ask you 

about. It deals with the regulation of the National Marketing System. The question I have is whether the NMS plan governance 

model should be reformed to reflect evolution of our markets and 

add additional participants as voting members. My question is: 

Does the SEC currently have legal authority to approve the addition of additional market experts as voting participants in the governance of NMS plans? 

Ms. WHITE. Subject to our overall SRO rule process, we could do 

that. One thing I should mention is we actually have recommendations coming from the subcommittee of the Equity Market Structure Advisory Committee on this very subject, but we are typically 

in the position of approving a rule filing. But we can also issue orders to solicit rule filings, if I could say it that way. 

Senator MORAN. So maybe there is more to this story than me 

just asking you whether you have the authority. Is there something 

in the works? Can you bring me up to speed on this topic? 

Ms. WHITE. It is certainly a topic that the Commission is focused 

on, the staff is focused on, and so is our Equity Market Structure 

Advisory Committee, and, in particular, I think it is called our 

Trading Venues Subcommittee. And that is one of the topics, indeed, that they discussed at their last meeting with the full committee, I think at the end of April, and is or may be the subject 

of recommendations. 

Senator MORAN. Do you have attorney personal thoughts on this 

topic? Or are you just waiting for those recommendations? 

Ms. WHITE. I am very well aware of the issues, and I know some 

accommodations have been made, which other advisory participants, have not found sufficient or satisfactory. And so it is an 

issue I am focused on. It is an issue I continue to consider whether 

and what changes, if so, should be made. 

Senator MORAN. OK. I want to follow up a bit on the Senator 

from Arkansas’ conversation about FINRA oversight. I noticed that 

FINRA appointed a new CEO yesterday who is a former employee 

of the SEC. I guess my question is: How do you satisfy the need 

for congressional oversight of FINRA? Is it just a matter of we have 

27 

oversight over the SEC and the SEC has oversight over FINRA? Or 

is there a greater opportunity—we have no appropriations process 

there, no confirmation process. Occasionally, FINRA representation 

is before Congress in a setting like this, but beyond that, it seems 

to me that FINRA’s role is growing more engaged in regulatory activities and Congress has little oversight in that regard. 

Ms. WHITE. You certainly, as you indicate, have oversight authority over the SEC, who has oversight authority and exam authority over FINRA, and it is an important one, I think. And, clearly, FINRA is a very important component of our investor protection 

and market safeguarding. 

Since I have come to the SEC as Chair, we have enhanced our 

oversight of FINRA and continue to do so. I think I heard Rick 

Ketchum, the outgoing president and CEO, indicate that he understands the interest by Congress, given their activities and the importance of their activities, in learning about them. I do not know 

if ‘‘oversight’’ is quite the right word for the reasons that you indicate. And, by the way, I think Rick Ketchum and Robert Cook, who 

is his successor, are just tremendous public servants, and we work 

very well with them. Obviously, we oversee them, but I have found 

them both to be extraordinarily knowledgeable—I know Rick better 

than I know Robert, but I know them both—about the markets, 

very committed to investment protection. So I think that is always 

a safeguard. 

Senator MORAN. I think you are telling me that my assurance is 

that you are watching over FINRA, and we need to watch—I know 

you would not say this, but we need to watch over the SEC. Maybe 

you would say that. 

[Laughter.] 

Ms. WHITE. It will happen anyway, right? I think that that is 

correct. I guess the other part of my answer was that I am aware 

of the need, and we have moved in that direction to enhance our 

oversight of FINRA at the SEC. 

Senator MORAN. You may use your position to encourage FINRA 

to be cooperative with Congress, open and available to us. That 

would be useful. 

Ms. WHITE. Yes. I agree. 

Senator MORAN. Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

Thank you for being here, Chair White. As you know, the SEC’s 

mission is to protect investors and our capital markets, and requiring companies to disclose information is a critical part of that mission. Publicly traded companies may not like disclosing potentially 

embarrassing or damaging information, but the SEC’s job is to look 

out for investors, not for big companies. 

Now, there is a lot you could be doing to protect investors. There 

are still 20 mandatory Dodd-Frank rules from 2010 that the SEC 

has not completed, and there are more than a million people, including countless investors and former SEC commissioners, pushing the agency to require publicly traded companies to disclose 

their political contributions. But instead of moving forward on 

issues intended to help investors, you have actually headed in the 

opposite direction. 

28 

Since your first year in office, you have dedicated significant SEC 

time and resources to a project you invented and called the Disclosure Effectiveness Initiative. According to the 2013 speech you 

gave, your big idea behind this project is that the SEC might be 

requiring companies to disclose too much information, causing investors to suffer from something you call information overload. 

Now, I am all for eliminating redundant disclosures or improving 

the ways that information is presented but, honestly, I have never 

heard of the concept of information overload in the context of investing in stocks. I have never heard of the idea that investors actually want less information than they are getting. 

So I have a pretty simple question. The SEC is an investor protection agency, so when you launched your project, what evidence 

did you have that information overload was a real problem that investors wanted you to solve? 

Ms. WHITE. It is an issue, Senator Warren, that the Commission 

has been looking at for, really, decades, among others. But the purpose of disclosure effectiveness—and by the way, it was not invented by me—it was basically in response to a congressional mandate to do a report that reviewed our entire Regulation S-K concept. 

Senator WARREN. I am sorry; when was this report that you are 

talking about? 

Ms. WHITE. It was, filed with Congress at the end of 2013. 

Senator WARREN. So are you—now, wait. Are you talking about 

the JOBS Act report? 

Ms. WHITE. Yes. 

Senator WARREN. Because that one, I actually looked at that. 

Ms. WHITE. Yes. 

Senator WARREN. And what was asked of you was that the SEC 

review one subset of disclosures to see if that subset should be 

modified as they apply to one subset of companies, so-called emerging growth companies. Your project has gone way—— 

Ms. WHITE. Right. 

Senator WARREN. ——beyond the boundaries identified in that 

law. 

Ms. WHITE. Emerging growth companies are a very broad swath, 

as you know, of the markets. 

Senator WARREN. I understand, but that is not what your project 

is. 

Ms. WHITE. But my point is we have been, for decades at the 

SEC, undergoing disclosure effectiveness review. And I absolutely 

agree that there is nothing more—— 

Senator WARREN. That is not my question. 

Ms. WHITE. ——there is nothing more important—— 

Senator WARREN. My question is—— 

Ms. WHITE. ——there is nothing more important than our disclosure powers. 

Senator WARREN. ——when you launched your initiative called 

the Information Overload, this is what you identified. And I just 

want to know what evidence you have that this is a real problem, 

that investors have come to you and said: We are worried about 

getting too much information. Just what evidence did you—— 

29 

Ms. WHITE. First of all, the review is not limited to duplicative 

or overloaded information. It is really—— 

Senator WARREN. You mean the review in the 2012 JOBS Act? 

Ms. WHITE. No, no, our review. It is meant to make disclosure 

more meaningful to investors. And we have also gotten comments, 

recently, from all kinds of constituents, including our Investor Advisory Committee, about identifying, and really not objecting to removing, things that are repetitive, duplicative, or not useful. And 

the purpose of this review is to make disclosure more meaningful 

for investors. 

Senator WARREN. I did not—I started this by saying I do not 

have a problem with getting rid of duplication. I do not have a 

problem with making it more effective. The question I asked you 

about is whether or not this so-called information overload is a real 

problem identified by investors that have come to you. 

Let us be honest about this. I cannot find, and you have not produced, a single investor who as complained to the SEC about receiving too much information. Investors do not want less information about the companies where they put their money. In fact, I 

think that is ridiculous. The SEC’s own Investor Advisory Committee, which includes everyone from hedge funds to pension funds 

to retail investors, say recently that the current amount of disclosure—and here was their word—is appropriate. 

So who wants less information to be disclosed? It is pretty clear. 

The National Chamber of Commerce, which represents the giant 

companies that have to do the disclosing. The Chamber has produced a fact-free report, whining about this nonexistent information overload problem, in 2014, shortly after you launched your initiative. 

You know, information overload is a problem that was invented 

to justify a project aimed at making life easier for big companies 

and harder for investors. In fact, Keith Higgins, the SEC’s head of 

the Corporation Finance Division and the lead on this project, kind 

of let the cat out of the bag in 2014 when he said in a speech the 

aim of this project was ‘‘to reduce the burden on companies, consistent with our mission of investor protection, wherever we can.’’ 

Now, I recognize that Congressional Republicans slipped language into the must-pass highway bill at the end of last year that 

asks the SEC to review disclosures with an eye toward eliminating 

ones that are unnecessary. Of course, that does not justify the SEC 

dedicating resources to this project for 2 years before that. But nevertheless, given the views of your own Investor Advisory Committee that the current disclosures are appropriate, do you agree 

that the supposed information overload problem does not exist? 

Ms. WHITE. Well, if you go back to even Thurgood Marshall years 

ago, in defining materiality under the Federal Securities laws, the 

concern was expressed that too much information could cloud and 

crowd out the meaningful. I think you are describing our disclosure 

effectiveness review in a way that is much narrower than its intent. 

Senator WARREN. That is the extent of your evidence? 

Ms. WHITE. And I think one of the most important things about 

the disclosure effectiveness review is that we are listening to everyone. We are also talking about adding information in this review 

30 

that is needed to be added, for example on foreign taxes and other 

things. But it is also the manner in which the information is being 

provided to investors that is a huge priority of this review. 

Senator WARREN. We are over our time so let me just stop you 

there. I have said now three times, I think, in just this brief exchange, I am fine with cutting out duplication; I am fine with making the information clearer, and as should be clear; I am fine with 

providing more information. What I am trying to identify is something that you specifically have targeted and talked about. 

I am frustrated that, at your direction, the SEC has voluntarily 

spent 2 years trying to address a problem that you have no evidence exists. Instead of making up work to help giant corporations, 

the SEC should do its job, starting with the 20 required rules 

under Dodd-Frank that still are not fixed 6 years after the law was 

passed. Your job is to look out for investors, but you have put the 

interests of the Chamber of Commerce and their big business members at the top of your priority list. 

Chairman SHELBY. Your time is up. 

Senator WARREN. A year ago I called your leadership at the SEC 

‘‘extremely disappointing.’’ Today I am more disappointed than 

ever. 

Thank you, Mr. Chairman. 

Ms. WHITE. And I am disappointed in your disappointment and 

could not disagree more with your characterization of what we are 

trying to do to improve our disclosure regime for investors to make 

it better. And we—— 

Senator WARREN. When you bring me evidence of this so-called 

information overload that you have initiated, then we can have 

more conversation about how disappointing this leadership has 

been. 

Ms. WHITE. I would suggest you read the Regulation S-K concept 

release for the range of issues we are addressing, including that. 

Senator WARREN. I would like to see some evidence that there 

really is a problem here. 

Chairman SHELBY. Senator Warner. 

Senator WARNER. Thank you, Mr. Chairman. 

Chair White, it is good to see you again. I want to move to another area of concern that I have. I have seen evidence recently— 

I am sure you probably have as well. RBC put together a chart of— 

its complexity is a little overwhelming—that there were 839 different fee structures— I am getting to the maker-taker issue—with 

2,700 different iterations in terms of incentives and rebates within 

our market structure right now, that quite honestly give the impression that the system is rigged to direct trading through to 

those firms and entities that are going to give you the biggest rebate or fee structure. 

It seems to me that there is an extraordinary amount of conflict 

of interest here in the whole question of brokers and their clients. 

When we look at this—and we have got, obviously, the complexity 

of our markets and trying to make sure—I agree with Senator 

Warren that we have got to get information out in a clear and 

transparent way. But, boy, you talk about an area that is opaque. 

You know, how are we going to get through this? 

31 

Now, you have talked about this back in 2014, the negative outcomes of some of these—this structure. You know, I strongly believe we need to move quickly on the maker-taker pilot. I would encourage you that when we take a look at this maker-taker pilot, 

that we have all venues included, both those lit and unlit. 

When we think about—again, if you look at that RBC chart and 

then you add the dark pools behind it, enormous challenges, and 

that we do not—you know, I know that the Trade Act component 

issue added a whole series of complexity to the tick size project. 

And my hope is that we will not see those same kind of great to 

have but potentially items that dramatically slow down the ability 

for us to bring more transparency to our markets, and particularly 

in terms of this area where there appears to be an enormous 

amount of conflict of interest. So could you speak to that? 

Ms. WHITE. First I will say—and I think I said it at the Committee meeting as well—I do think we should promptly proceed 

with a well-designed pilot. The discussion, of the—— 

Senator WARNER. How promptly do you think—I mean, considering we saw the tick size and—— 

Ms. WHITE. Right. 

Senator WARNER. ——we have gone through this a number of 

times and I know it has been delayed again. 

Ms. WHITE. For the tick size pilot, as you know, we ended up 

having to order the SRO’s to submit a plan that would work. And 

I think it is enormously important. It will launch in October of this 

year, but obviously it took a while to do that. 

I do think you have got to be careful that you are getting the information that you need to have from these pilots. I think you may 

not, Senator Warner, have been in the room when I mentioned before that we are expecting a recommendation at a July 8th telephonic meeting from the subcommittee that is in charge of this 

subject matter at the subcommittee level to the full committee on 

July 8th. And frankly, I urged that to happen sooner than their 

next scheduled meeting so that we could move this along. 

It obviously is up to the Commission, and the staff to recommend 

to the Commission what those parameters should be. But it is one 

that I think is more complicated than it seems. I do not think the 

system is rigged, but I think it has developed in a way that we 

have really got to figure out how to deal with. And I am particularly concerned about the conflicts of interest inherent in it. 

Senator WARNER. Once again—— 

Ms. WHITE. Yes. 

Senator WARNER. ——you sort through this bespoke Byzantine 

process, and how any investor, small or large for that matter, really knows where their trades are being directed based upon the 

level of fees and rebates. You know, we need more market confidence, and I really think moving aggressively on this—— 

Ms. WHITE. I think our transparency proposals are an important 

part of that too, but—— 

Senator WARNER. Right. 

Let me, the last few seconds here, go back. Senator Moran raised 

some of the question around market governance. And as more and 

more of these large exchanges do these—the SIPs, the securities 

exchange processors, and are making decisions to make huge capVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
32 

ital investments in technology, sometimes that technology which 

may give them that fractional second advantage over others. And 

as I have said before, you know, I do not want to appear as a 

Luddite, but I do believe at some point speed and the god of liquidity being the answer is not always the completely correct answer. 

But as we sort through this, and with all the various exchanges, 

you know, can you expand on what you said to Senator Moran in 

terms of governance? How do we make sure that, in terms of market governance, we have got all the right parties at the table sorting through these—sorting through these issues? 

Ms. WHITE. I am not sure we are talking about the NMS governance, which we were addressing, but frankly my whole idea for the 

Equity Market Structure Advisory Committee was to try to bring 

in expertises across the range of constituents, and also to make 

sure we had a panel at every one of those meetings that had everybody else there that had a different point of view and an expertise. 

And I have been very pleased with it so far. It is also something 

that focuses and I think moves along more promptly the Commission’s comprehensive review of these market structure issues, and 

it really needs to be there. 

In terms of the speed issue, certainly you can get to diminishing 

returns. I think you had that conversation with Steve Luparello at 

your subcommittee hearing. I do not think you roll back technology. 

We have had tremendous benefits, obviously to retail investors and 

institutional investors in our markets from the technological advances. 

Sometimes people talk about high-frequency traders as if they 

are one thing, and they are not. They are not monolithic. They 

have different strategies. And so, one of the proposals that the staff 

is working on is an antitrading disruption rule, which deals with, 

when markets are particularly vulnerable, liquidity being taken 

away by virtue of speed, to avoid that. So the issues, again, are 

complicated, but I am largely agreeing with you. 

Senator WARNER. And my time expired. 

I just want to say, Mr. Chairman, that, you know, as we look at 

complexities in the equities market, as we have seen complexities 

in the bond market, you know, even in the Treasurys markets, obviously the options markets—and my fear sometimes that some of 

these bespoke products and the incentive systems—you know, I 

worry that the complexity has gotten so great and the effect it has 

on the overall market ecosystem, that it is bleeding from one market into another. 

And I appreciate, Chair White, your comments, but would love 

to come back and revisit with that. 

Chairman SHELBY. Thank you. 

Senator Schumer. 

Senator SCHUMER. Thank you, Mr. Chairman. 

Welcome back, Chairman White, my fellow New Yorker. And as 

you know, I have a great deal of respect for you, but I am going 

to go back to the issue I care so much about. 

I just want to—the money—I am now involved in a lot of our 

races, our campaigns. The money that is pouring in is unprecedented and it is undisclosed. And it is a few organizations. One is 

the Koch brother organization, one is the Karl Rove organization, 

33 

one is the Chamber of Commerce itself—pouring in, poisoning our 

politics, and we do not know where that money comes from. The 

shareholders do not know where that money comes from. 

I will have to tell you, it is more important than anything else 

to me before the SEC. All the things between shareholder and corporate governance pale before what is happening in America. And 

you want to know why people are so discontent? In part, it is because a few powerful people can send cascades of money into our 

system. The ads they put on TV have nothing to do with the issues 

they care about. 

And you, frankly, are aiding and abetting at the SEC because we 

cannot do everything. And we know that our House Republicans— 

Mitch McConnell is insisting that this stay. They gain from this. 

And it is short-term gain because, in part, people become so discontent with the powers that be that they not only go against the— 

all establishment, they go against the Republican establishment. 

Witness the last election, the last primary. 

And I just do not get it. I just do not get why corporations that 

give money should not tell their shareholders. These are major decisions. They have effects on the corporations. If Exxon—and I am 

just picking one. I have no idea what they do undisclosed, but if 

they put a ton of money of undisclosed into the Chamber of Commerce to fight global warming—let us just assume that—their 

shareholders have a right to know they may be making a bad decision. 

I think you are hurting America. You are hurting America. And 

I know you can stay in your narrow little box and say, well, the 

rules of the SEC are limited, and this and that. First, a lot of people do not agree with that—most people. Second, the public. I 

mean, I know Senator Shelby said 1.2 million petitions is a small 

amount compared to the population of America. That is true, but 

how many other issues have you gotten 1.2 million petitioners calling you? And I wish you would change your mind. I am just so disappointed, so disappointed, because every one of our commissioners 

should be a citizen. They have to do things within the law. This 

is within the law and you have made the decision not to go forward. 

So let me just ask you this. This is a relevant question. Senator 

Menendez touched on this issue, but I want to come back to it. 

John Coates analyzed that the SEC, by this—we were—the Republican leadership insisted that this provision be put in the bill. It 

shows you—the provision that says—you know, that says that Congress cannot touch what you do. But it was not that explicit. And 

as I understand it, it only explicitly prohibited the SEC from finalizing, issuing, or implementing such a rule during this appropriated period. 

So do you disagree with Coates’ analysis? And second, if you do 

not disagree with his interpretation, will you add this issue to the 

SEC’s agenda? 

Ms. WHITE. I have not studied his interpretation of it. Let me 

just say that I respect you enormously, and your views—— 

Senator SCHUMER. It is a mutual respect we have. 

Ms. WHITE. ——enormously. And I also deeply respect the views 

on all sides of this issue. I explained earlier what the SEC was 

34 

looking at when I came in, and so forth. I will not repeat that or 

what I have prioritized for the benefit of investors and our markets 

since I have been there, although I certainly made a commitment 

to advance the mandated rulemakings and other mission-critical 

issues. 

But having said that, I have also talked about the avenues for 

shareholders to bring this issue to their companies, which is in our 

rules, the Rule 14a-8 shareholder proposal route. The average approval rate for those petitions last year was about 26 percent. I 

also certainly applaud those companies that are voluntarily providing the information, which they, by the way, are doing in greater numbers, like—— 

Senator SCHUMER. What else can you do to encourage companies 

to do it voluntarily? I understand the worst ones are not going to 

do it. The big violators are not going to do it. 

Ms. WHITE. There is a report that came out in October of 2015 

basically showing that over half of the S&P 500 now makes disclosures of their political spending. And I think 80-plus percent have 

policies and procedures governing their spending. So that information is certainly voluntarily being provided. Obviously our rules 

could never reach the Koch brothers because it is not a public company at all. 

Senator SCHUMER. That is good. 

Ms. WHITE. So it is not as if the SEC our rules—is the solution 

to campaign finance reform. I understand you are not suggesting 

they are, and I take your point. But essentially, the subject of 

doing a rulemaking has actually not been on the SEC’s agenda before me or after me. 

Senator SCHUMER. No, but what I am asking you is—— 

Ms. WHITE. Yes. 

Senator SCHUMER. ——since you are not prohibited from starting 

the process, would you be willing to start the process? 

Ms. WHITE. Well, again, the subject is not on our Reg Flex Agenda now. 

Senator SCHUMER. I know. 

Ms. WHITE. It is not one of the priorities that we are advancing. 

So do I get to that before I get to what could we do or what could 

not we do under the appropriations language? Obviously the appropriations language is there with its prohibitions. 

Our Corporation Finance staff did look at this, actually before 

the item was put on the Reg Flex Agenda in late 2012, just to research and consider whether to recommend a proposed rule, not to 

advance a proposed rule. And they did a lot—— 

Senator SCHUMER. I just—— 

Ms. WHITE. ——a lot of work on that. 

Senator SCHUMER. My time is expired—— 

Ms. WHITE. OK. 

Senator SCHUMER. ——but I am explicitly asking you a question, 

which is, are you willing to start the process? That is still allowed 

by—even with the legislation that we passed. 

Ms. WHITE. I have not researched the legal issue, but the answer 

is that it is not a subject that is on our current Reg Flex Agenda—— 

Senator SCHUMER. OK. I would—— 

35 

Ms. WHITE. ——because of my priorities and the priorities of the 

Commission. 

Senator SCHUMER. I know my colleague is here. I would just say 

to you, your priorities are out of line with what corporate America 

needs and America needs. And I hope when you go to bed late at 

night you will think about that, because our country is basically 

being steered in an awful direction by a narrow few wealthy people. At the very least there ought to be disclosure. 

Chairman SHELBY. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

And thank you, Chair White, for appearing. As you know, I have 

been working on a number of provisions within the Homeland Security and Governmental Affairs Committee regarding supervision 

of independent agency rulemaking, obviously still concerned that 

we have been unable to effectuate the implementation of a longstanding executive order in legislation and have met, as you know, 

with great resistance from all the independent agencies. 

That is not going to be the basis of my question, but I wanted 

just to remind you that when we met, you offered to sit down and 

actually have a conversation about this, because I think there is a 

growing amount of concern in the regulated community that there 

is not the kinds of safeguards that other rulemaking have. And so 

I want to just remind you that I have not forgotten about that. 

But I want to ask you about SEC rulemaking and small business. As you know, Senator Heller and I introduced a bipartisan 

bill that would create an Office of Small Business within the—a 

small business advocate within the SEC. I am wondering if you 

have had a chance to review that legislation and if you have an 

opinion. 

Ms. WHITE. Well, first let me say that I think we have really 

prioritized the interests of, perspectives, if I can say that, and special needs of small businesses since pretty much the day I arrived 

at the Commission, and we have taken a number of steps. 

We were mentioning the tick size pilot before. We actually have, 

in our Division of Corporation Finance, an Office of Small Business 

Policy, which responds to a thousand-plus, sometimes nearly 2,000 

requests for questions like how do I navigate the rules, how do I 

do this, how do I do that? They look at all of our rules from the 

perspective of how is this going to impact small businesses? So I 

think it is a very highly functioning unit. 

I am an advocate for small business so, conceptually, I am all in 

favor of any advocate for small business because they are so important to our economy. I worry about—and I know our staff has given 

some technical assistance on this—but I worry, if the bill is adopted, that we might fragment or dilute the efforts that we have within the SEC. 

Senator HEITKAMP. Chair White, I would submit that a lot of 

small business feel like they are being left behind and their capitalization is restricted in ways that they do not understand. And it 

is so critically important that they feel like they are part of the economic fabric as well. And so I think creating an advocacy so there 

is somebody there, and not just kind of the good will of the Chair 

and the good will of the rest of the Commission, to basically be that 

voice that is heard on small business concerns. So—— 

36 

Ms. WHITE. I certainly understand the priority on it, if I can say 

it that way. I think that is why we have the office we have, but 

I also understand the priority that you are putting on it in this 

way, as well. 

Senator HEITKAMP. And I do not know if you have had a chance 

to answer questions about the Department of Labor fiduciary rule 

yet. 

Ms. WHITE. Here and there I have, yes. 

[Laughter.] 

Senator HEITKAMP. Yeah, I bet you have, so I will just kind of 

read the testimony there rather than reiterate what has been said. 

The SEC is credited—has been credited for developing and adopting a March 2012 Current Guidance on Economic Analysis, an SEC 

rulemaking which emphasizes the importance of rigorous economic 

analysis and rulemaking, including relevant cost benefits. It is generally recognized that accurately estimating the benefits of regulation is more difficult than determining the costs, whether or not 

they can be quantified or monetized. 

What lessons learned, if any, can you provide on SEC’s efforts to 

justify regulations, especially when these limitations exist? 

Ms. WHITE. Well, we obviously adopted and implemented our 

Economic Guidance. I think it was March of 2012. We take the 

cost-benefit economic analysis of our rules and pre-our rules quite 

seriously. And I think it is working very well. We have actually received compliments on the thoroughness of it and the pointedness 

of it, if I can say it that way. 

So I think it is enormously important to do. And I will not say 

much about it but you alluded to the bills that are pending to add 

more review and other factors. What I worry about there is the 

compromise of independence and adding burdens that, at least at 

the SEC, I think we are discharging what you want us to. 

Senator HEITKAMP. Chair White, I am running out of time, but 

I just want to reiterate that, you know, we can all have good intentions but sometimes we need a cop on the beat who is going to be 

reviewing the work. 

And so that is really what we are asking for in that legislation. 

And we will continue to talk about what makes the independent 

agencies comfortable as we move forward, but I have not given up 

on my challenge of making sure that there is some oversight that 

assists this body in terms of oversight on independent agency regulations. 

So, thank you so much for appearing and thank you for your 

work. I think if you have not been thanked already, as you know 

I am greatly appreciative that you have stepped up and taken the 

chair. 

Ms. WHITE. Thank you very much. Thank you. 

Chairman SHELBY. Senator Brown. 

Senator BROWN. I have one last question. Thank you, Mr. Chairman. 

First, one real brief comment. I join Schumer—Senator Schumer’s plea with you to move on that. I think it is—I think there 

is a huge majority of the country, people paying attention, that 

want you to do that, and so many Members of this Committee too. 

37 

Along with other members of both houses, I sent you a letter in 

March asking you to consider rulemaking pursuant to a petition 

that would provide enhanced disclosure of the diversity of board 

nominees. In your response, you indicated you had asked your staff 

to look at the nature of the disclosure companies are providing. 

Could you give this Committee an update on what you are doing? 

Ms. WHITE. Yes. And this is an example of an existing rule that 

we have that investors have basically indicated is not providing 

them useful enough information on diversity. There is no definition 

of diversity, et cetera. So those concerns resonate with me and I 

have had the Division of Corporation Finance work on what the 

disclosures have been in the past, what they are now, and how we 

might enhance that rule. They have not completed that process, 

but they are well into it, and I expect them to make a recommendation to me fairly soon. 

Senator BROWN. Please keep me appraised of those findings. 

Ms. WHITE. Absolutely. 

Senator BROWN. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. We appreciate your appearance today here, 

and we look forward to some more. Thank you. 

Ms. WHITE. Thank you very much. Thank you. 

Chairman SHELBY. The meeting is adjourned. 

[Whereupon, at 10:57 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

38 

PREPARED STATEMENT OF MARY JO WHITE 

CHAIR, SECURITIES AND EXCHANGE COMMISSION

JUNE 14, 2016 

39 


audit trail-while moving forward \\1th a comprehensive assessme-nt of other fundamental 

structural questions. We also issued a series of propOsals to address the increasingly complex 

p0nfolios and operations of mutual funds and exchange-traded funds (ETFs). We adopted new 

rules for crowd funding and smaller securities offerings under Regulation A, while propOsing 

additional avenues for smaU businesses to raise capitaL We finalized critical compOnents of the 

regulatory regime for security-based swaps. We also propOsed the full suite of rules regarding 

executive compensation practices. And we continued to execute a comprehensive review of the 

effectiveness of our disclosure regime. 

This work, which is described in greater detail below, marks lhe latest phase of an 

extraordinary regulatory elTon by the agency since before I became Chair, enlisting all of our 

pOlicy divisions and offices. Beyond our discretionary initiati\•es, the Commission bas now 

adopted final rules for 66 of the 86 mandatory rulemaking provisions of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (Dodd-Frank Act} directed to the SEC, the majority 

of them since I became Chair] We have completed all of the rulemakings directed by tbe 

Jun1pstan Our Business Stanups Act (JOBS Act). And we have made significant progress 

advancing the rulemakings required of us late last year under the Fixing America's Surface 

TranspOrtation Act (FAST Act). Some of the most significant initiatives of the last three years 

include: 

• Equity Market Structure. An imperative of our modem equity markets is s!rong 

technological systems and operations, and the Commission has adopted Regulation 

Systems Compliance and Integrity (SC~ tO require critical market participantsincluding exchanges, clearing agencies, and large alternative trading systems (A TSs)- to 

implement wide-ranging measures designed to reduce the occurrence of systems issues 

and improve resilience when such issues do occur. The self-regulatory organizations 

(SROs), acting w1der Commission oversight, have also continued to develop further 

measures to enhance the operational integrity of the markets. In addition, the 

Commission bas proposed new rules to enhance market transparency, \\1th the first-ever 

major update of Regulation ATS, and I expect that we will very soon propOse rules 

requiring impOrtant new disclosures for how investor orders are handled by brokerdealers. The Commission bas also propOsed enhancements to our core regulatory tools of 

registration and firm oversight. And we have put out for notice and comment the final 

plan for the consolidated audit trail. as well as expanded our consideration of additional 

market structure reforms through the establishment of the Equity Market Structure 

Advisory Committee. 

• Money Market Funds and Asset Management. To address the risk of investor runs, as 

experienced during the financial crisis, the Commission in 2014 adopted rules that 

fundamentally change the way money market funds operate, rules that \viii become fully 

operational this coming October. Following that work. the Conunission undertook to 

enhance its regulatory regime for the broader asset management industry. In furtherance 

' The current slalUS of the Commission's implementation of the Dodd-Frank Act is summarized at 

https://www.ses.gov/spotJightfdodd·frnnl;.s!Jtml. 

2 
40 


of that goal, the Commission last year proposed four major rules to address potential ri.sks 

in the modem asset management industry, including rules that would improve and 

expand lhe infonmation reported to lhe Commission and investors, impose new conttols 

on how funds manage their liquidity, and enhance the regulation of funds' usc of 

derivatives. 

• Capiro/ Formarion. Implementing mandates from lhc JOBS Act, the Commission 

adopted rules to increase access to capital for smaller companies by revamping and 

enhancing Regulation A, and other rules to penmit companies to offer and sell securities 

through equity crowd funding. Separately, the Commission has also proposed rules to 

facilitate intrastate and regional securities offerings, including offerings relying upon 

recently adopted intrastate crowd funding provisions under state securities laws. We also 

worked \\ith the SROs to build a pilot program to 11iden the minimum quoting and 

trading increments- or tick sizes-for stocks of some smaller companies. which should 

aid in understanding whether wider tick sizes enhance the market quality and secondary 

liquidity of these stocks. This work follows on the Commission's adoption of rules to 

allow general solicitation for certain offers and sales made under Rule 506, as well as a 

rule to disqualify certain felons and other ''bad actors" from participating in private 

securities offerings made under Rule 506. 

• Disclosure Efficriveness. The staff of the Commission has undertaken a comprehensive 

assessment of the efl'ectiveness of our disclosure regime for investors and issuers. As 

part of that assessment, the Commission issued a major concept release that seeks input 

on modernizing certain business and financial disclosure requirements in Regulation S-K 

for the benefit of investors and companies. We also issued a request for comment for 

certain financial reporting and disclosure requirements in final statements under 

Regulation S·X. I expect that the Commission will also shortly propose revisions to 

Industry Guide 7, which applies to disclosures about the projections and properties of 

mining companies. 

• Securii)•Based Swaps. The Commission has implemented a substantial portion of a 

regulatory regime for security-based swaps required by lhe Dodd-Frank Act, which is 

designed to ensure that theSil trillion market for security-based swaps is safer, more 

!ransparent, and more efficient. Since !last testified, the Commission adopted the core 

rules for reporting security based swap transactions to regulators and the public through 

security-based swap data repositories. We also adopted the framework for registering 

security based swap dealers and major security-based swap participantS with lhe 

Conunission, as well as mles to help ensure that non-U.S. dealers participating in the 

U.S. market comply with our rules. Most recently, the Commission adopted extensive 

requirements for how these entities must conduct business 11ith counterparties and 

acknowledge and verify their transactions. Finalizing the remainder of lhe rules for trade 

reporting and dealers activities- and operationalizing those regimes- is a priority for 

2016. 

• Asser-Backed Securilies. The Commission in 2014 adopted wide-ranging rules to 

enhance transparency and betteJ protect investors in the asset-backed securities market. 
41 


The Commission completed rules requiring significant enhancements to registered 

offering disclosures for asset-backed securities, a market with $4.8trillion in issuances 

over !he past decade that stood at !he epicenter of the financial crisis. Since I last 

testified, acting jointly with five other federal agencies, !he Commission also adopted 

credit risk retention rules. which require securitizers of asset-backed securities to keep 

"skin in the game'' for !he securities they package and sell. 

• £recutive Compensation. In 2015, the Commission adopted !he rule mandated by !he 

Dodd-Frank Act requiring a company to disclose the ratio of compensation of its chief 

executive officer to the median compensation of its employees. The Commission in 

2015 al.so proposed the remaining executi1·e compensation rules required by the DoddFrank Act, including disclosure of whether a company allows executives to hedge the 

company's stock, disclosure of pay versus performance measures of executive 

compensation, and new disclosures and rules for clawing back incenti1•e compensation 

erroneously awarded. We also in 2016 re-proposed, jointly with other regulators, rules 

regarding disclosure and restrictions for certain incentive-based compensat.ion 

arrangements at large financial institutions. 

• Credit Rating Agencies and Credit Ratings. The Commission has adopted a 

comprehensive package of reforms in 2014 for the regulation and oversight of credit 

ratings agencies, including new controls on the management of conflicts of interest. The 

Commission has also acted to remove almost all of the references to credit ratings from 

its rules and forms. 

• Broker-Dealer Financial Responsibility_ The Commission, soon after I became Chair, 

adopted rules to provide additional safeguards 111lh respect to a broker-dealer's custody 

of customer securities and cash, as well as to strengthen tlte audit requirements for 

broker-dealers. In addition, the Commission adopled amendmeols to the broker-dealer 

financial responsibility rules to enhance protections for customer assets, firm capital 

requirements, and risk management contrOls. In 2016, we proposed, jointly wilh ~1e 

Federal Deposit Insurance Corporation (FDIC), rules !hat implement procedures for !he 

orderly liquidation of covered broker-dealers. 

• Municipal Advisors. The Commission has established a new regulatory regime to protect 

municipalities and investors from conflicted advice and uuregulated advisors by requiring 

municipal advisors to register with !he SEC and to comply wilh the rules of the 

Municipal Securities Rulemaking Board (MSRB). And we continue to work with the 

MSRB to establish the full suite of regulatory obligations for municipal advisors. 

• Volcker Rule. The Commission. in December 2013, adopted, jointly 111th other 

regulators, rules to implement a prohibition on proprietary trading and certain 

relationships with hedge funds and private equity funds. Compliance with !hose rules 

was required in 2015. and the SEC is now working in coordination with the olher 

financial regulators to ensure that fimts have taken !he necessary steps. 

4 
42 


While our work in enforcement and rulemaking are perhaps the most prominent examples 

of the agency's achievements, the imperatives of our mission are carried forward each day by all 

of the dedicated staff of our divisions and offices. The Division of Corporation Finance, for 

example, reviews the annual and periodic reports of thousands of issuers each year, helping to 

ensure that investors receive full and fair disclosure about the public companies in which they 

invest. And staff in the Office of Small Business Policy alone responded last year to over a 

t!1ousand inquiries from small businesses abouttbeir questions and concerns. During the same 

period, the Division ofTrading and Markets reviewed more than 2, I 00 filings from exchanges 

and other SROs to preserve a fair and orderly marketplace for all investors. The Division of 

Investment Management re1•iewed mings last year covering more than 12,500 mutual funds and 

other investment companies, where many individuals invest their hard-earned money to save for 

retirement, college, and other important goals. Our economists in the Division of Economic and 

Risk Analysis produced more than 30 incisive papers and publications in2015, including two 

major analyses to help inform our work on asset management. And the numbers are only a small 

part oft.he story. Each instance of such engagement makes our markets better and safer for 

investors. 

Throughout the agency, we are increasingly harnessing technology to better identify 

risks, uncover frauds, sift through large volumes of data, inform policymaking, and streamline 

operations. The Commission's emphasis on technological improvements is continuing to pay 

dividends, improving efficiencies while allowing us to cover more ground than ever before. We 

continue to build on this progress by seeking sufficient appropriated funds for a number of key 

information technology (IT) initiatives, including improvements to the Electronic Data 

Gathering, Analysis and Retrieval (EDGAR) system and our enforcement surveillance tools. 

While the Commission today is stronger and more effective than ever before, challenges 

remain if we are to continue our current trajectory and address the gro11ing size and complexity 

of the securities markets. We now oversee approximately 28,000 market participants and 

selectively review the disclosures and financial statements of over 9,000 reporting companies. 

From 2001 to 2015, assets under management of SEC-registered advisers more than tripled from 

approximately $21.5 trillion to approximately $66.8 trillion, and assets under management of 

mutual funds more than doubled from $7 trillion to over SI5trillion. Trading volume in the 

equity markets from 2001 through 2015 nearly tripled to over $70 triltion. And, as this 

Committee knows, the SEC's responsibilities have also significantly increased, 11ith new or 

expanded responsibilities for security-based derivatives, hedge fund and other private fund 

advisers, credit rating agencies, municipal advisors, clearing agencies, and crowdfunding portals. 

As I have testified before both the House and Senate, the SEC is significantly under·resourced 

for the extensive responsibilities it has, even though our budget is deficit neutral and funded by 

very modest transaction fees. 

It is critical that we have the resources necessary to discharge our responsibilities, both 

the new ones and the many others we have long held in the face of a growing and ever-more 

sophisticated financial senices industry. I deeply appreciate the serious charge we have to be 

prudent stewards of the funds we are appropriated, and we strive to demonstrate how seriously 

we take that obligation by the work we do. At the same time, the cuts and limitation to the 

SEC's budget that some have proposed would imperil the progress we have made and our ability 
43 


to fulfill our mission. Only with Cong e~s' continued assistance can we continue to successfully 

execute our mission to protect investors, preserve the integrity of our markets, and promote 

capital fomtation. We very much appreciate ihe Committee's support. 

Vigorously Enforcing the Securities Laws 

The SEC's vigorous enforcement program is at the heart of our efforts to protect 

investors and instill confidence in the integrity of the markets. The Division of Enforcement 

(Enforcement) advances these efforts by investigating and bringing civil charges against 

violators of ihe federal securities laws. Successful enforcement actions impose meaningful 

sanctions on securities law violators, result in penalties and disgorgement of ill·gotten gains that 

can be returned to hanned investors, and deter future wrongdoing. 

Enforcement delivered very strong results on behalf of investors in FY 2014, FY 2015 and 

continues to do so in FY 2016. The SEC filed a record 807 enforcement actions in FY 2015 

covering a wide range of misconduct, and obtained orders totaling S4.19 billion in disgorgement 

and penalties, boih at record levels. Of ihe 807 enforcement actions, a record 507 were 

independent actions for violations of the federal securities laws, and 300 were either actions 

against issuers who were delinquent in making required filings with the SEC or administrative 

proceedings seeking bars against individuals based on criminal convictions, civil injunctions, or 

other orders. 

Even more important than ihe numbers, ihese actions addressed many of ihe most 

important issues for investors and markets, spanned ihe securities industry, and included 

numerous "first-of·their·kind" actions. Significantly, approximately two·thirds of our 

substantive actions in FY 2015 also included charges against individuals. A few other important 

features of our enforcement program also bear highlighting. 

Executing the Admissions Policy 

The Commission continues to use its first of its kind admissions po~cy to aggressively 

seek admissions in certain cases where heightened accountability and acceptance of 

responsibility by a defendant is particularly important and in ihe public interest. These types of 

cases include those involving particularly egregious conduct; where large numbers of investors 

were hanned; where the markets or investors were placed at significant risk; where the conduct 

undermines or obstructs our investigative process; where an ad.rn.ission can send an important 

message to ihe markets; or where the wrongdoer presents a particular future threat to in1•estors or 

the markets. Since implementing tbe admissions protocol in 2013, the SEC has obtained 

admissions from over SO entities and individuals, including major financial institutions and 

national auditing firms. We also required individuals to admit wrongdoing in a number of cases, 

including a world·lvide pyramid scheme targeting the Asian·American community.4 While this 

' We also do not acctp4 "neither admit nor deoy" S<lllemems where a defendant has ad;nowledged relevant facts in 

a settlement with other criminal or civil authorities, or betn convicted. This regularly occurs in ronnoctioo with 

6 
44 


is an evolving protocol that continues to be applied to more cases, as we indicated when we 

implemented it, the majority of cases "ill continue to be resolved on a "neither admit nor deny" 

basis, which is the norm for other civil law enforcement agencies and in private litigation.; We 

are committed, however, to requiring admissions where appropriate, and are prepared to litigate 

those cases if necessary. 

Enhancing Focus on Key Areas of Misconduct 

The Comm.ission also continues to focus resources on key areas of misconduct. One 

critical area is financial reporting and issuer d.isclosure. Comprehensive, accurate, and reliable 

financial reponing is the bedrock upon which our markets are based, and is essential to ensuring 

public confidence in them. And at my direction, since 20 I 3, our Enforcement Division has 

intensified its focus on pursuing violations in this area. Pan of this efton involved creating a 

dedicated group of accountants, attorneys, and analysts who use cutting edge data analytical 

tools to look for e1idence of reporting discrepancies and other early warning s\gns of financial 

reporting fraud. The SEC brought a series of significant financial reporting C.1SCS in FY 2015, 

including four emblematic actions last September, each of which involved sophisticated 

guilty pleas that arise from parallel criminal investigations, whitb frequently are Jtl3Utl1 that we refem!<l to a 

criminal prosecutor in which our own investigation assisted in steuring a fava<able resolution on the criminal silk as 

11~11. While these cases are not included in the admi$$iOns r.ited above, they sen·e the same purpose and have the 

same impact We have ob!aintd these kinds of setdements with do~ens of individuals and entities sioce this policy 

ebanged at the end of201 t. 

' In the majority of its cases, lhe Commission, like all other feden~l agencies with civil law enforcement powers, 

detennines that it is appropriate to continue to seule on a "no admit, no deny" basis. This practice allows the 

Commission to obtain significant relief, elimill3te litigation risk, rerum money to victims more expeditious~·, and 

conserve enforcement resources for otbef mauers. But, in 2013, we <ktennined that our Enforcement program's 

deterrent message could be enhanced by requiring admi$$ions of wrongdoing in appropriate cases. We aie pleased 

to sec that other eivtllaw enforcement ageocies havt begun to follow our lead. For exantple, the CtrC r<quires 

admissions in cenain cases and entered into its firm admissions seulement in October 2013. &e Release PR6737-

13, CFTC Files and Selllts Charges AgaiiiSt JPMorgon Chose Bonk. N.A.,for Violating l'rohibition on 

Munipuloti>~ Conduct In Connection M'ith "London Whole" Swaps Trod<$. 0<1. t6, W13, 

hnp ~/www.cftc.gov/PressRoom!PressReleaseslllf§J37 tl [Max Stendahl, CFTC Mimics SEC Policy Shift With 

JPMorgon 'Whole' Poet, Law360 (0<1. 16.2013, 7:47p.m.~ hno1/www.law360.comlarticlesl4806861cftc·mimic:s· 

ste:Jl!)lic:y-shifi·with·iPmomAA·•ilale·pactJ. Similarly, the CFPB requires admissions in certain rases and entered 

into its fil1t admissions seulement in February 2014. S.. Pms Release, CFPB Takes Action Against Mongoge 

under for Illegal Payments, Feb. 24,2014, ht1p://www.consumerfinance.govlahout-uslne"m><>mlc.fpb-lllkesactioft.aoaiJ!S!·mortgage=jender·for·ilk&al·paymentsl. 
45 


disclosure violations or cleverly masked reporting fraud. 6 Each of these cases also involved 

charges against senior executives. Holding individuals accountable for their role in financial 

misconduct is a significant priority of mine and in FY 2015, we charged 120 individuals in our 

substantive issuer reporting and disclosure cases, approximately t\\ice the number of individuals 

we charged in FY 2014. 

Another key area of enforcement is investment management, where the SEC has 

continued to bring actions addressing a 1\idening range of issues, including perfom1ance 

advertising, undisclosed conflicts of interest, compliance issues, and private equity fees and 

expenses. Among the.se are "first-of-their-kind" actions for failures to repon material 

compliance matters to fund boards and the improper allocation of expenses by private equity 

advisers. The Enforcement Division's focus on private equity has expanded significantly over 

the past few years and, to date, the SEC has brought eight enforcement actions related to private 

equity advisers breaching their fiduciary duties by charging undisclosed fees and expenses, 

shifting and misallocating expenses, and failing to adequately disclose conflicts of interest. 

In addition, since I last testified before the Committee, Enforcement has emphasized 

market stmcture issues, bringing significant enforcement actions involving high frequency 

trading, the operation of trading platforms such as dark pools, manipulative trading, and market 

access and technology controls. \Ve have brought cases, for example. against ATSs for misusing 

confidential customer trading infom1ation, actions against high frequency traders for 

manipulative trading and net capital violations, and against exchanges for providing some, but 

not all, traders 1vith additional information about certain order types. 

Enhancing the Whistleb/oll'er Program 

The SEC's Whistleblower program continues to have a transformative impact on our 

enforcement program. The SEC's Office of the Whistleblower is currently tracking hundreds of 

matters in which a whistleblower's tip has caused a matter under investigation or an investigation 

to be opened, or which have been forwarded to Enforcement staff for consideration in connection 

1\ith an existing investigation. The number of whistleblower tips n.>ceived by the Commission 

has increased each year of the program's operation. In Fiscal Year 2015, the Commission 

received nearly 4,000 whistleblower tips, representing a 30% increase over the number of tips 

received in Fiscal Year2012, the first year for which the office had full-year data. In FY 2015, 

the Commission paid more than $37 million to whistleblowers who provided original 

information that led to successful enforcement actions resulting in an order or monetary 

' Su Press Release No. 20 t $-184. SEC Ch<uges BDO and Fn·e Portners in C()llnt<lion With Folse and Misleading 

Audit Opini()IIS (Sepl9, 20t5). /J'o'oiloble ot httos:llwww.ses.gov{n$ws/orsssrttease!2015·t§4.html; elease 

No. 20 t S· t 79, SEC Ch<uges Sporu NNifition ComfJiliTY With Foilitrg to Properly DiJcJ1J$e Perks for Execvtil'es 

(Sept. 8, 20 15) available at https:llw'I'W,S«.govlnewsiD!tSS!eleasel2015-119.html; Press Release No. 20 15· t 80, 

SEC Chorgesli<mlrrote ond F()171ltr Executil•es With Aca)llnting Froud (Sep1.8, 20 5~ available at 

hups ;//www se.:.gov/ne~< pr=leasel20 5- 80.htm ; and Press Release No. 2015-183, SEC Charges Video 

Munagemens Com parry Execulives With Acrounring Froud (September 8, 20 IS), available at 

https:l/www.seqovloews/Dm!!tleaset2J)I5·!83 htmL 
46 


sanctions exceeding Sl million, and has awarded more than S50 mill.ion since the program's 

inception. Just last week, the Commission announced a $17 million award, its second largest, to 

a fonner company employee whose detailed tip substantially advanced Enforcement's 

investigation. The Commission has also filed numerous "friend of the court'' briefs in support of 

private actions by whistleblowers who have experienced retaliation for reporting internally at 

their companies. and has brought our own actions against fimts for whistleblower retaliation and 

improper restrictions of whistleblowing activity in confidentiality agreements. 

Preserving Investigative Tools 

During my tenure as Chair, I have sought to work \\1th Congress to modernize the 

Electronic Communications Privacy Act (ECPA), which governs the authority of law 

enforcement to obtain emails from internet service providers QSPs). The bills currently pending 

in Congress to antend ECPA would unfortunately pose significant risks to the American 

investing public by impeding the ability of Commission staff to investigate and uncover insider 

trading, Ponzi schemes, and other types of fraud. Although I agree that ECPA's privacy 

protoctions and evidence collection procedures should be updated, I believe there are ways to 

update ECPA that offer stronger privacy protections and observe constitutional boundaries 

without putting innocent victims and our capital markets at risk. 

As drafted, the bills would require government entities to obtain a criminal warrant when 

they seek the content of subscriber emails and other eloctronic communications from ISPs. The 

SEC, as a civil law enforcement agency, cannot obtain criminal warrants. Thus, the SEC would 

no longer be able to gather these communications diroctly from an ISP to obtain often critical 

and otherwise unobtainable evidence of serious wrongdoing. Any effort to update ECPA can, 

and should, be done without ham1ing the ability of the SEC to protect our nation's citizens from 

securities fraud. I look forward to the opportunity to continue to work 111th Congress on 

solutions that both protoct investors and privacy interests. 

Building Stronger, Safer Markets for Investors and Issuers 

The SEC continues to pursue an extensive program of rulemaking and other policy 

efforts designed to ensure that our securities markets continue to optimally and securely serve 

investors and issuers. Since I last testified before the Committee. the SEC has significantly 

progressed in implementing mandatory rulemakings under three separate statutes, as well as in 

pursuing an impressive range of important discretionary initiatives. 

As the Committee knows, the SEC and our fellow regulators have been working hard to 

strengthen our nation's financial systems by implementing the rules mandated by the DoddFrank Ac~ which responded to the worst financial crisis since the Great Depression. Over the 

last two years, the SEC has moved into the tinal phase of implementing the Dodd-Frank Act, 

focusing on completing all of the remaining rules in the two major remaining areas of mandates: 

security-based swaps and exocutive compensation. 

9 
47 


Increasing Transparency ami Ol•ersight for Security-BtlSed Swaps 

Since September 2014, we have marked several milestones in the establishment of a 

comprehensive regulatory framewori< for security-based swaps, which will give us powerful 

tools to oversee an $11 trillion market. First. we finalized the core requirements for reporting 

security-based swap transactions to regulators and the public through security-based swap data 

repositories, 7 and we proposed additional requirementS to ensure that reporting will produce 

accurate data for regulators and market participants.' With the adoption of these rules expected 

later this year, the regulatory infrastructure for transaction reporting will be complete. 

Second, we adopted the framework for registering security-based swap dealers and major 

security-based swap participants 11ith the Commission/ as well as rules to help ensure that nonU.S. dealers participating in the U.S. market comply with our rules.10 Work is now underway to 

finalize the obligations tlJal registered dealers and participants 11111 be required to undertake. In 

April, the SEC adopted extensive requirementS for how these entities must conduct business 11~th 

counterparties- including special entities like municipalities and pension funds - and supervise 

such conduct. 11 We also this month finalized ru.les for timely and accurate trade 

acknowledgment and verification requirementS for security-based swaps, 

12 and have proposed a 

'Su Release No. 34-74246, Securi~"&sed S.·ap Data Repository Registration. Dutits. and Col-e Principles 

(february I I, 20t5),tNailab/eOJ hnps;//www.gc.•ovlruley0na!l10]5/34·74244.!!df.; Release No. 34·14244, 

Regulation SBSR- Reporting and DU.eminotion ofSeC!lri~Bo.std Swap Information (February II, 20 IS). a\'Oilohle 

at hnos://www.seqov/ruleslfina!llO t5134-74244.odf. 

• See Release No. 34-74245, ReguiOJian SBSR- Reporting rmd Disstminatitm ofSecuri~Based Slftlp JnformOJion 

(February II, 2015), a•;ailabltOJ hups1/www.stc.gov/rukslproposedl20 ll/34-74245.pdf; Release No. 34-76624, 

Establishing the Form and Manner with which Secwi~~Based Swap Data Rqmiwies MU$1 Make Secwil)·-Based 

S.·ap Data A•·ai/able to the Commission,( December II, 2015),a>Yiilab/e at 

https1/www.see.gov/rulesloro!!OStdnOISI34·76624.odf; and Release No. 34-75845, Acctss to Data Obtained by 

Security-Based Swap Data Repositories and £xemprion from Indemnification Requiremenl (September 4, 20 IS), 

m·oilable OJ https:ilwww.S!£. gov!rule;lorooosed/20 I 5f34.75S45.odf. 

• Su Release No. 34-75611, RegisrrOJion Process far Secwio·-Bo.sed S.'IJ{I De<Jiers and Major Secwi~•Bo.sed Swap 

P(IJ'ticipants (August 5, 2015}, a>·ailoble at https;/lwww.sec,gow'n•le.<lfina!llOI 5/34-756ll.!!df. 

10 See Release No. 34-711()4, Security-Based S"~P Transactioos Connected with a Non· U.S. Person's Dtaling 

Activity That A~ Arranged, Negotiated, or Executed By Personnel Located in a U.S. Branch or Ollie< or in a U.S. 

Branch or Office of an Agent; Socuri~ ·Based Swap Dtaler De Minimis Exception (feb. 10, 2016~ 0\'ailob/e at 

hnps:l/www.see.gov/ruleslfina!ll016134·771G4.odf; aod Release No. 34-72472, App/iroJion of"Securio•Bawd 

S.rap Dealer" IJild "Major Securi~·Bo.sed S.·op Participant" Diftnitioru to Cr03S·Border Seturio~Based Swap 

Activities (June 25, 2014), m·ai/able at hups;//www,sec govirule¥final!2014f34· 72412.!!df. 

11 Su Release No. 34-77617. 8111intss Cond11tt Standards far Sec11rity-8ased S.·op Deolm and Major 

Suurity/kued Swap Participoms (April/4. 2016). 01'0iloble at https://\\ww.S!£.1!9VIrulesltina!l1016/34· 

llli1l12f. 

"Su Release No. 34-780 II, Trade AcJ.oowledgmenr and Verification ofSecwi~•Based S•·ap TraiUilCii/Jn$ (June 

8, 2016), m•aifob/e OJ hUps:ilwww gc govlrules/finaii20161J4·780! l.!!df. 

10 
48 


process for dealing with had actors in the security-based swap market. 13 Next in line 11ill be to 

finalize that process, complete capital, margin, and asset segregation requirements for securitybased swap entities, ~ and adopt rules for recordkeeping and regulatory reporting.

15 With those 

steps, the regulatory structure for securitthased swap dealers will be complete, a priority 

supported by all of the Commissioners. 1 Our goal is to finalize those rules by year-end. 

Creating New Disclosuus and Limits for Execlllil'e Compensation 

With respect to executive compensation, the SEC last year issued proposals for all of the 

1\'lllaining executive compensation rulemakings required by the Dodd-frank Act, including 

disclosure of whether a company allows executives to hedge the company's stock. disclosure of 

pay versus performance measures of executive compensation, and new disclosures and rules for 

clawing back incemive compensation erroneously awarded. 17 Together with five of our fellow 

financial regulators, we also re-proposed a joim rule regarding incentive-based compensation 

arrangements at large financial institutions.18 The final rules arc expected to be advanced 

expeditiously. And following the analysis of snme 285,500 total comment letters. 1,500 of them 

unique, the final pay ratio rule was adopted in August 2015. 19 

" &e Release No. 34· 75612, APfJ/icatiom by Security-Based Swap O.alm or Major !kcuriry-8ased S.-ap 

Participants for Statutorily Disqualified Associated PtrsOII$ to £ffoct or Be lm•ol•·ed in Effecting !kcurit}•Based 

S.·aps (Augus1 5, 20 15~ IJ\•ai/ab/e at hnps11www.see.gov/roleslprooosed/201 5134-75612.odf. 

"Set Release No. 34-68071, Capital, Margin. and Segregation Requirements for ~rity-8ased S•·ap O.alus and 

Major ~ri~·8ased S.·ap Participants and Capital Rtquirementsfor Bralrer-O.Oiers (Ocrober 18. 2012~ 

0\'ailab/e at hnps:l/www.sec. govltuleslprooosed/20 12/34-68071.00 f. 

"See Release No. 34-71958, Ruordkeeping and Repctting Requiremtnts for Securi~•Based S-.·ap O.olm, Major 

~rity-8ased Swap Participants, and Broktr-O.alers: Capital Rule for Certain !kcurit)'Bastd S.-ap 0.0/ers 

(April l7. 20 4~ IJ\'ailable at ht1pS1/Wllw.ses.govlruiMf9!J05edl2014!34-7 J958.odf. 

16 &e Commissioner Daniel M. Gallagher and Commissioner MichaelS. Piwowar, Statement Regarding !kcuriry• 

Based Swap Rules (Sept.25. 20tS~ m·ailable at hnps:l/www.sec.govtnewslstatemenrlgallagher-piwowar-securil)'-

basc<kwaps.hlml; alld Commissioner KaraM. Srein, Remar!$ at the "SEC Spea!$" Confer""" (Februlll)' 19. 

20 16}, al'ailable at hnoo1/WI\-..se<:.gov/newslsomhl!lein-see-spcaks-20 16.hunl. 

17 &e Release No. 33·9723, Disclosure of Hedging by f.mplo)~es. Ojfiws and Directors (February 9, 2015), 

m•ailable at hn!*:llwww.ste.AAv'roleslprooostd/2015/33·9723.odf; Reltase No. 34-74835, Pay Versra Performance 

(Aj>ril 29, 20 15}- IJ\·ailable at hnos://www.see.Rov/Juleslproposedl2015m-74835.odf: and Release No. 33-9&61, 

Listing Standards for Rt<O>~ry of £rron<cusly Awarded Compe1!$ation (July I, 2015), available at 

hnps:I/Wllw.ses.•ovlrules/prooosed/2015133·986).odf. 

"&e Release No. 34-77776, lnce.nth-e-basedCompensation Arrangements (May 6, 2016), m•ailable oJ 

hnps11www.ses. •ovhJ! les/orooosed/20 16/34· 77776.00 f. 

" Set Release No. 33-9877, Pa;• Ratio Disclome(August5. 2015), m·oilable at 

https://www.ses.govhJ!Iesffinal/2015133-9877.odf. 

11 
49 


Comple/ing /mp/emenlalion oj1he Dodd-Frank Acl 

Beyond these two areas, the SEC has continued to finish all of the mandates of the 

Dodd-Frank Act since I last testified. As required by Section 1504, we re-proposed rules that 

would require resource extraction issuers to disclose payments made to the U.S. federal 

government or foreign governments for the commercial development of oil. natural gas, or 

minerals.20 And, working with our colleagues at the FDIC, we proposed joint rules for broker· 

dealers covered under the orderly liquidation provisions ofTitle II, as required by Section 205(h) 

of the Dodd-Frank Act.21 

These accomplishments of the last two years were, of course, only the latest in an historic 

undertaking by the agency to execute the most daunting rulemaking agenda in memory. 

Pursuant to mandates ofthc Dodd-Frank Act, since I arrived at the agen~ in April2013, we 

have stood up an entirely new regulatory regime for municipal advisors, and implemented 

sweeping changes in the securitization markets that were at the epicenter of the crisis-including 

the joint rulemaking on credit risk retention since !last testified before the Committee.n We 

significantly enhanced the rules for credit rating agencies, 24 strengthened the rules for how 

broker-dealers handle customer funds and securities, lS disqualified bad actors from private 

offerings, 26 removed credit rating references from throughout our rules, 27 and, through the 

Volcker Rule, restricted proprietary trading by financial institutions.zs 

"See Rei= No. 34· 76620, Dlsc/IJ$1JJ'e of Puymenu by Rtsorqce Extraction lssuen (December II, 20 15), 

m·ailable aJ hUos:llwww.S££ •ovlrulcy!l!900S<dl2()15/34· 766?0.00f. 

"See Release No. 34-77157, U!l·ered 8rolrer-{)e,fer Pro•·isiorr; under Title II of the Dodd-Frank IYoJI Street 

Reform andCorr;umer ProteCiilllfACI(February 17, 2016~/1\·ai/obleat 

hnps://www.sec .go•·lru leslpropostdl20 16/34· 77 L 57.00 r. 

11 See Release No. 34-70462, Registration ofMrmicipol Advi.sors (Sejlt<mbcr 30, 2013), m•oiloble aJ 

https:J/..,.w.sec.oo••lru les{final/20 L 3134· 71}!62. Pdf. 

n See Release No. 34-73407, Credit Risk Retell/ion (Octobef 22, 2014~ I!I'(Jilable at 

httos:llwww.S£C.govlruleslfinai/20L4/34·73407.odf; and Release No. 33-9638, Asset-BacJ:edSecurities Ducl0$!lre 

and Registration (September 4, 20 14~ /1\'ailllble at hnos:l"'""'·sec.•ovlrultslfinal/2014133·96l8.00f. 

1

' See Release No. 34-72936. Nariqno}ly RecognizedStatisticQI Rating ()rgoni:otiorrs(August 27. 2014~ m·ailoble 

at hnps:liw•nv.S£C.govlrules{final120 14/34· 72936.odf. 

»See Release No. 34-70013, 8rolrer-Deoitr Repcru (July 30. 2013), m·ailableot 

htiDs:l/...,w.sw.•ov/ruleslfinal/20 L J/34· 70073.odf. In addition, the Commission adopted amendments to the 

broker~aler financial responsibilhy rules to enhan~ protettions for customer asstts, firm capital requirtments, and 

risk management controls and proposed rules to provide investors with useful information aboot mO<Iern broker· 

dealer order handling practices. See Release No. 34-70072, Financial Responsibility Rules far Broker-Dealers (July 

30, 2013), /1\'ailable at httpS:IIwww.ses.gov/rules{finai120]3Q4· 700ll.odf. 

"See Release No. 33-9414, DisqualificarianofFelonsondOther "BodActOt$"from Rule S06 Ojferings(Ju~· 10, 

2013), /1\'oiloble at httpS:Jiww-w S£C.gov/ru!csffina!l2013133·9414.pdf(•Bad Actor Rule"). 

"See Rei= No. IC· 31828, RemO>·o/ of Certain Reftrent:ts to Credit Ratings ond Amendment to the Issuer 

Dn·ersificatian Requiremenl in tit£ Money Market Fund Ru/e(September 16. 2015~ /1\'0ilab/e aJ 

hnps:llwww.see.go•·lrultslfinai/20L5roe-31828.00f: Rei= No. IC-30847, Rem11>·al ofCertoin Reforencts to Credit 

12 
50 


Facilitating Capital Formation for both Large and Small Issuers 

The SEC performs a critical function for issuers seeking to raise capital to grow their 

businesses and the larger economy. Our rules must facilitate offerings by a diverse set of 

companies -large and small, engaged in all manner of commerce- while ensuring that investors 

have the protections they require to maintain confidence in the strongest capital markets in the 

world. Since I last testified before this Committee, the SEC has concentrated our commitment to 

this responsibility through a number of key initiatives, with particular emphasis on smaller 

businesses. 

Completing lmplement01ion of the JOBS Act and the FAST Act 

The JOBS Act, in particular, made several significant changes to the avenues for capital 

formation in the securities markets, especially for smaller issuers, 3lld we bave now completed 

all of the rules m3lldated by that legislation. A few months after I became Chair, we finalized 

the changes to private offerings required by the JOBS Act, while advancing measures to ensure 

the agency has the information it needs to monitor the ch3llges and protect investors.l'l Last 

year, the SEC adopted final rules to update and exp3lld Regulation A (commonly referred to as 

Regulation A+), an exemption from regisllation for small ofrerings of securities, to facilitate 

smaller companies' access to capital. 30 And we also finalized new rules to pem1it 

securities-based crowdfunding offerings by issuers and the operation of funding portals to 

intermediate such offerings.31 Issuers are now actively using both of these new avenues for 

raising capital. 

1/all'ngs Under the Investment Company Act (De«mbet 27, 20t3), m·oi/able at 

htms11w'lw,sec,gov/nJieslfinati2013133·9S06.pdf; and Release No. 34·71194, Remo,·ol of Certain Referenus 10 

Credit Ratings Under the SeCIIrities Exchange Act of 1934 (De<emb<r27, 2013), a~ailable at 

https:llwww.set.govlruleslfinalf2013134·71194.odf. 

"See Releose No. BHCA·I. Prohibitions and ReSirictiO#IS on Propritltuy Trading and Certain Interests In, and 

Relotionshiflil W&h, Hedge Fwuls and Prirate Equity Funds~ctmbtr 10, 2013), m•ailable at 

hnos1/www.set.eovlruleslfinat/2013/bllca-l.odf; and Release No. BHCA-2, Trwmem ofCertain Collatero/ited 

Debt Ob/iglllions Backed Primarily by Tnat Preje"ed Securities •·ith Regard to Prohibitions and Restrictions on 

Certain Interests in, and Re/ationshiflil with, Hedge Funds and Pril·ate Equity Funds {Januaty 17. 20 14). a~·ailoble 

111 hnps1/www gov ruleslintcriml20141bht.1· .odf. 

"See Release No. 33·941 5, Eliminating the Prohibition Against General Solicitation and Generoi Adl•ertuing in 

Rule 506 and R11fe 144A Offering> (July 10, 20 13). a~•ailab/e a/ h1tps://w•w.stc.govlrultslfinalf20 13133·941 S.odf 

alld Rem No. 33-9416, Amendmemsto Reguhuion D, Form Dand Rule 156 underdle Securities Act (July 10. 

20 13), m'Dilob/e at hnps11www.sec,gov/nJieslpropos<dl2013f.l3·94 I 6.pdf. On tltc same day, the Commissioo 

adopced rules 10 disqualify cenain felons alld odler "bad act~'" from p01ticipa1ing in securities offerings mode 

under Rule 506. See Bad Actor Rule,.rupra note 26. 

30 See Release No. 33·9741, Amendmt~~tsfor Small and Additional issues Exemptions undu thtSecurities Act 

(Regulation A) (March 25, 2015), m•ailable at hnps://www.sec.gov/rultslfinatl2015133·9741 .odf. 

"See Release Nos. 33·9914: 34-76324, Crowdfimding(October30, 2015),m·oilobleat 

hnps1/www.see.go,·/ruleslfinalf201Sf33·9974.pdf. 

13 
51 


The FAST Act was enacted by Congress late last year, requiring the SEC to undertake 

several more rules and studies to promote capital formation and modernize disclosure. We have 

already made progress on implementing those mandates, adopting interim final rules to revise 

registration forms for emerging growth companies and smaller eponin~ companies.

32 and to 

permit issuers to include a summary in the annual report on Form I 0-K. 3 Earlier this year, the 

SEC also approl'ed amendments to revise the rules related to the thresholds for registration, 

termination of registration, and suspension of reporting under Section 12(g) of the Securities 

Exchange Ac~ implementing provisions of both the JOBS and the FAST Acts . .l4 

Creati11g New Opporlu11ities for Smaller Issuers 

The Commission has gone beyond the statutory mandates since I last testified and also 

developed and adopted a number of additional initiatives that are designed to facilitate capital 

formation, particularly for small businesses. In October 2015, for example, the Commission 

issued a rule proposal seeking to modernize Rule 147, a safe harbor to a statutory exemption for 

intrastate securities offerings, which would establish a new exemption to facilitate capital 

formation through intrastate offerings.35 Many market participants and state regulators had 

raised concerns that the current requirements have not kept up \11th changes in the business 

environment and technology. which limits the usefulness of the safe harbor for capital-raising, 

especially for smaller state and I neal businesses. The rule proposal would retain the key feature 

of existing Rule 147-its intrastate character. which permits companies to raise money from 

investors within their state without concurrently registering the offers and sales at the federal 

level. In recognition of the transformative nature of the internet and other technologies, 

however, the rule would, among other things, remove the existing intrastate restriction on offers, 

but- critically for the state-based nature of the otl"ering and its regulation- would continue to 

require that sales be made only to residents of the state or territory of the issuer's principal place 

of business. The proposal would also modify and modernize some oftbe issuer eligibility 

requirements to make the rule available to a greater number of businesses seeking financing in-

"See Release No. 33-t 0003, Simp/ijiCIJrion of Disclosure Requiremenu fer £merging Gl'fftl·rh Companies and 

For,..ord lncorporarion IT)• Reference on Form S-1 for Smaller Reporting Companits (January 13, 2016), Ql'oiloble 

m hnps://www.seqovlrule!linteriml2016133-10003.odf. 

"See Release No. 34-77969, form 10-K Summary (June I, 20t6), (JI•ai/oble at 

https:lhnlw.ses .2ov/ru les/interim/20 t6/34· 71969. pdf. 

"See Release No. 33-1 007), Changes to Exchange Act Registration RequirementJ to lmplemenJ Title V and Title VI 

oft he JOBS Act (May 3, 20 t6), Ql'ailob/e at https://www.ses.•ovlrute#final/20 t6J33· tOOJS.odf. 

11 Set Release No. 33-9973, Exemptions to facilitate /ntr/lState and Regional Securities 0/frtings (October 30, 

20 I 5). (JI•oiloble at hups://,vww.ses.gov(rulesloromd/201 Sf33-m3.odf. 

14 
52 


state. while requiring that such fmancing occur 11ith a set of certain investor protections and that 

issuers have a sufllciem in-state presence within the state of offering. 36 

Another imponant initiative is the pilot program to 11iden the minimum quoting and 

trading increments- or tick sizes-for stocks of some smaller companies. Following a study 

directed by the JOBS Act, 31 the Commission in May 2015 approved a proposal, submitted in 

response to a Commission order, 31 by the national securities exchanges and the Financial 

Industry Regulatory Authority (FINRA) for a two-year pilot program.39 The SEC plans tO use 

the pilot program to assess whether 11ider tick sizes enhance the market quality of these stocks 

for the benefit of issuers and im·estors. The pilot is scheduled to begin on October 3, 2016.40 

More broadly, the Commission staff remains commiucd to helping small issuers use 

these channels and others to build their businesses using the securities markets. The Office of 

Small Business Policy within the Division of Corporation Finance provides extensive guidance 

to small businesses seeking to raise capital or comply with our reponing requirements. Each 

year, the office responds to over I ,000 requests for interpretive advice, provides guidance 

through speaking engagements, and meets frequenily with interested parties about pending 

rulemakings that could impact small businesses. The Commission also renewed the Advisory 

Committee on Small and Emerging Companies to provide the Commission with advice on 

capital fomtation and reporting requirements for smaller issuers.41 

16 While lht pi'Ojl(l1td rule coukl be used for any in113Siate offering meeting iiS conditions, more than 25 statts have 

macted some fonn of in113Siate crowd funding, and this provision could fooilitale capital raising lhtough those stale 

provisions. 

" Report to Congress on Decima/izati<>n(July 2012), ovailable at 

hnps1/www.see.gov/newslstudies!2012/deeimali>ation-0720t2.odf. 

"See Releast No. 34- 12460. Order Diretting the Exchanges and the Finom:iai Industry Regulatory Authority To 

Submit o Tick Size Pi/111 Plan (June 24, 2014), O>·oilablt /11 hnps1/w"w.see.govlruleslotber/2014/34-72460.odf. 

19 See Release No. 34· 74892. Joint Industry PI all$; Order Apprqving the Nalional Martel .\)~tem Plan to Implement 

o Tick Sire Pi/111 PrOf/am by BATS Exchange, Inc.. BATS Y·Exchange, Inc., Chicago Su!CI. Exchange, Inc., £DGA 

fxchang~ in~. EDGX E.rchangt. Inc.. Financial Industry Regulatory Aulhori~·. Inc., NASDAQ OMX BX Inc.. 

NASDAQ OMX PHLr LLC. The Nosdaq Stock Market LLC, New York Stock Exchange LLC, NYS£ MKT UC. and 

NYSEArca, inc.. os ModifiedbytheCommwion, ForaTwt>-Year Period(May6, 2015), a<·ailabiea/ 

hup ~lwww see gov eslsrolnms/2015/34 N892.odf. 

"On November 6, 2015, the Commission issued an exemption to !he Participants requiring implemenwion of !he 

Tick Size Pilol until Octobe< 3, 2016. See Release No. 34-16382, Order Granting Exemption from Compliance with 

tbe National Mari<et System Plan to Implement a Tick Siu Pilot Program (No1•ember 6. 2015), a<·oilable at 

https1/www.sepovhJ!Ies/exordlnl20 I S/34: 76382.odf. 

" lnfonnation regarding lhe committee and its recommendations can be found at 

https://www.ses.•o•·linfofSI!!llllbuslacsec.shtml. 

15 
53 


Updating the Definition of an ''Accredited Investor" 

In another important step for modernizing the private offering market, the Commission 

published a staff report in December 2015 regarding the key definition of"accredited investor," 

which analyzes various approaches for modifying the definition and provides staff 

recommendations for potential updates and modifications.'2 The report recommends that the 

Conunission consider expanding the definition to include alternative indicators for individuals to 

qualify as accredited investors (other than looking solely at income and net worth). The report 

also evaluates the impact that potential changes to the definition would have on the size of the 

accredited investor pool. I have directed the staff to prepare recommendations for the 

Commission on how the definition should be modified, and the comments we are receiving in 

response to the report will help infonn the next steps. 

Strengthening Markets with Targeted Action and Data-Driven Analysis 

Since I last testified before this Committee, we ha1•e proceeded with our ongoing 

assessment of U.S. equity market structure to ensure that our markets remain the deepest, fairest, 

and most reliable in the world. It is important that our market structure is optimally serving 

investors and companies of all sizes seeking to raise capital. Our approach is data-driven and 

includes a number of identified short·tenn enhancements. as well as a comprehensive review of 

the entire structural operation of the equity markets to detennine whether other changes should 

be made to optimize our markets for investors and issuers. The Commission staiThas also 

continued to pursue efforts with FINRA and the MSRB to enhance the structure of the fixed 

income markets. 

Preserving Operational Integrity in the Equity Markets 

As I have remarked since my earliest days at the Commission,4.l a fundamental 

n.'quirement of our modem equity markets is strong technological systems and operations. 

Shortly after my appearance at the September 2014 hearing of the Committee, the Commission 

adopted wide-ranging rules designed to strengthen the tec.bnology infrastructure of the U.S. 

securities markets. 

44 The rules-together comprising Regulation SCI-impose requirementS on 

'

1 See Report on tht Rtl'itw oftht Defmition of '"AccreJiteJ Jm·estw • (De(ember 18, 20 5~ tl>'oi/oble 01 

ttps:/lwww ser.govi£Q!I! fi nlfiOO!ISPI!bsfspes:ja ·stu esl~view.<Jefi itioo=9 acmd te<i n' estOf·l2·1 ·2015.!1df. 

"See, ~g. Chair Mary Jo White. Enhoncil!g Our Equil)! Mar!eJ Smtclure (Jtme 5, 2014) 111·oiluble at 

https:/Jw-,.w.sec.goviNews/Spee<Ml<laitiSPmh/1370542004312 ("Chair White Marl:et Structure Fram<worl: 

Speech'"); Chair Mary Jo White. Focosif!g on FundomenJot.: The P01h 10 Addrm Equity Markel Strue/ure, 

(Oaober 2, 20t 3), 111•ai/oble at hups:llwww.see.gol'/News/Speecli/IJetailiSOetth/1370539857459; and Chair Mary 

Jo White, Slat<ment 0!! Mee1ing with Leaders of Exchanges (September t2, 2013), available at 

hups:llwww.sec.oov/Newlil'wsRele,ye!!XtaitiPressRekasei13705398Q.!861 (''Chair White E.xchange Metting 

Statement"). 

"Set Release No. 34-73639, Regulation S>>tems Compliance and lnlegril)! (November t9, 20!4)("Regulation SCI 

Adopting Re ease·~ m·ailob/e at hnos:l/www seC govlrules!fina!I2014IJ4·73639.!1df. 

16 
54 


certaio key market panicipants iotended to reduce ~te occurrence of systems issues and improve 

resiliency when systems problems do occur. 

Our eiTons to preserve the operational integrity of the market extend well beyond 

Commission rulemaking. In response to my requests,'; the SROs have continued to work to 

address issues like order types and operations, data feed disclosures, and "single poiots of 

failure" within infrastructure systems that have dte ability to significantly disrupt trading.-" Most 

recently, the Commission approved new rules of the New Yori<. Stock Exchange, NYSE MKT, 

and Nasdaq that provide for closing contingency procedures for listed securities if the relevant 

exchange is unable to conduct a closing transaction in one or more securities due to a systems or 

technical issue. 47 All of the exchanges have now conducted and completed in-depth analyses of 

order types and have filed proposed rule changes to clarify the operation of their order types.43 

All of the exchanges have also now submitted rule filings disclosing how they use securities 

information processor (SIP) feeds and direct feeds.-19 These filings provide significandy 

"&e. e.g., Chair White Marktt Structure Framework Speteh and Chair White Exchange Meeting Statemtnt, sup13 

n01e43. 

"&t Chair Mary Jo White, Tire Continuous Proem ofOptimhing tire f.qllity Markets (June 2, 20 t6). m·oilable at 

https1/www.sec.gov/newslspeecMhe..:ontinUOO$-process-llf-ootimizing-tbe-eouitv·marl<ets.html. 

"See Release No. 34-78/)15. Notice of Filings of Amendment No. I, and Order Granting Accelerated Approral of 

Prt>jmed Rule Changes. as Modified by Amendment No. 1. to PriJVide for How tire £xcJJ1Jnges Would Oetermine on 

Officio! Closing Price if tire £xchmrges are Unable to Conduct o Closing TraiU/lction (June 8, 2016). lll'ailab/e 01 

http1/www.sec-govlruleslsrolnysel20 16134-780 15.pdf; Release No. 34-781J 14, Notice of filing of Amendment 

No. I, and Order Granting Accelerated Appr01•0l of o PrOjmed Rule Chongt, as Modified by Amendment No. I. to 

Establish Secimdl/1}' Contingency Procedures for tire £xclwnge 's Closiltg Cross (June 8, 20 16), m·oi/oblt 01 

httpJ/www.sec.govfrule!lsrofnasdaq120 16134· 780 14 .odf. 

'

1 See Release Nos. 34-74796 (April23, 2015). 80 Fed. Reg. 23,838 (April29, 20 IS)(SR·NYSEArca·2015.{18); 

34·747l8(April l6, 2015),80 Fed. Reg, 22.600(Aprii22,2QIS)(SR·BATS·201S~);34-74139 (Aprill6, 20 5~ 

80 Fed. Reg. 22,567 (April22, 2015)(SR-BYX-2015.{17); 34-74558 (March 2Q, 2015~ SO Fed. Reg. 16,050 (March 

26, 2Q15) (SR-NASDAQ-2015.{124); 34-74618 (March 31. 2015), SO Fed. Reg. 18,452 (April6, 2015) (SR-Phlx2015·29); 34·74617 (March 31, 21>15).80 Fed. Reg. 18.473 (Aprii6, 201S)(SR·BX·2015-015);34-74439 (Maroh4, 

2015), 80 Fed. Reg. 12,666 (March 10, 2015)(SR·EDGX-2015.{18);34-74435 (March4, 2015),81) Fed. Reg. 

12,655(March 10,2QI5)(SR-EDGA-2015-10); 34-73468 (October29, 2014), 79 Fed. Reg.6S,450(November4, 

2014)(SR·EDGX-2014-18); 34·73592(No,·ember 13, 2QI4). 79 Fed. Reg. 68937 (November 19, 2014)(SR· 

EDGA-2014·20); 34-73572 (November 10. 2014), 79 Fed. Reg.68.736(November 18, 2014)(SR.CHX-2014·18); 

34-74678 (April S, 20 5~ 80 Fed. Reg. 20,053 (April14, 2015)(SR·NYSE-2015-15); and 34-74682 (AprilS, 

2015),81) Fed. Reg.20.043 (Aprill4, 201S)(SR·NYSEMKT-2QIS·22). 

"&t Release Nos. 34·72685 (July 28, 2014), 79 Fed. Reg. 44,889 (AugUSI I, 2014) (SR·BATS-2014.{129); 

34-72687 (July28. 20 14~ 79 Fed. Reg. 44926(August I, 2014)(SR-BYX-2014.{112); 34-72682 (July28, 2014), 79 

Fed. Reg. 44,938 (August I. 2014)(SR·EDGA·2014·17); 34·72683 (July 28, 2014~ 79 Fed. Reg. 44.950 (August !, 

2014)(SR·EDGX·2014·2Q); 34·72111 (July29. 20t4~ 79 Fed. Reg.45,570(August 5, 2014) (SR·CHX-2014-10); 

34-72710(July29, 2014), 79 fed. Reg. 45,511 (AugUSI5. 2QI4)(SR-NYSE-2014-38): 34-72708 (July29, 2014), 79 

Fed. Reg.45.5n (AugustS. 2014)(SR·NYSEArca·2014-82); 34-72709(July29, 2014), 79 Fed. Reg. 45,513 

(August 5, 2014) (SR·NYSEMKT-2014~2); 34·72684 (July 28, 2014), 79 Fed. Reg. 44956 (August I, 2014) (SR· 

NASDAQ-2014-072); 34-72713(July29, 2014), 79 Fed. Reg.45,544 (August 5, 2014)(SR-Phlx·2014-49); 

34-72712 (July29, 20 14~ 79 Fed. Reg. 45,521 (Auguso5,2Q I4)(SR-BX-2014.{137); 34-74074 (January 15, 21>15), 

SO Fed. Reg. 3.679 (January 23. 2QI5)(SR·BATS·201S-M); 34·74075 (January IS, 2014~ 80 Fed. Reg. 3,693 

(January 23. 2015) (SR·BYX-2015.{13); 34-74076 (January 15, 21>14), 80 Fed. Reg, 3,674 (January23, 2015) (SR17 
55 


improved lransparency for investors and the public on how the exchanges operate. And, also at 

my request, the SIPs have implemented a time stamp in their data feeds, tO facilitate greater 

lranSparency on the issue of data latency.50 In this regard, it should also be noted that the SIPs 

have steadily upgraded their systems to reduce average latencies from nearly one second a 

decade ago to less than 1/IOOOth of a second today.;' 

Another important component of this effort is ensuring that the moderators put in place in 

2012to address extraordinary volatility in the market work well. And the SEC and the SROs are 

actively reviewing the operation of the limit up-limit down pilot plan, with a focus on issues that 

occurred during the volatile trading of August24, 2015. ;z This re,1ew has included extensive 

public analysis by SEC staff of that day's events and the consideration of specific improvementS 

to refine the plan's operation_;3 

EDGA·20t5.02); 34·140n (January 15, 2015~ 80 Fed. Reg. 3,282 (January 22, 20t5) (SR·EDGX·201S.02); 

34·74357 (Fd>ruary24, 2015~ 80 Ftd. Reg. t1252(March2, 2015)(SR·CHX-201l-OI); 34·74410(Marth2, 

2015~ 80 Fed. Reg. 12,240 (March6, 2015) (SR NYSE 2015~); 34-74409(March2, 2015~ 80 Ftd. Reg. 12,221 

(March 6, 2015)(SR-NYSEArca-2015-ll); 74408(Marth 2. 2015~ 80 Fed. Reg. 12.225 (March6. 2015)(SRNYSEMKT-2015-11); and34-74690(Apri19. 20 5~ 80 Fed. Reg. 20282(Apri115, 2015)(SR-NASDAQ-2015· 

033). 

"&e Release No. 34-75505, Joint lntfustry Plan: Order Appr011ing Amendmenr No. 15 Ia tire Join/ Sd}RtguiOIII<')' 

Organi:arion Plan G11>-.rning the CollecriOtJ, COIJS<!Iida1i011and Disseminarion ofQuOialiOII anti TrOJISoctiOII 

Informal ion for Nasdaq-LisredSecurities Traded on &chtmges on an Unlisred Trading Pr;.ileges Basis Submilled 

by rhe BATS Exchange, Inc., BATS Y-&change, Inc., Chicago Board Optif)IIS Exchange, lncorpormed, Chicago 

Stade Exchange, Inc., E.DGA Exchange. Inc., E.DGX £rdrange, Inc., Financial Jndus/ry Regularory AuthOti~; Inc., 

lnrernorional Securiries Exchange LLC, NASDAQ OMX BX,Inc., NASDAQ OMX PHLX Li.C, Nosdoq Srock Market 

UC, N01ionol Srock Exchange. Inc .. New York Srock Exchange LLC, NYS£ MKT LLC, ontf NYSE. A1ta. Jne (July 

22, 2015), m·ailab/e at https:llwww.sec.gov/ru!cslsm'nms'2015134·7S50S.!!df; and Reltase No. 34·75505, Order 

Appro>ing lht Twenty Steond Substantive Amendment to lht Second Restatement of the CT A Plan and Sixteenth 

Substantil·e Amendment to the Restated CQ Plan (July 22, 2015), avai/(W/t ar 

bttpsJ/www.sec.gov/ruleslsrolnms/20 15134·75504.pdf. 

11 &e. e.g,. Release No. 34-70010, Notice of Filing and Immediate Effectil•eness oflht Nineteenth Charges 

Amendment to lht Se<ond ReSiatement of the CT A Plan and Eleventh Charges Amendment to lht Restated CQ Plan 

(July 19. 2013~ 11>'ailoble at httos:l/www.xc govlrules/srolnms/nmsarchi>pnms2013.s!JtmL 

"&e Release No. 34-77679. Order Approving lht Tenth Amendment to the National Marl;et System Plan to 

Address Extraordinary Market Volatility by Bats BZX Exchange. loc., Bats BYX Exchange, Inc., Chicago Stock 

E.xchange,lnc., BatS EDGA Exchange, Inc., Bats EDGX Exchange, Inc., Financial Industry RegulatOI)' Authority, 

loc., NASDAQ BX, loc., NASDAQ PHLX LLC, The Nasdaq Stock Market LLC. National Stock Exchange, loc., 

New Yorl; Stock Excbaoge LLC, NYSE MKT LLC, and NYSE Area, lnc.(APfil21 , 2016)./J\·oiloble ar 

httpsJ/www.sec.gov/ruleslsrolnmsi2016/34-7120S.pdL &e also Testil110fly ofSteplten luparello, Director, 

Division ofTradingand Markets, SEC. before the United Stales Senate Committee on Banking, Housing, and Urtl0n 

Affairs Subc;ommittee on Se<urities, lnsurante, and Investment (March 3, 20161 IMiloble at 

httpsJ/www.sec-.gov/ne\11/testimonyhestimony-regulatOI)'-reforms·to-imPfove-equity·market·SIJUCture.html. 

!l &e Researcb Note: Equity Market Volatility on August24, 20 15 (December 2015). lll'uilable OJ 

https://www.soc.gov/marketstructurelresearphtoouitv market vola!ility.OOf. 

18 
56 


Implementing Targeted Initiatives to Optimize Equity Market Struc/1/re 

The Commission is also taking oction to address enhanced equity market transparency 

and disclosure, including our proposal issued in November2015 to update disclosures by 

alternative trading systems (A TSs),"' and I expect a proposal imminently to modernize Rules 

605 and 606 of Regulation NMS. Updating Rules 605 and 606 could provide investors \\1th 

important new infornJation about broker-dealer order handling practices, empowering them to 

better assess the routing decisions of broker -dealers. 

The Commission ·s proposal on Regulation A TS, issued last November, would require 

ATS platforms that trade national market system (NMS) stocks to provide significant new 

transparency with respect their operations. In the years sinee Regulation A TS was first adopted 

in 1998, our equity markets have undergone significant change. A TSs are now an important 

component of our current market structure, fueled by advancements in technology and 

competing directly with exchanges. Consequently, the number of trading centers has increased 

substantially, trading activity in NMS stocks is less cooeemrated, and A TSs collectively now 

account for approximately 15% of the dollar volume in NMS stocks. This proposal, marking the 

first-ever major update of Regulation A TS, would require new detailed disclosures about the 

operation of these platfom1s and would create a new proeess for Commission oversight of them. 

In addition to enhancing the transparency of our market for investors, the Commission 

has also advaneed measures to improve our core regulatory tools of registration and firm 

oversight. In March 2015, for example, the Commission proposed important an1endments to 

Rule 15b9-1 to require broker-dealers that engage in off-exchange proprietary trading to become 

members of a national securities association, which would enhance oversight of active 

proprietary trading firms. ss The staff also continues to make progress on recommendations to 

the Commission to address, among other things, the registration status of certain active 

proprietary traders, improvements to finns' risk management of trading algorithms, and an antidisruptive trading rule that would address the use of aggressive, destabilizing trading strategies in 

vulnerable market conditions. ;

6 

Assessing Furiher Data-Dril'en Enhancemenisto Equity Market Siructure 

The Commission's continuing work in market struct\lfe is a substantial undertaking that 

requires updates in technology, and utilization of data and analytics to make infom1ed decisions 

on enhancing market structure. That means new ways of using existing market data through 

tools like the Market Information Data Analytics System (MIDAS), Sl and it also means building 

~See Release No. 34-76474, Regulation of NMS Stock Atternotil·e Trolling .\)~1ems (November 18, 20 I 5).<1roilable 

01 https://www.sec.gov/ruleslpropostd/20 I S/34-76474. pdf. 

ll St< Release No. 34-74581, E:umption fiJI' Cerloin &change Men1hm (M31(h 25, 20 15), m·oi/ohle ot 

hups:/lwww.seqov/rulesiP!OOOMdl2015t34· 74581.odf. 

16 St< Chair White Markel Structure Fmme1<ori: Speech. supro n()(e 4l 

" lnformari<m regl!lding MIDAS may be found 31 httptl/www.S£C.gov/ntaike!$1nlC!UreJmid3s hlml. 

19 
57 


new systems to provide even more powerful anal)1ical capabilities for the Conunission and our 

fellow regulators. This past April,the Commission published for comment a proposed national 

market system plan for the creation of a consolidated audittrail.ll This is a substantial 

undertaking and ''ill result in one of the most sophisticated financial databases, providing a full 

lifecycle of all orders and transactions in our equity and options marltets. Final implementation 

of the consolidated audit trail is a top priority, and I expect the staff to prepare a recommendation 

for approval of a final plan for Commission action later this year, consistent with Commission 

Rule 608 under Regulation NMS. Aller final approval of a plan, Commission Rule 613 requires 

the selection of a plan processor \\ithin two momhs of approval to build, operate and maintain 

the consolidated audit trail. Data would be reported by the exchanges and FINRA within one 

year of Commission approval. 

In early 2015, as part of our broader marltet structure wort, tlte Commission established 

the Equity Market Structure Advisory Committee to provide a formal mechanism through \\hich 

the Conunission can receive advice and recommendations on key equity marltet structure issues 

from a diverse group of experts.19 The Committee as a whole has since met four times to 

consider issues such as the operation of Regulation NMS, the impact of access fees and rebates 

widely used by stock exchanges and the regulatory structure of trading venues, and the impact of 

various market stmcture issues on customers. The Committee has established subcommittees to 

look more closely at specific issues identified by the SEC staff and Committee members before 

presenting them to the full Committee for discussion and delibe-ration. The Committee is 

expected 10 conve-ne a telephonic meeting on July 8 to receive finalized recommendations from 

their subcommittees on an access fee pilot program, NMS plan governance, and SRO proposals 

requiring technology changes. The staff and the Committee will continue to use a variety of 

tools to ensure both the transparency of the Committee's consideration of issues and input from 

the full range of investors and other interested market participants, including coordination ''ith 

our Investor Ad,~sory Committee. 

Deepening Oversight oft he Fixed Income Markets 

Fixed income market structure has long been a focus at the Commission, and the 

continued impact of technology, regulation, and other forces require us to deepen our oversight. 

In particular, as I have remarked before, technology in the fixed income marltets may not be 

"See Reltase No. 34-m24, Jointlmlu.5/Ty Plan; Notice of Filing ofthe Nati"""l Marktt $)•stem Plan GIJI'eming 

the COII!(){idated Audit Trail by BATS Exchange. Inc., BA'fS.Y Exchange, Inc.. BOX Options Exchange LLC. C2 

Optia/1$ Exchange, Incorporated. Chicago Board Optians Exchange, Incorporated, ChicogoSiocl Exchange, Inc., 

£DGA E.tchangt, Inc., £DGX Exchange, Inc., Financial Industry Regularory AuthoTio•. lnc., /nternaJi®al 

S«urities Exchange, LLC. IS£ Gemini, LLC. Miami International Secoritles Exchange LLC. NASDAQ OMX 8X 

Inc .• NASDAQ OMX PHLX LLC. Tht NASDAQ Stock Market LLC, NOJi®al Stock Exchange. Inc.. New York Sloe! 

ExchongeUC. NYSEMKT LLC, andNYSEArca.lnc. (April27, 2016~a.-oilableat 

hnps11""'w.seuov/ru les/sro!nms/20 16134· 77724.odf. 

" Information regarding lheoommittet and its ongoing wO<k can be found at ms1/w~w.s<~:.gov soo li• tloo v· 

matket·Sltuaure-advisolV-oommittet.shtml. See al•a Chair Mary Jo White, Optimizing our £q11ity Market 

Structure: Opening RemarJs at the lnf/JJgurol Meeting of tire E.qvio• Market Stroct•re Advisory Commilltt (May t l, 

20 I S ). a~·oilable at https:/llnvw.sec .. gov/newslstatementlop~im izing-our -equ ity·mlllket·structure.html. 

20 
58 


deployed today to achieve all of the benefits it could for investors, including the broad 

availability of pre-trade pricing infonnation, lower search costs, and greater price competition. 60 

One important step is to ensure that the best execution and pricing disclosure rules for the 

corporate bond and municipal securities marl>ets are robust and useful to investors, and FINRA 

and the MSRB have been moving forward on such refom1s. At the Commission's urging, 61 the 

MSRB in December 2014 ad~ted a best execution rule for the municipal bond market similar to 

FINRA's best execution rule. And both SROs have since developed and published additional 

guidance on the best execution obligations of broker-dealers and municipal securities de.alers. 6> 

In 2014,1 also urged both FINRA and the MSRB to move forward on markup and markdo1m 

disclosure rules, a refonn also publicly supported by my fellow Commissioners.61 Both have 

advanced proposals and SEC staff has been dedicated to working closely 11ith FINRA and 

MSRB as the proposals are finalized. 

A related effort in these markets is enhancing pre-trade price transparency. Work on this 

initiative is undeT\vay at the SEC. Pre-trade transparency for corporate bonds and municipal 

securities should remain a critical objective, and the Commission staff continues to worl> through 

the challenging issues inherent in such a transfonnative market structure change. The staff's 

immediate goal is to develop a recommendation for the Commission's consideration. 

The initiatives in these marl>ets also include interagency worl> on the U.S. Treasury 

market in the wake of the events of October 15, 2014.6s One important priority for the Treasury 

'-' See Chair Mary Jo \Vhite,ln/ermediatii!IJ in the Modern SecuritieJ Markm: Pulling Technology und CompeJition 

to Work for ln>-estorJ (June 20, 2014)("Chair White Fixed Income Speech"~ lll'ailable at 

httpflwww.see.gov/News/Speochlll<!aiVSpetch/13705421220 12. 

" See SEC Report ortthe Municipal Securities MarieJs (July 31, 20 12), IJI'ailable at 

httpJ/www.ssqovlnewslstudies/20 12/munirepon073112.odf. 

'~ See MSR.B Rule G-t8 (Best Execu1ion): Release No. 34-73764, Self Regulatory Organi:otia~~S; Municipal 

Securities Rulemaking Board; Order Granting Appro•·oi of a Proposed Rule Change C011$isting of Rule G-18, on Best £ttCUiion ofTroJtsactions in Municipal Securities, and Amendments to Rule G-48, on TramactiOIIS .-ith 

Sop/liMicoted Mtmiclpal Market Professional! ("SMMP'), and Rtde D-1 5, on the Definition ofSMMP (Decem bet 5, 

20 14), IJI•ailable at https1/www.see.gov/rules/sro.lmsrotli)l4134· 73764.odf. 

" See MSRB Implementation Guidmlceon MSRB Rule G-IS, on Best Exec.ttion(November20t5~oi'Oi/ahleat 

http:/lwww.msrb.org!-/media!Files.IM ISC!!Iesi-Ex-lmplementation-Guidance,ash?la=ep: and FINRA Regulaloty 

Notice 15-46(Novembet2015),111-oilab/eat 

hnps:l/www.finm.oWsiti!Sidefaultlfileslnotiee doc file refiN01ic:e Re2ulat0!\' t5-46.odf. 

"See, eg Chair White Fixed Income Speech, supra n01e 60; and Commissioners KaraM. Stein and MichaelS. 

Piwo~or. Statement on E.dward D. Jones £nforcemenl Actii!IJ (August t3, 2015~ 0\'llilab/e at 

hnp-JI•ww.see.gov/newslstatemenllstatement-on-edwatd-jones-enfortement-action.html. 

" SeeJointStaf!Report: The U.S. Tre=ryMarkeJ onOcJobtr 15. 2014(/uly 13, 20 1S),m-oilableat 

hups:/lwww.treasurv.govlpress-<enter/press-rtlwes/Documentslloim S1aff Repon Treasury 10-15-2015.odf; 

Deparunent ofTreasuty, Notie< Seeking PrblicCommMt on the Evolution of the Trt/J11Jf)' Markel (Janua.y22. 

20 16). IJI•ailable at bupsdlwww ueasury.govforess:;«nterlprrss· 

releaseslllocuments!Marl<tt%20Structure%20RFI%20Final.odF. 

21 
59 


market is developing a mechanism for post-trade transparency, which systems operated by 

FINRA and the MSRB already provide in the corporate and municipal marketS. Last month, the 

SEC and Treasury announced the consideration of concrete steps to further enhance post-trade 

transparency to regulators of the U.S. Treasury cash market, and I look forward to further 

advancing this effort. 66 

Strengthening Other Critical Market Infrastructures 

Clearing agencies provide vital services to both the equity and fixed income markets 

every day, and it is vital that the clearance and settlement cycle continue to work effectively and 

efficiently as the markets grow in size and complexity. The Commission has proposed new rules 

to enhance the oversight of clearing agencies that are deemed to be systemically important or 

that are involved in complex transactions, such as security-based swaps. 67 Completing these 

rules is a priority this year in order to guard against systemic risk that can arise in the clearance 

and settlement system, and pro,~de certainty to market participants, especially those engaged in 

cross-border activities. I have also directed the staff to develop a reconmtendation for the 

Commission'sconsideration to shorten the seulement cycle,68 which should yield a number of 

benefitS including reduced counterpart)' risk and decreased clearing capital requirements. My 

fellow Commissioners have expressed strong support for this effort,69 and it is an important 

measure for the Commission to advance in coordination with the broader SRO and industry 

efforts underway. 

Last year, again with broad support from all ofthe Commissioners, 10 the SEC also took 

the first major step in the regulation of transfer agents in decades, issuing an advance notice of 

proposed rulemaking, concept release, and n."'<juest for comment on the full n.>gulatory regime. 71 

" See Stotement on TrOik Reporting in 1k Treasury Morket (May t6. 20 16), m·ailable 01 

https1/www.sec .. oov/news{!!!£SS!eleas<!101§..90.html. 

"See Rele3se No. 34-71699, Standords f« C~•-ered Clearing Agencies (Mllltb 12. 2014 ), (II·ailoble at 

huos:/lwww.seqovlrulesforooosod/2()14134· 71699.odf. 

'*See Letter from Chair \\'bite 10 the ln••estment Company Institute aod the Securities Industry and Pinancial 

MarteiS Associalion (September 16. 2015). m•ailoble t11 http;:ttwww.sec.gov/divisionslmartetreg.lchair-white-letterIQ:Sifma-ici-t2.odf. 

"Commissioners MichaelS. Piwowar and KaraM. Stein. Stotemell/ Regarding Proposals 10Shorten 1he Trade 

Set1lement Cycle, (June 29, 2015~ m•ailob/e a1 huos:!/www.sec.govlnews/Siateroent(statement:()n:Jiroposals-!oshorttn·the-trade-seuleme.u-CYCit.hlml. 

" See, eg •. Chair Mary Jo \\'bite. Beyl)lldDisclosurtaltheSEC in 20t6(Feb. 19, 2016),avoilobleal 

httpilwww.ses.•o••!news/speechlwhite-speesh·bmnd-disdoS!!!NI·the·s.c·in-20 16-021916.hlml. See 

also Commissioners Michael Piwowar and Kara Stein Statemenl ofSuppon for tile Need to Modernize the 

Commission· s Transfer Agent Rules (June II, 20 15), available ot http://www.sec.govlnewslstatementlstatement·of· 

suppon·modemize·ste·Uansfer .. aoent:fllles.btml. 

11 See Release No. 34·76743, Transftr Agtnl RegutaliOtlS (De<ember 22, 2015), m·ailab/e at 

htms:/lwww.see.go•·lrulesloonoeptl201504-76743.odf. 

22 
60 


II is imporunt that this work progress so that the integral work of these market participants 

continues to serve investors and issue.rs. 

Making Disclosure More Effective for lnv!'Stors and Issuers 

Another important ongoing initiative is our review of the effectiveness of disclosure for 

investors and issuers. Following the issuance of the Regulation S-K study required by the JOBS 

Act, 12 1 directed the staff to review comprehensively our disclosure rer:ime for corporate issuers 

and develop specific recommendations for updating the requirements. 3 The goal is for the staff 

to make recommendations on how to update our rules to facilitate timely, material disclosure by 

companies. as well as improving shareholders' access to that information. 

This is a comprehensive undertaking and the staff is revie11ing the disclosure 

requirements in phases. In the first phase of the review, the staff is focusing on the business and 

financial disclosures required by periodic and current reports, Fomts I 0-K, I 0-Q and 8-K, and 

updates to certain Industry Guides, including Guides 3 and 7. The staff is also considering 

whether disclosure requirements should be scaled for certain categories of issuers, such as 

smaller reporting companies or emerging growth companies, and, if so, how. In September 

2015, the Commission issued a request for comment for certain financial reporting and 

disclosure requirements in Regulation S-X. ~ 

Most recently, in April20 16, the Commission issued a major concept release that seeks 

input on modernizing certain business and financial disclosure requirements in Regulation S-K 

for the benefit of investors and companies.7s We have already l'l.>teived a number of helpful 

n See Rt{J()'I on Re>·iew of Disclosure Requirements in Regulation S-K (December 20 I 3), m·ailab/e at 

https1/www.se.:.gov/newslstudies/2013/rtg-sk-disctosure-requirements-revitw.pdf. 

" See Chair Mary Jo Whire, 1M Path Fon .. IJTd on Disdosure{Oclober 14, 2013). 1milable at 

huos1/www.m .gov/News!Speedl1De!aii/Spmlt1137053987SW; and Chair Mary Jo White, Tire SEC in 2014 

{January 27, 2014~ tmilable at htt!1}1/www.sec.gov/News1Sptech/Detaii/Soe«lllt 37054!)6n500. 

" See Rei~ No. 33-9929, Request f01 Commtnl on 1/re £flecti>~ness of Financial Disclosures about Entities 

01her than the R<gistranl (Sepcember 25. 20 15~ m·ailoblt at https1/www.sec.gov/rules/otherl2015133·9929.pdf. 

Regulalion S-X tonrains disclosure requirements that diaate tile form and rom em of fill3ntial Statements to be 

included in filings with the Commission. It addresses both registrant financial statements and financial statements of 

<:er1llin <ntities other than tile registrant It also requires that do•c issuer financial swements fikd with the 

Comm~sioo be prepared in ll((:()rdan<:t with ~rally acctpt<d accounting priociples. 

" See Release No. 33-10064, Business ond Financial Disclosure Requir<il by Rtg~~lotion S-K (April 13. 20 16) ("$-

S-K Concept Releost"). m•ailable at hlle<:IIW'..w.lfc.w-!ntleslronm?lflll/6131-I!IIJ6!.pdf. Regulation $-K is the 

001tral repository for 1he Commission's non-financial dis<:losure requirement~ 11 is intended to foster uniform and 

integrated disclosure for registtalion Statements under 1he Securities AC1, registtalion Statements under the Securities 

Exchange Act, and periodic and current reportS filed under 1he E."hange Act. In July 2015, the Commission issued 

a concept rtle:l!t about possible revisions to audit committee disclosures. See Release No. 33-9862, Possible 

Re>·islons to Audit Commillte DiJdosures (July I, 2015), m·ailable at h!!pS://I>\IW,sec.AAv/rule$1COI1(eptl201 S/33-

2Jili!cjf. 

23 
61 


comment letters on the concept release, which discusses many issues and questions that will also 

serve as a basis for the study of our disclosure requirements mandated by the FAST Act. In a 

later phase of the project, the staff \\ill review and consider recommendations regarding the 

governance and compensation disclosures required in proxy statements. 

Importantly, the staff is also considering how companies file their disclosures and is 

exploring alternatives that could enhance the way that investors access the disclosures. ll!is 

component of our initiative is of vital importance as technology and investors' needs and 

behavior evolve. In the neM term, we are working on changes to sec.gov that would make 

EDGAR filings more accessible to investors and easier for them to navigate. We also continue 

to wort to improve the technology behind EDGAR and sec.gov, most recently this week by 

allowing lilers to submit eXtensible Business Reporting Language data in line as pan of their 

core filings to facilitate easier access to, and analysis of, information. 76 

Another important new phase of this ongoing review is to expand it to cover investment 

companies. Last month,! directed Staff in the Division of Investment Management to undertake 

a disclosure effectiveness initiative of their own to consider ways to improve the form, content, 

and delivery of funds' disclosures.17 Staff is in the early stages of prioritizing aneas of focus, but 

I expect they will include ways to leverage advances in technology to improve the presentation 

and delivery of disclosures and ways to enhance disclosure about fund strategies, investments, 

risks, and fees. 

Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management 

Industry 

We have also already made sigJJificant progress on the Commission's major undertaking 

to enhance risk monitoring and regulatory safeguards for the asset management industry, which I 

announced in December 2014.

78 ll!is effort, which comprises five core initiatives addressing 

funds' evolving portfolio composition risks and operational risks, follows the fundamental 

reforms to money market funds proposed and adopted during my tenure, which \\ill come fully 

into efiect this October.

79 

"Set Release No. 34·7804 t, Order Granting Limited 0/Jd C<Jnditionol E.rtmption Under Stttion J6(a) oftht 

Stturities fxch1111gt Act of 19J4 from Compliance with Interactive Data File fxhibit Requirement in Forms 6-K, 8· 

K, IO.Q. 1/J.K, 1/J.F and 40.F to Facilitate Jnline Filing of Tagged Financial Data(JWl< 13, 2016), m·ailable at 

hup1/w\\w.see.eovlruleslexordenl20 t6134· 7804 t .t>df. 

" See Chair Mary Jo White, The Future oflm·estment Company RegulaJion (May 20, 2016), availablt ot 

https"l/www.see.gov/newslsoeecl>'white·speedl·keynote·address·ici.0520t6.btml. 

"See Chair Mary Jo White, Enhan<il!g Risk Monitoring and Regulatory Sllfeguards for thtAssef Management 

Industry (De<tmber II, 20 14~ Ol'ailable at https:l/www.sec.•ovlNews!Speedvll<1aii/SP«<hll370543677722. 

"Set Release No.IC·3 t 166, Money MIUAet Fund Reform; Amendments to Form PF(July 23, 20t4), 0\VIilabJe 01 

https"l/www.ses.gov/nJtesffinal/2014!33·96j6.t>df. 

24 
62 


The Commission has now proposed rules to implement three of the five initiatives I 

announced in late 2014, all of which I expect will be finalized this year. Fir;r, 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. 

10 These proposed rules, if adopted, would require registered funds to provide 

ponfolio-wide and position-level holdings data to the Commission on a monthly basis. as well as 

repon annually on cenain census-type information that reflects current infom1ation needs. This 

data would be reponed in a structured data forma~ which would improve the ability of the 

Commission and the public both to aggregate and analyze infomtation across all funds and to 

link the reponed information with information from other sources. Also in May 2015, the 

Commission proposed amendments to Form ADV, the primary investment adviser reponing and 

disclosure form, that would among other things: (I) provide additional information regarding 

advisers, including infonnation about their separately managed account business; and (2) address 

issues that sta!Thas identified since the Commission made significant changes to form ADV in 

2011.81 

To advance the second initiative on liquidity management, in September 2015, the 

Commission proposed a new rule that would require mutual funds and other open..:nd 

investment companies, including ETFs, to adopt and implement liquidity management 

programs. 82 l11ese funds would also be required to provide enhanced disclosure regarding their 

liquidity and redemption practices, the methods used by funds to meet redemptions, their 

committed Jines of credit, and interfund borrowing and lending. In addition, mutual funds 

(except money market funds or ETFs) would be permitted to use "swing pricing,"33 which would 

also require additional disclosures. 

In December2015, the Commission advanced the third initiative by proposing a rule that 

would impose new requirements on the use of derivatives by open and closed-end funds and 

business development companies. 84 Funds would be required to comply with one of two 

10 See Rele3se Nos. 3J-9776: 34-75002; IC-31610, Investment Comf!IJ1f)• Reporting MC<iernaati()l) (May 20. 2015), 

rmilable ol https:/lwww.gc.gov/rules!proooscdl2() J5!33·9716.od f. 

"See Rei-No.IA-4091. Amendmems 10 Form ADV 1J11d lm·estmtnl AcMsm Act Rules (May 20, 2015~ 

m•oiloble 01 h!!J)S:/Iwww.sec.govlrules!!l!O!)!)sed/2015{1a-409t.odf. For example, llle proposals woold. if adop«ed, 

require aggregate infonnation related to assets held and use of borrowings and deriYati•~s in stpaNitely llUIIlaged 

ooooums and provide additional infonnation about an adviser's advisory btJsintSS. including branch offict 

operations and the use of social media. 

"See ReltaSe No.tC-31835, Open-£nd Fund Liquidity Rislc Managemenl Programs; Swing Pricing; R..Opming of 

OJmment PeriC<ifor lm·esfmenl Company lle{XJI"ting Moclernizolion Release, (September 22, 20 S~ 0\'oilahle at 

huos;//www sec.g9V/nttesfD!Oom!l2015f.ll·9922.odf. 

13 Swing pricing is the process of reflecting in a fund's nel asse1 value the costs associaled •vith llle IJ'ading activity 

of the fund occasioned by shareholde~· redemptions and purchases in orderto reflect those costs in the prices paid 

and received by purchasing and redeeming shareholdefl. 

"See Rei-No. IC-31933, Use of Derivato·es by Registered lm·estment Companies and Business Derelopmtnt 

Companies (December II, 20 I 5~ oroilable ot httos:ll"ww.sec oovfrules/proom!I20JSflc-3 1933.!!df. 

25 
63 


alternative portfolio limitations designed to limit tbe amount of leverage that a fund may obtain 

through derivatives and certain other transactions. In addition, funds would be subject to asset 

segregation requirements to manage risks associated 111th derivatives transactions, as well as 

requirements to establish risk management programs for their derivatives activities. 

The SEC staff is working on recommendations to address the two remaining initiatives 

that I outlined in 2014: transition planning and stress testing. l11e fom1er, on which I expect a 

rule proposal to soon be issued soon, would require investment advisers re.gistered with the 

Commission to create and maintain transition plans to prepare for a major disruption in their 

business. StaO' is also developing a recommendation that the Commission propose new 

requirements for stress testing by large investment advisers and large investment companies. 

Such rules would implement, in part, requirements under section J65(i) of the Dodd Frank Act. 

Finally, to furtl1er promote compliance with our rules in the asset management space, I 

have asked the staff to prepare a reconm1endation to the Conm1ission for proposed rules 

requiring independent compliance assessments for registered invesunent advisers. The 

assessments would not replace examinations conducted by OCIE, but would he designed to 

improve overall compliance by registered investment ad~sers. 

Ad1·ancing Personalized Investment Advice Standard of Conduct 

Section 913 of the Dndd-Frnnk Act granted the Commission authority to adopt rules to 

establish a unifomt fiduciary standard of conduct for broker-dealers and investment advisers 

when providing personalized investment advice about securities to retail customers. As 1 have 

stated previously, my evaluation of the diiTerences in the standards that apply to advice under the 

federal securities lawli has led me to conclude that broker-dealers and investment advisers should 

he subject to a uniform fiduciary standard of conduct when providing personalized investment 

advice about securities to retail investors. I recognize that this is a complex issue, and that there 

are significant challenges that 1vill need to he addressed in proposing a unifonn fiduciary 

standard, including how to define the standard. how it would affect current business practices, 

and the nature of the potential effects on investors, particularly retail investors. 

SEC staiThas developed a framework for this rulemaking that has been 01~ded to the 

Commission for its consideration. As part of its analysis in developing its recommendations, the 

staff is consideri~, among other things, the SEC staO's 201 I study under Section 913 of the 

Dodd-Frank Act. the response to the request for infom1ation from March 2013,

116 the additional 

views of investors and other interested market participants. and the potential economic and 

market impacts. Ultimately, of course, the Commission as a whole will decide whether to 

uSee Study on Jm·estmem Advisers and Broker-Dealers (January 2011 ~ tJWtiloble at 

httpsJiwww.sepovlnews/studies/2011/913studvfinal.odf. 

16 Set Release Nos. 34-69013 and IA-m8, Dutie;ofBrthrs, O.alers. andlmestmenJ Mrisers (Marth I, 2013), 

UI'Oifab/e QJ httpsJ/www sec gov/rules(odJer/2013/34·690 IJ.pdf. 

26 
64 


proceed with a rulemaking to implement a unifomt fiduciary standard and its parameters. And I 

11111 continue to discuss all aspects of this issue with my fellow Commissioners as we proceed. 

Prioritizing Cybersec.urity 

Cybersecurity is-as I have said before17 - one of the greatest risks facing the financial 

services industry and will be for the foreseeable future. Cybersecurity risks can have 

far-reaching impacts, and robust and responsible safeguards for market participants and 

investors' information must be maintained. The Commission has been proactive in publicly 

prioritizing awareness of cyber risks and in examining and enforcing the rules we oversee that 

relate to cybersecurity. 83 

Our own regulatory efforts are focused primarily on ensuring that our registered entities 

have pOlicies and procedures to address the risks pased to their systems and data by cyberattacks. 

In the asset management space, stan· from the Division of Investment Management issued 

guidance that discussed a number of measures that funds and advisers should consider. 19 We are 

also are keeping close watch on how public companies are addressing the issue in accordance 

11ith the 2011 guidance issued by the Division of Corporation Finance.

90 

On the exam front, the staff is building on its successful "cybersweep" from last year, and 

will focus on cybersecurity compliance and controls in 2016 as well. 

91 This year's efl'orts will 

involve more testing to assess firms' preparedness and implementation of firms' procedures and 

controls. Also, this past November marked the compliance date for most entities covered by 

Regulation SCI, which, as noted above, covers certain key market participants- including 

exchanges, large ATSs, clearing agencies. and others ~ In particular, Regulation SCI requires 

those entities to have comprehensive palicies and procedures in place surrounding their 

technological systems to make them more resilient. It also requires those entities to repart 

disruptions in their technology systems to the SEC promptly. The first set of exams of SCI 

entities with respect to these requirements is underway. 

"See, eg, Chair Mary Jo White, Opening Statement at S£C Roundtable on Cybertecurity Ma~th 26, 20 ~ 

ai'Oilable 01 hnps:/lwww.ssc.gov/News/P)lbli<Stm!l!Xtai!!N?IicSunUI37054 12864§8. 

" General infonnation about these activities can be found a1 huos:llwww,sec,gov/sootlightlcvbersccurily.shtm!.. 

"See CybersecurityGuitlanu, lnvestme.nt Management Guidan<:e Update No. 2015.{)2 (Apr. 201 5~ ami/able at 

~/www see gov nl·estment/ 2uidance 20 5.{)2.od . 

,. CF Disclosure Guidance: Topic No.2. Cyberst('W'ity (October 13, 2011 ), a~·ailable at 

1/www.see.gov divisionsicorofinlguidancelcf~u dance4o ic2 htm. 

" See also National Ewn Program, Risk A len: Vol. IV, Issue 8, OCI£'s 2015 Cyb<rsecurity Examination lnitiatil~ 

(Sep. I 5, 20 !51 available at huos1/www.see.gov/ocielann()Ull(tmcntlodt-20 15-cvbersteuritv-ua.ninationinhiative.odf. 

" See SCI Adopting Reltase. supra note 44. 

27 
65 


Finally, just last month I added a Senior Advisor for Cybersecurity Policy to my stalf, 

who has deep expertise in cybersecurity and will continue to enhance our coordinated approach 

to cybersecurity policy across the SEC and engage at the highest levels with market participants 

and other agencies. While all disruptions from cybersecurity events cannot be prevented, we 

continue to explore ways to ensure that our regulated entities consider the full range of 

cybersecurity risks to their businesses and consider and use appropriate tools and procedures to 

prevent breaches, detect attacks, and linlit hann. 

Strengthening Compliance with Risk-Based Examinations 

As I know the Committee appreciates, the Office of Compliance Inspections and 

Exanlinations (OCIE) plays a critical role in protecting investors and the integrity of our capital 

markets. OCIE examiners focus on conducting risk-based exanlinations of registered entities, 

including broker-dealers, investment advisers. investment companies, national securities 

exchanges, SROs, transfer agents, and clearing agencies to evaluate their compliance with 

applicable regulatory requirements. This work is essential to address deficiencies directly with 

registrants and, more broadly, to improve industry compliance, detect and prevent fraud, infonn 

policy. and identify risks. 

Since the September 2014 hearing, OCIE has continued to bolster its risk-based approach 

by using data analytics to identify activities that may warrant examination as well as deploying 

technology to make examinations more efficient and targeted. OCIE's Qt•antitative Analytics 

Unit has, for example, developed and continues to impro1·e a National Exam Analytic Tool, 

which allows examiners to analyze huge amounts of trading data in minutes. These efforts and 

others have enhanced our ability to reach more registrants, and more effectively use our limited 

examination resources. In FY 2015, OCIE conducted nearly 2,000 fonnal examinations of 

registrants, an increase over each of the prior five fiscal years. 

In furtherance of its risk-based approach, OCIE publishes its annual public statement of 

examination priorities to infonn investors and registrants about areas that the staJTbelieve.s 

present heightened risk. The examination priorities are selected through a collaborative process 

in which OCIE's senior management and senior representatives of other SEC Divisions and 

Offices worked side-by-side to analyze and perfonn a risk-based assessment of infonnation from 

a number of sources. In 2016, OCIE's stated priorities include ETFs, fee selection practices at 

investment advisers and dual registrants, variable annuities, retail retirement issues, clearing 

agencies, cybersecurity, and Regulation SCI compliance. In March, OCIE created a new Oftice 

of Risk and Strategy to consolidate and streamline OCIE's risk assessment, market surveillance, 

and quantitative analysis teams and provide operational risk management and organizational 

strategy for OCI E. 

Deplo)1ng technology and the risk·based approaches as described above is imperative 

and helpful, but they do not and cannot produce sufficient exam coverage. I remain concerned, 

as I was in September 2014, that we do not have the resources to adequately examine lbe vast 

and gro"ing registered investment adviser population, of which there are more than 12,000. The 

Commission has therefore taken additional steps to prioritize our limited examination resources 

to better cover investment advisers. In fiseal year 2015, OCIE conducted more than I ,200 

examinations of investment advisers, more examinations than any of the previous five years. 

28 
66 


OCIE has also made significant enhancements to its examination program for advisers, including 

hiring additional industry expertS, strengthening its examiner training program and increasing its 

use of advanced quantitative techniques. However, despite these efforts and in light of rapid 

growth in the adviser population, OCIE was only able to examine approximately I 0% of advisers 

in fiscal year 2015, representing 30% of assets under management. 

This level of coverage cannot be allowed to persist. Afier exploring a nuntber of 

additional measures, OCIE is now begiMing to transition some resources from its broker-dealer 

examination program to its program for investment advisers and investment companies. 

Significantly more resources will still be needed to fulfil our responsibility to investors. 

Investing in People and Technology for a Smarter, Stronger Commission 

Since I last appeared before this Committee, the Commission has worked hard to enhance 

its internal operations. The investing public depends on the stall' of the Conunission and our 

public systems each day to navigate the securities markets, and it is important that we continue to 

work to improve the quality of both. for example, we have made increasing investments in 

information security to improve risk management and monitoring and modernize and secure the 

SEC's infrastmcture. The agency is also engaged in an ongoing, multi-year effort to simplify 

and optimize the financial reporting process through EDGAR to promote automation and reduce 

filer burden. With a more modem EDGAR, both the investing public and SEC stafr will benefit 

from ha\1ng improved access to belter data. The steps over the last few years to modernize 

SEC.gov have also continued to improve one of the most widely used federal government 

websites, making it more nexible, informative, easier to navigate, and secure. 

Technology also continues to be the bedrock for much of our ongoing enforcement and 

examination effort, creating efficiencies and capabilities that were previously impossible. In the 

last two years, our initiatives have included: 

• E:cpanding data analytic tools that assist in the integration and analysis of huge volumes 

of financial market data, employing algorithms and quantitative models that can lead to 

earlier detection of fraud or suspicious behavior and ultimately enabling the agency to 

allocate its resources more effectively. For example, SEC staff has used data analytic 

(including pattern recognition) tools to, among other things, detect potential fraudulent or 

manipulative trading, identify financial statement outliers or unusual trends indicative of 

possible accounting fraud, discover possible money laundering, sifi through massive 

volumes of trading data to detect SUSpicious trading patterns, and flag higher risk 

registrants for exantination prioritization. 

• Enhancing the Tips, Complaints, and Referral system (FCR) to bolster its flexibility, 

configurability, and adaptability. TCR investments 1\ill provide more flexible and 

comprehensive intake, triage, resolution tracking, searching, and reporting functionalities, 

with full auditing capabilities. 

29 
67 


• Improving enforcement im•esligation and litigmion tracking to better handle the 

substantial volume of materials produced during investigations and litigation. Among 

other initiatives, the SEC needs to build capacity to electronically receive data lor 

tracking and loading (versus the current practice of receiving content via the mail); 

implement a document management system for Enforcement's internal case files; and 

revantp the tools used to collect trading data from market panicipaots. 

Of course, none of these achievements, including those made possible by enhanced 

technology, would be possible without the hard work and dedication of the extraordinary women 

and men who work at the SEC. Our human capital strategy is built to ensure that we continue to 

anract and retain talented, engaged, and productive employees that reflect the constantly 

evolving markets we oversee. Since the September 2014 hearing, the Partnership for Public 

Service oamed the SEC as the most improved agency in the Best Places to Work in Government 

annual awards for 2014.93 And in 2015. the SEC rose to #10 on the Best Places to Work an10ng 

mid-size agencies list in their annual survey based on the results of our Federal Employee 

Viewpoint Survey ~ While these results are encouraging, we remain committed to fostering an 

even better and stronger workplace to serve the country's investors and its markets. 

Conclusion 

The Commission's extensive work to protect investors, preserve market integrity, and 

promote capital formation goes beyond the initiatives and policies I have discussed. But I have 

tried by exan1ple to convey the breadth and imponance ofihe Commission's ongoing efforts and 

provide a sense of the agency's work both since my time as Chair and since I last testified before 

this Committee. While more remains to be achieved, I am very proud of the agency's significant 

accomplishments across its diverse areas of critical responsibilities. For that, I want to thank 

first and foremost the exceptional stall' of the SEC, as well as my fellow Commissioners, present 

and past. They richly deserve the praise and confidence of investors and the markets. 

In closing, I also want to thank the Chaim1an, the Ranking Member, and this Committee 

as a whole for your suppon of the agency's mission. Your continued suppon \1111 allow the 

Commission to better protect investors and facilitate capital formation, more effectively oversee 

the markets and entities we regulate, and continue to build upon the significam progress we have 

achieved. 

I am happy to answer any questions that you may have. 

" See Panne~ip for Public Service, 71re Big Piaure: Profiles of Notable Afowrs, /JI'Oiloble at 

http://bestplacssto"ork.oWBPTW/rankineyprofiJesiises. 

"Set Panne~ip for Public Ser,.ice, Best Ploces to WOt'k Agency Ranlci"f,,, INailable at 

http://bestplacestO"M·ore/BPTW/rnnkingslo"e!JIVmid. 

30 
68 

RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY 

FROM MARY JO WHITE 

Q.1. With respect to delegations of authority: 

Are all delegations of authority made public? If so, please provide 

a complete list of all delegations or a Web address where that information can be obtained. 

How many delegations of authority are currently in place? 

Once the Commission has voted to delegate its authority to staff, 

how are you and your fellow Commissioners made aware of the 

staff’s use of that authority? 

If the Chair is recused on a specific matter, who is accountable 

for the staff’s use of delegated authority? 

Are there any formal or informal delegations of authority to staff 

not directly named in the delegation of authority, and if so, how 

many? Please provide a specific list of any such formal and informal delegation. 

Would you support an SEC review of existing delegations, including an analysis of their appropriateness? 

How many SEC staff have the ability by means of delegated authority to issue subpoenas? 

A.1. In light of the breadth of the Commission’s extensive responsibilities, section 4A(a) of the Securities Exchange Act of 1934 (Exchange Act) authorizes the Commission ‘‘to delegate, by published 

order or rule, any of its functions to a division of the Commission, 

an individual Commissioner, an administrative law judge, or an 

employee or employee board, including functions with respect to 

hearing, determining, ordering, certifying, reporting, or otherwise 

acting as to any work, business, or matter.’’ The section prohibits 

the delegation of the function of general rulemaking or the making 

of any rule pursuant to section 19(c) of the Exchange Act. 

The following table provides links to the Commission’s delegations of authority that appear in the Code of Federal Regulations: 

69 


Division of tt~ //www.ecfr gov cgi bin! extEnforcement idx?node=17:3.0.1.l.l&rrm=<liv5#se17.3.200 130 64 

Director of the 17 C.F.R. § 200.30-5 42 

Division of tt~ //www ecfr.gov cgi bi tex

Investment idx?node= 17 :3.0.1. 1.1 &rgn=divS#se 17.3.200 130 65 

Management 

Regional Directors 17 C.F.R. § 200.30-6 6 

htt~://www.ecfr.gov c!!i bin!text

idx?node=l7:3.0.1.1.l&rgn=div5#se17.3.200 130 66 

Secretary 17 C.F.R. § 200.30-7 14 

tt~: //www.ecfr ov cgi bin/ ext

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Inspections and 

Examinations 
70 

In addition, the Commission has delegated to an individual Commissioner, designated as the Commission’s ‘‘duty officer’’ by the 

Chairman from time to time, all of the functions of the Commission, other than general rulemaking or the making of any rule pursuant to section 19(c) of the Exchange Act. 17 CFR §200.43. 

To facilitate the performance of delegated functions, section 4B 

of the Exchange Act authorizes the Chair to assign personnel to 

perform functions that have been delegated by the Commission to 

Commission personnel. Specifically, section 4B provides that ‘‘there 

are hereby transferred from the Commission to the Chairman of 

the Commission the functions of the Commission with respect to 

the assignment of Commission personnel . . . to perform such functions as may have been delegated by the Commission to the Commission personnel . . . pursuant to section 4A of this title.’’ Under 

this authority, the Chair has assigned specified staff, under the direction of the person with delegated authority, to perform certain 

of the functions that have been delegated by the Commission. 

Among the delegations of authority, the Commission has delegated to the Director of the Division of Enforcement the authority 

to designate officers empowered to issue subpoenas in the course 

of investigations instituted by the Commission pursuant to section 

19(c) of the Securities Act of 1933, section 21(b) of the Exchange 

Act, section 42(b) of the Investment Company Act of 1940, and section 209(b) of the Investment Advisers Act of 1940. The Commission has delegated similar authority to the Director of the Division 

of Trading and Markets and the General Counsel with respect to 

investigations instituted pursuant to section 21 of the Exchange 

Act. Pursuant to section 4B, the Chair has assigned specified persons to perform these delegated functions under the direction of the 

Director of the Division of Enforcement, the Director of the Division of Trading and Markets, and the General Counsel, as applicable. 

The staff is accountable for any exercise of delegated authority 

through the statutory power of any one Commissioner to request 

a review of an action taken by delegated authority. Specifically, 

section 4A(b) of the Exchange Act provides that the Commission retains a discretionary right to review any action taken by delegated 

authority, upon its own initiative or upon the petition of a party 

to or intervenor in such action, within such time and in such manner as the Commission by rule shall prescribe. Under the Commission’s rules, the Commission may, on its own initiative, order review of any action made by delegated authority at any time, except 

that where there are one or more parties to the matter, such review shall not be ordered more than 10 days after the action. 17 

CFR §201.431(c). The vote of one member of the Commission, conveyed to the Secretary, is sufficient to bring a matter before the 

Commission for review. In addition, a party to an action made pursuant to delegated authority or a person aggrieved by an action 

taken by delegated authority may seek Commission review of the 

action by filing a written notice of intention to petition for review. 

17 CFR §201.430. 

Given the breadth and scope of the Commission’s vast responsibilities, and the need for timely action and responses to market 

developments, I believe that the framework and subject of staff delVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
71 

egations have been appropriately drawn by the Commission. But, 

as I have previously advised my fellow Commissioners, I am receptive to reconsidering particular delegations of authority that may 

no longer be appropriate, and to considering whether there are new 

areas where additional delegations may be appropriate. 

Q.2. As a follow up to my question at the hearing, please provide 

specific examples to the following question: 

You have often stated that the SEC is an independent 

agency. While one can expect some split votes because of 

the way the Commission is set up, there have been many 

party-line 3–2 and 2–1 votes under your chairmanship. By 

comparison, according to the press, former Chairman 

Breeden never had a 3–2 vote, and former Chairman 

Levitt rarely would take a matter to a vote unless he knew 

he had a 5–0 vote. Are there any areas that you can work 

on cooperatively with the other two Commissioners to 

reach a unanimous decision? Please provide specific examples. 

A.2. While I believe that it is generally preferable for Commission 

decisions to be unanimous—and we strive for that—each Commissioner brings his or her unique perspective to matters that come 

before the agency, and I cannot predict, nor should I dictate, how 

each member will vote on each matter that comes before the Commission. And, as I indicated at the hearing, a number of our nonunanimous votes during my tenure have occurred on mandated 

rulemakings to implement certain of the provisions of the DoddFrank Act, on which Commissioners continue to have very different 

views. Nevertheless, during my tenure at the SEC, the Commission 

has reached unanimous decisions on the majority of matters that 

have come before it, including on rulemakings. 

Most recently, for example, the Commission voted unanimously 

in August to approve final rules to enhance the information reported by investment advisers and rule amendments to provide authorities with access to data obtained by security-based swap data 

repositories. The month before, at the Commission’s open meeting 

on July 13, 2016, the Commission voted unanimously to approve all 

four rulemakings under consideration, including: 

• final rules and guidance under Title VII of the Dodd-Frank Act 

related to the reporting and dissemination of security-based 

swap transaction data; 

• proposed rules that for the first time would require brokerdealers to disclose specific data regarding order handling information; 

• proposed amendments to update certain disclosure provisions 

by eliminating redundant, overlapping, outdated, or superseded requirements due to changes in rules, accounting principles, and technology; and 

• amendments to the Commission’s rules of practice applicable to 

administrative proceedings. 

This year, the Commission also has voted unanimously for, 

among other things: 

72 

• proposed rules for investment adviser business continuity and 

transition plans; 

• final rules requiring security-based swap dealers and major security-based swap participants to provide trade acknowledgments and to verify those trade acknowledgments in securitybased swap transactions; 

• proposed rules to revise the property disclosure requirements 

for mining registrants; 

• proposed rules to amend the definition of ‘‘smaller reporting 

company’’ as used in our rules and regulations; 

• proposed amendments to address the covered broker-dealer 

provisions under Title II of the Dodd-Frank Act; 

• final rules governing certain security-based swap transactions 

connected with a non-U.S. person’s dealing activity in the 

United States; 

• final rules for changes to Exchange Act registration requirements to implement Title V and Title VI of the JOBS Act; 

• a concept release on business and financial disclosures required by Regulation S-K; and 

• interim final rules amending certain issuer disclosure forms 

(Forms 10-K, S-1, and F-1) and providing for a summary of 

Form 10-K, to implement provisions of the Fixing America’s 

Surface Transportation (FAST) Act. 

I also note that this is only a partial list—since I have been 

Chair, there have been many other Commission matters, including 

the vast majority of votes on initiating or settling enforcement matters, on which the Commission has acted unanimously. 

Q.3. As a follow up to my question at the hearing, please provide 

specific examples to the following question: 

There have been concerns raised by the public as well as 

Members of this Committee about repeated violations by 

SEC registered entities. Two years ago, a former SEC 

Commissioner stated that, with respect to the most egregious and repeated violations of our securities laws and 

regulations, ‘‘we need to ask ourselves a fundamental 

question: should the violating entity retain the privilege of 

participating in our capital markets?’’ In your opinion, 

when is it appropriate for the SEC to exercise its ability 

to deregister an entity? Please provide a specific example 

of what you would consider to be a valid cause for 

deregistration. 

A.3. The SEC has broad authority under the Securities Exchange 

Act of 1934 (Exchange Act) and Investment Advisers Act of 1940 

(Advisers Act) to sanction regulated entities for a variety of misconduct if it finds that the sanction is in the public interest. If a 

regulated entity engages in misconduct, such as willfully violating, 

or willfully aiding and abetting a violation of, the securities laws, 

or is enjoined or convicted of certain specified offenses, the Commission is authorized to pursue a variety of sanctions against that 

entity. These sanctions include suspending or revoking a regulated 

entity’s registration. See Section 15(b)(4) of the Exchange Act and 

73 

1See also ‘‘In the Matter of J.S. Oliver Capital Mgmt. L.P., and Ian O. Mausner, Admin.’’ 

Proc. File No. 3-15446, Exchange Act Release No. 78098 (June 17, 2016), https://www.sec.gov/ 

litigation/opinions/2016/33-10100.pdf (Commission revoked investment adviser’s registration 

and barred its principal where respondents repeatedly violated the antifraud provisions by systematically fraudulently allocating trades and failing to disclose material information to investors). 

Section 203(e) of the Advisers Act. Revoking a registered entity’s 

registration is the most severe sanction available to the Commission. 

The Commission must justify any sanction it imposes by finding 

that the sanction is necessary to protect the public interest. In determining whether a sanction is in the public interest—including 

revoking a registered entity’s registration—the Commission looks 

to a broad range of factors. The factors are: (1) the egregiousness 

of the respondent’s actions; (2) whether the violations were isolated 

or recurrent; (3) the degree of scienter; (4) the sincerity of the respondent’s assurances against future violations; (5) the respondent’s recognition of the wrongful nature of his or her conduct; and 

(6) the likelihood that the respondent’s occupation will present opportunities for future violations. See Steadman v. SEC, 603 F.2d 

1126, 1140 (5th Cir. 1979), aff’d on other grounds, 450 U.S. 91 

(1981). The determination is a flexible one and no single factor is 

controlling. A Commission Order revoking an entity’s registration 

is made in an administrative proceeding in which the entity may 

contest the allegations made against it and the proposed sanctions. 

The Commission’s determination to revoke an entity’s registration 

is appealable to the Federal appeals courts. 

The Commission has revoked the registration of registered entities in cases involving egregious misconduct, such as recurring or 

systematic violations of the antifraud provisions. For example, the 

Commission recently issued an opinion revoking an investment adviser’s registration and barring its principal for recurring violations 

of the Advisers Act’s antifraud provisions. See In the Matter of 

Edgar R. Page and PageOne Financial, Inc., Admin. Proc. File No. 

3-13037, Advisers Act Release No. 4400 (May 27, 2016), https:// 

www.sec.gov/litigation/opinions/2016/ia-4400.pdf. In determining 

that the revocation of the investment adviser’s registration was in 

the public interest, the Commission noted the egregiousness and 

recurring nature of the conduct and found that the firm presented 

a significant risk of future misconduct. See id. at 15-17. 1

Q.4. In a speech earlier this year you stated that the SEC is ‘‘engaged with our fellow financial and consumer protection regulators, 

including the Department of Treasury, the Federal Reserve, the 

CFPB, OCC, FTC, and FDIC, to develop a broader understanding 

of the online marketplace lending industry, and regulatory initiatives that would enhance investor, consumer and borrower protections.’’ Please explain what role the SEC has had in developing regulatory initiatives in the online marketplace lending sphere and describe the SEC’s future plans in this area. 

A.4. As in other subject areas, the Commission’s role in the area 

of online marketplace lending is the protection of investors in connection with the offer and sale of securities. Obtaining money from 

investors to fund borrower loans through an online lending platform involves the offer and sale of securities. The Commission does 

74 

not oversee the lending activities of online lenders and extensions 

of credit. 

Commission staff has engaged in discussions with other agencies 

and the Treasury Department to keep apprised of developments in 

the marketplace and to enhance others’ understanding of how the 

Federal securities laws apply to these activities. I support the continuation of the interagency staff working group to help determine 

whether regulatory initiatives would be appropriate. 

Q.5. I have previously raised concerns about the accountability and 

transparency of the Financial Stability Board (FSB). The FSB is 

not a U.S. regulator, it is not accountable to Congress or the American people, and yet it issues directives that U.S. regulators often 

adopt in some form. As the Chair of the SEC, you are a member 

of the FSB Plenary. Please provide a list of all FSB Plenary meetings and any other FSB meeting that you have been invited to attend or participate in, annotating which ones you attended and/or 

participated in person, telephonically or not at all. For the last category, please provide the names and titles of SEC staff that participated or attended in your place. If you are unable to attend an FSB 

meeting in person, have you considered sending another Commissioner, and if not, why not? 

A.5. The FSB has a number of committees whose meetings I, another Commissioner, or senior SEC staff attend. With the exception 

of the first meeting after I joined the SEC held in April 2013, I 

have personally participated in all of the meetings of the FSB 

Steering Committee, which is the leadership group within the FSB. 

Prior to my tenure as Chair, Chairman Shapiro had Commissioner 

Elisse Walter attend such meetings, as she did the April 2013 

meeting. In another change from prior practice, I or, at my request, 

another Commissioner has also personally attended nearly all 

board meetings of IOSCO. With respect to meetings of the other 

committees of the FSB, including the Plenary, I have continued the 

existing practice of having SEC senior staff attend. 

Members of the SEC staff attend the FSB Plenary and meetings 

of the standing committees in which the SEC participates, which 

are: (i) the Standing Committee on Supervisory and Regulatory Cooperation (SRC); (ii) the Standing Committee on Assessment of 

Vulnerabilities (SCAV); and (iii) the Standing Committee on Standards Implementation (SCSI). 

Currently, meetings of the Plenary and the SRC are attended by 

Paul Leder (Leder), Director of the Office of International Affairs 

(OIA), and meetings of the SCAV, which the SEC joined in 2015, 

are attended by Mark Flannery (Flannery), Director of the Division 

of Economic and Risk Analysis (DERA). Meetings of the SCSI are 

attended by Katherine Martin (Martin), Associate Director in the 

Office of International Affairs. 

Below is a list of the FSB Steering Committee, Plenary, and 

standing committee meetings I, another Commissioner, or an SEC 

staff member attended during my time as SEC Chair. Meetings 

where attendance was by phone are noted by an asterisk. 

75 


FSB Meetings 

April 2013- Present 

Date I Meeting I Participant 

2013 

4/20/20 13 STEERING COMMITIEE COMMISSIONER ELISSE 

WALTER 

5/&/2013 SRC* ROBERT FISHER (''FISHER"), 

QIA ACTING DIRECTOR 

6/10120 13 SRC FISHER 

6/1212013 SCSI* ERIC PAN (''PAN"), OIA 

ASSOCIATE DIRECTOR 

6124/20 13 PLENARY FlS~IER 

7/ 1512013 SCSI PAN 

8/612013 SRC* FISIIER 

8/12120 13 STEERING CO.'viMITIEE* CHAIR MARY Jo WUJTE 

("WHITE") 

8/20/2013 PLENARY* ELIZABETii JACOBS, QIA 

DEPUTY DIRECTOR 

I 0/2-3/2013 SRC FISHER 

10/23/2013 SCSI* PAN 

11/&/2013 PLENARY FiSHER 

12/5-6/2013 SCSI PAN 

12/9120 13 SRC* FISHER 

2014 

1/ 1312014 STEERING COMMITIEE WHlTE 

3/612014 SRC LEDER 

3/10/2014 SCSI PAN AND THOMAS 

BUTLER, OFFICE OF CREDIT 
76 


RATINGS DIRECTOR 

3/3 1/2014 PLENARY LEDER 

5122/2014 SCSI* PAN 

6/3/2014 SRC LEDER 

6123/2014 SCSI* PAN 

6/26/2014 SRC* LEDER 

6/30/2014 STEERING COMMITTEE WHJTE 

7/3/2014 SRC* LEDER 

7/31/2014 STEERING CoMMITTEE* WHITE 

8/29/2014 SCSI PAN 

912/2014 SRC LEDER 

9117-18/2014 PlENARY LEDER 

10/7/2014 SRC* LEDER 

10/15/2014 SCSI* PAN 

10/28/2014 STEERING COMMITTEE* WHITE 

11 /4/2014 PLENARY* LEDER 

12/5-6/2014 SCSI PAN 

2015 

1/11/2015 STEERING COMMITTEE WHITE 

1/15/2015 SCSI* PAN 

1/29/2015 SCSI* PAN 

2/3/2015 SRC LEDER 

317/2015 SCAV FLANNERY 

311012015 SCSI PAN 

3113/2015 STEERING COMMITTEE* WHITE 

3119/2015 SRC* LEDER 

3/26/2015 PlENARY LEDER 

5/6/2015 SRC* PAN 

5112-13/2015 SCSI PAN 

5/27/2015 SRC* LEDER 

6123/2015 SRC LEDER 

6/29/2015 SCAV/SRC FLANNERY 

7/2/2015 SCSI* PAN 

7/1 7/2015 STEERING COMMITTEE WHITE 

8/31/2015 STEERING COMMITTEE WHITE 

9/7-8/2015 SCAV FLANNERY 

917-812015 SCSI PAN 

9/17/2015 STEERING Co~fM TTEE* WHITE 

9122/2015 SRC* LEDER 

9/25/2015 PLENARY LEDER 

10/15/2015 SRC* KATHLEEN HUTCHINSON 

("HUTCHINSON"), OIA 

ASSISTANT DIRECTOR 

10/15/2015 SCSI* HUTCHINSON 
77 

2See generally, Lipperus U.S. Fund Flows, http://www.lipperusfundflows.com; Morningstar 

Direct U.S. Asset Flows Update: Data through Dec. 31, 2015, U.S. Mutual Funds and ExchangeTraded Products (Jan. 15, 2016), http://corporate.morningstar.com/US/documents/AssetFlows/ 

AssetFlowsJan2016.pdf; and Investment Company Institute, 2016 Investment Company Factbook 

26-30 (2016), https://www.ici.org/pdf/2016lfactbook.pdf. 

Q.6. A recent news article stated that ‘‘passive investing is taking 

over the money-management world’’ and as a result, ‘‘mutual funds 

are facing extinction.’’ Is the SEC studying this issue, and if so, 

when do you expect the results of that study? If not, what is the 

SEC doing to permit innovation and competition to thrive in this 

space? Do you anticipate to have any legislative recommendations 

for Congress to consider? 

A.6. The Commission and its staff generally monitor trends within 

the asset management industry, including those related to mutual 

funds and exchange-traded funds (ETFs). Recent industry data 

suggests an increasing trend towards passive investing. While overall investor demand for mutual funds declined in 2015, industry 

data indicates that demand for both index-based mutual funds and 

index-based ETFs has increased. 2 The Commission staff generally 

does not believe that this recent trend toward passive investing— 

which may or may not continue over the long term—will eliminate 

the role in the investment company marketplace for mutual funds 

and ETFs, whether passively or actively managed, as each product 

line presents its own relative set of advantages and disadvantages 

to different investor groups. 

The Commission’s mission is to protect investors, maintain fair, 

orderly, and efficient markets, and facilitate capital formation. 

Consistent with its mission, the Commission continues to evaluate 

78 

and, as appropriate, approve requests for exemptive relief for new 

and novel investment products, including ETFs. The Commission 

evaluates all exemptive application requests to operate such investment products under the standards prescribed by the Investment 

Company Act of 1940—that is, such exemption must be necessary 

or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and 

provisions of the Investment Company Act. The Commission has 

approved, over the years, a number of exemptive applications 

under this statutory exemptive authority, including applications 

submitted by sponsors to operate various types of actively managed 

ETFs. 

I do not anticipate the Commission making legislative recommendations regarding ETFs at this time. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM MARY JO WHITE 

Q.1. At the June 14 hearing, you were asked about the legislation 

introduced in the House of Representatives regarding Business Development Companies (BDCs) and your investor protection concerns with respect to the changes that would increase the leverage 

used by BDCs. Specifically, you were asked why you are particularly concerned by the increase in leverage for BDCs when investors have access to other investments with leverage, including securities purchased on margin, listed options, or shares of banks that 

operate on a leveraged basis. 

For clarification, please describe any limitations on the purchase 

of those investments, as well as any limitations on similar instruments such as 3x leveraged exchange traded funds. Please include 

in your discussion any regulatory requirements or guidance, or 

stock exchange regulations, such as options or margin account approval, or limitations on margining low-priced or illiquid shares, 

that broker-dealers must comply with or consider for clients who 

wish to trade those instruments. 

In addition, you mentioned that BDC shares are predominately 

held by retail investors. Based on the most recent data available, 

please provide the portion of investors in BDC shares and listed options that are ‘‘retail’’ investors. Also, please provide data, to the 

extent available, of the percentage of retail investors that have brokerage accounts authorized to use margin. Finally, please discuss 

any investor protection concerns that might exist in an initial offering of BDC shares aimed at retail investors. 

A.1. As entities regulated under the Investment Company Act of 

1940 (1940 Act), BDCs, as well as other types of funds, such as mutual funds, closed-end funds, and exchange-traded funds (ETFs), 

are subject to statutory provisions and regulations that are designed to protect investors. There are also various regulatory requirements with which investment advisers and broker-dealers 

must comply when making a recommendation in connection with a 

securities transaction or investment strategy involving securities, 

including those involving investments in BDCs or ETFs and those 

using options or a margin account. 

79 

1See H.R. Rep. No. 76-2639, at 10 (1940). See also S. Rep. No. 76-1775, at 12 (1940). Because 

the Act was enacted, in part, to provide ‘‘small investors’’ with ‘‘a regulated institution for the 

investment of their savings,’’ the 1940 Act includes far more extensive substantive regulation— 

e.g., prohibitions on transactions between an investment company and its affiliates—than the 

other Federal securities laws. 2The section balances the interests of fund shareholders and the holders of senior securities— 

e.g., preferred stock or debt securities issued by the fund. Section 1(b) of the 1940 Act states 

that the national interest is adversely affected ‘‘when investment companies by excessive borrowing and the issuance of excessive amounts of senior securities increase unduly the speculative character of their junior securities [i.e., common stock].’’ 15 U.S.C. §80a-1(b). Section 1(b) 

further states that the Act is to be interpreted ‘‘to mitigate and, so far as is feasible, to eliminate 

the conditions enumerated in this section which adversely affect the national public interest and 

the interest of investors.’’ Id. 3See H.R. Rep. No. 96-1341, at 22 (1980); S. Rep. No. 96-958, at 5 (1980). 

4 A BDC, for example, may issue more debt securities as a percentage of total assets than 

other closed-end funds, may issue debt in multiple classes, may issue long-term options and warrants, and is subject to relaxed regulation of transactions with affiliates. See Investment Company Act §§61(a)(1), 61(a)(3), and 57(d), 15 U.S.C. §§80a-60(a)(1), -60(a)(2), -(56)(d). 5Open-end funds are prohibited from issuing or selling any ‘‘senior security’’ other than borrowing from a bank and must maintain 300 percent asset coverage after any such borrowing. 

Investment Company Act §18(f)(1), 15 U.S.C. §80a-18(f)(1). Section 5(a)(1) of the 1940 Act defines ‘‘open-end company’’ as ‘‘a management company which is offering for sale or has outstanding any redeemable security of which it is the issuer.’’ 15 U.S.C. §80a-5(a)(1). Closed-end 

funds registered under the 1940 Act are also required to have 300 percent asset coverage for 

debt, but their ability to issue senior securities representing indebtedness is not limited to bank 

borrowings, and they may issue senior securities that are stock, subject to certain limitations 

and a more liberal 200 percent asset coverage requirement, with both asset coverage requirements being measured at the time of issuance. Unlike open-end funds, BDCs and closed-end 

funds are required to maintain the asset coverage at the time of issuance of senior securities 

and are subject to limits on distributions to holders of the common stock and repurchases of 

common stock if the asset coverage requirements are not met. Investment Company Act 

§18(a)(1)(A), 15 U.S.C. §80a-18(a)(1)(A). Section 5(a)(2) of the Investment Company Act defines 

‘‘closed-end company’’ as ‘‘any management company other than an open-end company.’’ 15 

U.S.C. §80a-5(a)(2). 6See Investment Company Act §61(a)(1), 15 U.S.C. §80a-60(a)(1). 

Investment Companies. The 1940 Act was enacted, in part, to 

provide ‘‘small investors’’ with ‘‘a regulated institution for the investment of their savings.’’ 1 Many of the 1940 Act’s provisions correspond to abuses that contributed to the rapid decline in the value 

of closed-end investment companies at the end of the 1920s. Section 18 (which is applicable to BDCs), for example, was intended 

to protect investors from abuses associated with complex capital 

structures, including excessive leverage. 2

Congress created BDCs in 1980 as a specialized type of closedend investment company operated for the purpose of providing capital for small, growing, and financially troubled domestic operating 

companies. Congress recognized the need to ‘‘avoid compromising 

needed protections for investors in the name of reducing regulatory 

burdens.’’ 3 Under the 1940 Act, the regulation of BDCs is the same 

as the regulation of registered closed-end funds with modifications 

that generally allow BDCs greater operating flexibility. 4

From my perspective, increasing leverage for BDCs would give 

rise to significant investor protection concerns. Section 18 of the 

1940 Act requires open-end funds (including mutual funds and 

ETFs) and closed-end funds to comply with 300 percent asset coverage requirements. 5 In comparison, BDCs must comply with a 

200 percent asset coverage requirement for senior securities representing indebtedness (i.e., debt) and senior securities that are 

stock (i.e., preferred stock). 6

For example, a BDC with assets worth $100 and no liabilities 

can borrow $100 for $200 in total assets. If the value of those assets subsequently falls 25 percent, then the BDC holds assets 

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80 

7This calculation is an average, weighted by total assets, of 72 active BDCs with securities 

registered under the Securities Act of 1933. Of this number, 21 are nontraded BDCs, and 51 

are traded on securities exchanges or over the counter. Commission staff calculated this average 

internally using publicly available information on institutional ownership. The institutional 

ownership percentage for each BDC was subtracted from 100 percent to determine the retail 

ownership percentage. A recent report on the BDC industry states that the average institutional 

ownership of 46 exchange traded BDCs is 24.9 percent. This percentage is a simple average of 

the institutional ownership percentage for each of the 46 BDCs and excludes ownership by brokers and private bank/wealth management firms, as reported in FactSet, a data service. See 

BDC Industry Investment Banking Weekly Newsletter (Raymond James), July 15, 2016. 8For example, since 2012, over a dozen BDCs have issued ‘‘baby bonds’’ (i.e., fixed income securities issued in small denominations and traded on a securities exchange) in $25 denominations. This information is based on Commission staff review of Form N-2 filings by BDCs with 

the Commission. BDCs register under the Securities Act of 1933 public offerings of their securities on Form N-2. 9See ‘‘Use of Derivatives by Registered Investment Companies and Business Development 

Companies’’, Investment Company Act Release No. 31933, 80 FR 80883 (Dec. 28, 2015), https:// 

www.sec.gov/rules/proposed/2015/ic-31933.pdf. 10See ‘‘Office of Compliance Inspections and Examinations, SEC, Examination Priorities for 

2016’’ (Jan. 11, 2016), https://www.sec.gov/about/offices/ocie/national-examination-programpriorities-2016.pdf. Leveraged ETFs are highly specialized investment vehicles that seek to replicate the performance of an underlying index each day. For example, a 3x ETF is designed to 

produce a daily return equal to three times the return of a specified index. Thus, a 3x ETF can 

magnify the amount of an investor’s gain or loss. Leveraged ETFs are designed to achieve their 

stated objectives on a daily basis; they are not designed for buy and hold investors. See ‘‘SEC 

Office of Investor Education and Advocacy and Financial Industry Regulatory Authority, Investor Alert on Leveraged and Inverse ETFs: Specialized Products With Extra Risks for Buy-andHold Investors’’ (Aug. 18, 2009), https://www.sec.gov/investor/pubs/leveragedetfs-alert.htm. 

holders’ equity dropped from $100 to $50. Shareholders’ equity declined by 50 percent although the value of the BDC’s assets declined only 25 percent, and the asset coverage fell from 200 percent 

to 150 percent. 

Reducing the required asset coverage, for example to 150 per- cent, would permit that same BDC to borrow $200, effectively doubling its leverage, for $300 in total assets. If the value of those assets subsequently falls 25 percent, then the BDC holds assets 

worth $225 but owes the lender $200. Thus, the BDC’s shareholders’ equity dropped from $100 to $25. Shareholders’ equity declined by 75 percent although the value of the BDC’s assets declined by 25 percent, and the asset coverage fell from 150 percent 

to 112.5 percent. 

Increasing BDC leverage increases the potential losses for both 

holders of BDC common stock and BDC debt and preferred stock. 

My concern is heightened because BDC common stock is predominantly held by retail investors. Retail investors account for nearly 

70 percent of BDC common stock ownership. 7 In addition, retail investors account for an unknown percentage of debt securities 

issued by BDCs. 8

Use of leverage in funds continues to be a significant focus for 

the Commission and staff. In December 2015, the Commission proposed a new rule regarding the use of derivatives by mutual funds, 

ETFs, closed-end funds, and BDCs. 9 SEC staff is also focusing resources on examinations of ETFs’ compliance with applicable regulatory requirements, sales strategies, trading practices, and disclosures, including excessive portfolio concentration, primary and secondary market trading risks, adequacy of risk disclosure, and suitability, particularly in niche or leveraged/inverse ETFs. 10

Investment Advisers and Broker-Dealers. Investment advisers 

and broker-dealers must comply with various regulatory requirements when making a recommendation in connection with a securities transaction or investment strategy involving securities, includVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
81 

11See ‘‘Status of Investment Advisory Programs under the Investment Company Act of 1940’’, 

Investment Company Act Release No. 22579, 62 FR 15098 (Mar. 31, 1997), https:// 

www.sec.gov/rules/final/ic-22579.txt (citing ‘‘Suitability of Investment Advice Provided by Investment Advisers’’, Investment Advisers Act Release No. 1406, 59 FR 13464 (Mar. 22, 1994)). 12See, e.g., FINRA, ‘‘Regulatory Notice 12-55: Suitability’’ (Dec. 2012), http://www.finra.org/ 

sites/default/files/NoticeDocument/p197435.pdf (providing guidance on FINRA’s suitability 

rule); FINRA, ‘‘Regulatory Notice 11-25: Know Your Customer and Suitability’’ (May 2011), 

http://www.finra.org/sites/default/files/NoticeDocument/p123701.pdf (providing guidance on 

new FINRA Rule 2111). In addition, there are enhanced suitability and disclosure obligations 

in connection with penny stock transactions. See Exchange Act Section 15(h), 15 U.S.C. §78o(h) 

and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100, 17 CFR §§240.3a51-1, .15g-1 to 100. 

A small number of BDCs disclose that because of their stock price, they are subject to the penny 

stock rules. 13 A broker-dealer is also subject to FINRA Rule 2360(b)(16) with respect to its suitability obligations and the opening of an options account. More specifically, FINRA Rule 2360(b)(16) requires its members to exercise due diligence to ascertain the essential facts relative to a customer, his or her financial situation and investment objectives when considering whether to 

open an account for that customer to trade options. In addition, FINRA Rule 2360(b)(19) subjects its members’ recommendations to engage in options trading (including whether to open an 

account and the subsequent recommendations for that account) to heightened suitability obligations. 14See FINRA, ‘‘Regulatory Notice 09-31: Non-Traditional ETFS’’ (June 2009), http:// 

www.finra.org/sites/default/files/NoticeDocument/p118952.pdf. See also FINRA, ‘‘Regulatory 

Notice 12-03: Complex Products’’ (Jan. 2012), http://www.finra.org/sites/default/files/ 

NoticeDocument/p125397.pdf (providing guidance to firms about heightened supervision of complex products, including, among others, inverse or leveraged ETFs). 15See FINRA, ‘‘Regulatory Notice 12-03: Complex Products’’ (Jan. 2012), http:// 

www.finra.org/sites/default/files/NoticeDocument/p125397.pdf. See also NASD, ‘‘Notice to 

Members 03-71: Non-Conventional Investments’’ (Nov. 2003), https://www.finra.org/sites/default/files/NoticeDocument/p003070.pdf (reminding members of their obligations when selling 

‘‘nonconventional investments,’’ such as asset-backed securities, distressed debt and derivative 

products). 16See, e.g., Federal Reserve’s Regulation T, 12 CFR §§220.1 to 220.132; Exchange Act Rule 

10b-16, 17 CFR §240.10b-16; FINRA Rules 2360 (Options); FINRA Rule 2264 (Margin Disclosure 

Statement); FINRA Rule 4210 (Margin Requirements). See also FINRA, ‘‘Regulatory Notice 11- 

15: Low-Priced Equity Securities’’ (Apr. 2011), http://www.finra.org/sites/default/files/ 

NoticeDocument/p123431.pdf (reminding firms to consider risks associated with low-priced equity securities when extending credit in a strategy-based or portfolio margin account); FINRA, 

‘‘Regulatory Notice 09-53: Non-Traditional ETFS’’ (Aug. 2009), http://www.finra.org/sites/default/files/NoticeDocument/p119906.pdf (outlining increased margin requirements for leveraged 

ETFs and associated uncovered options). 

ing strategies utilizing derivatives and leverage. For example, investment advisers must make a reasonable determination that the 

investment advice provided is suitable for the client based on the 

client’s financial situation and investment objectives. 11 Similarly, a 

broker-dealer recommending particular investments has an obligation to only make suitable securities recommendations to their customers, taking into account the particular circumstances and investment goals of each investor. 12 Heightened suitability obligations, as well as enhanced account opening requirements, apply to 

listed options. 13 In addition, FINRA guidance reminds members 

that leveraged ETFs typically are unsuitable for retail investors 

who plan to hold them for longer than one trading session, particularly in volatile markets, 14 and that members have certain obligations in connection with the sale or recommendation of complex investment products, including derivatives. 15

Securities margin accounts are also subject to a comprehensive 

system of regulation. 16 In general, any equity security that is listed on a national securities exchange is margin eligible. However, 

broker-dealers often have more restrictive house-margin requirements where they may not extend margin on certain securities 

such as low-priced equities. The Commission staff does not maintain statistics on the number of retail investors with margin accounts. We also understand that not all retail investors who open 

82 

17See Exchange Act §3(a)(4)-(5), 15 U.S.C. §78c(a)(4)-(5); Investment Advisers Act §202(a)(11), 

15 U.S.C. §80b-2(a)(11). 18See, e.g., 29 U.S.C. §1104 (standard of care for fiduciaries). 19See 29 U.S.C. §1002(21) (definition of fiduciary). 

margin accounts actually purchase shares on margin (e.g., some investors may view such accounts as overdraft protection). 

Q.2. Please clarify your understanding of the jurisdiction of the Department of Labor (DOL) with respect to retirement accounts that 

are covered by the Employee Retirement Income Security Act and 

its related rules and the SEC’s jurisdiction over broker-dealers or 

investment advisers that service those accounts. To the extent it is 

relevant, please elaborate on the comment you made about how the 

historic overlap of SEC and DOL jurisdiction has been managed. 

A.2. The DOL and the SEC are separate agencies with their own 

perspectives, jurisdiction, and statutory authority. The SEC oversees and enforces the Federal securities laws, including the Exchange Act with respect to broker-dealers and the Investment Advisers Act of 1940 with respect to investment advisers. In general, 

a ‘‘broker’’ is any person engaged in the business of effecting transactions in securities for the account of others, a ‘‘dealer’’ is any person engaged in the business of buying and selling securities for 

such person’s own account, and an ‘‘investment adviser’’ is any person engaged in the business of advising others regarding securities 

for compensation. 17

I am not in a position to describe in detail DOL’s jurisdiction 

under the Employee Retirement Income Security Act of 1974 

(ERISA) or the Internal Revenue Code of 1986. In general terms, 

however, the statutes set minimum standards for employee benefit 

plans and provide protections to plan participants, including by 

prescribing certain requirements and responsibilities for fiduciaries 

of those plans. 18 A ‘‘fiduciary’’ includes a person who exercises discretionary authority or control with respect to the management of 

a plan or disposition of its assets, renders investment advice for a 

fee or other direct or indirect compensation, or has any discretionary authority or responsibility in the administration of a 

plan. 19

An SEC-regulated broker-dealer or investment adviser that 

works with accounts governed by these statutes must comply with 

their requirements in addition to what is demanded of the financial 

institution under the Federal securities laws. For example, advisory firms that provide advice as fiduciaries under both the ERISA 

and SEC regulatory regimes must ensure that their practices comply with the provisions for fiduciaries under both regimes, which 

may include steps to address differences between the two sets of 

requirements (e.g., different contract provisions for accounts subject 

to ERISA and accounts not subject to ERISA). 

The interplay between the DOL’s regulations and the requirements under the Federal securities laws, and the application of different standards to the provision of investment advice to retail investors, are important issues. Consultation among the staff from 

the DOL and SEC has been important to manage any conflicts and 

issues that may arise related to the application of our separate regimes and mandates. For example, in 2011 staff from the Division 

83 

20See U.S. Dept. of Labor, SEC No-Action Letter (Oct. 26, 2011), www.sec.gov/divisions/investment/noaction/2011/dol102611-482.htm. 21 Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based 

Swap Participants, Exchange Act Release No. 77617, 81 FR 29959, 29965-66 (May 13, 2016), 

https://www.sec.gov/rules/final/2016/34-77617.pdf (clarifying that security-based swap dealers and major security-based swap participants would not be ERISA fiduciaries solely for complying with the Commission’s external business conduct rules). See also 29 CFR §2510.3-21(c)(2) 

(providing that the provision of any advice to an employee benefit plan shall not cause a security-based swap dealer or major security-based swap participant to be deemed to be an ERISA 

fiduciary, where certain conditions are met). 

of Investment Management issued a letter stating that disclosure 

to participants and beneficiaries of certain plan and investment-related information required by a rule under ERISA, including performance information, would be treated as satisfying the SEC’s 

rules on mutual fund advertising, notwithstanding differences 

among the requirements. 20 More recently, SEC staff consulted 

with DOL staff on the Commission’s security-based swap business 

conduct rulemaking and the intersection of ERISA fiduciary status 

with the Dodd-Frank Act business continuity provisions. 21 Consultation will continue to be important as the DOL’s new conflict 

of interest rule comes into effect. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO 

FROM MARY JO WHITE 

Q.1. In a speech at Stanford you highlighted that fintech has ‘‘the 

potential to transform how our markets operate in virtually every 

respect—from streamlined market operations to more affordable 

ways to raise capital and advise clients.’’ 

I am interested in the approach the UK has taken to fintech, 

such as Project Innovate. Do you expect the SEC will explore ways 

to better understand fintech through roundtables and other outreach efforts? 

A.1. The staff continues to monitor fintech developments in the securities industry and engage market participants to analyze the potential effect of new technologies on market efficiency, capital formation, and investor protection. This monitoring includes direct 

outreach to and discussions with industry participants, and staff is 

considering whether a roundtable or other more formal outreach 

mechanisms will foster staff’s understanding of these issues. 

For example, established and new firms have been exploring the 

application of distributed ledger technology to potentially improve 

or replace existing processes across the infrastructure of the securities markets. Some of these firms appear to be developing applications that could be implemented in the clearance and settlement of 

securities. The staff has met with several of these firms to discuss 

their activity in this setting as well as consider potential regulatory 

implications. The Commission has also solicited comment on the 

utility of the new technology. For example, in response to a recent 

Advanced Notice of Proposed Rulemaking and Concept Release on 

transfer agent regulations, the Commission received industry feedback on the possible use of distributed ledger technology by transfer agents. 

Q.2. In response to a question from Senator Toomey on Rule 18f4 and potential unintended consequences, you suggested that the 

84 

SEC is reviewing the comment letters and working to improve the 

rule. I encourage you to consider the merits of the comment letters 

on how best to account for the actual amount of market risk exposure and work to tailor the rule accordingly. 

Can you commit to doing so as part of the rulemaking process? 

A.2. To date, the Commission has received more than 180 comment 

letters on proposed Rule 18f-4, and Commissioners and members of 

the staff collectively have held more than 50 meetings with commenters and other interested parties to discuss the proposal. The 

staff is currently reviewing the comment letters, and the Commission will carefully consider all of them, including those urging the 

Commission to consider adjustments to the proposed rule’s exposure limitations, as the Commission works to finalize Rule 18f-4. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK 

FROM MARY JO WHITE 

Q.1. Chair White, the Commission recently updated its interpretative release regarding automated quotations under regulation NMS 

to allow for delays in price quotations. As part of that release, the 

Commission announced that it would conduct a study within 2 

years regarding the effects of any intentional access delays on market quality, including asset pricing, and report back to the Commission with the results of any recommendations. Based on that study, 

or earlier, the Commission stated that it will ‘‘reassess whether 

further action is appropriate.’’ 

Which office at the Commission will be responsible for conducting 

the aforementioned study? 

What factors will the Commission be monitoring to determine if 

‘‘further action is appropriate’’ before the aforementioned study is 

completed? 

What types of problems could arise due to the issuance of the updated interpretative release that could prompt the Commission to 

reassess its position? 

Given that the issue of delayed quotes raises fundamental concerns about the structure and efficiency of our financial markets, 

why did you decide to approve IEX’s application rather than undertake a rulemaking? 

A.1. In response to technological and market developments since 

the adoption of Regulation NMS in 2005, as well as novel proposals 

like IEX’s exchange application, the Commission proposed and subsequently adopted an interpretation under Regulation NMS that 

‘‘immediate’’ in the context of Regulation NMS does not preclude a 

de minimis intentional delay—i.e., a delay so short as to not frustrate the purposes of the trade-through rule of Regulation NMS by 

impairing fair and efficient access to an exchange’s quotations. The 

Commission sought public comment on its proposed update to its 

prior interpretation of ‘‘immediate’’ in Regulation NMS, publishing 

a draft for review and comment by investors, broker-dealers, and 

other interested parties. These comments were carefully reviewed 

and taken into account in preparing the final interpretation. 

The Commission’s interpretation referenced a study to be completed by Commission staff within 2 years regarding the potential 

effects of intentional access delays on market quality, including 

85 

price discovery. That effort will involve staff from the Commission’s 

Division of Trading and Markets in cooperation with the Division 

of Economic and Risk Analysis. 

Examples of areas that staff may evaluate include potential impacts on the national best bid and offer for equity securities and 

volume and quotation characteristics of exchanges with an intentional access delay. Through these efforts, or earlier as it determines, the Commission will reassess whether further action is appropriate. 

As the Commission noted in its interpretation, however, markets 

and market participants already deal with short unintentional 

delays in the current system, generally as the result of geographic 

or technology latencies. IEX’s single intentional access delay is 

within existing latencies experienced by market participants as 

they route orders between dispersed exchanges. At the same time, 

the importance of this issue requires careful scrutiny, and the Commission staff will gather data to inform the evaluation of any potential impact of any intentional access delays, including those established by IEX. 

Q.2. According to some commentators, the Commission’s recent approval of IEX’s application to be a national securities exchange is 

vulnerable to court challenges. 

Did you consult with the Commission’s general counsel about 

whether the Commission’s order approving IEX’s application was 

lawful? If so, what was the conclusion? 

A.2. Included among the responsibilities of the Office of the General Counsel is the provision of legal counsel on regulatory actions 

such as this one, offering explanation and analysis of open legal 

questions as well as legal consequences of potential Commission determinations and any associated legal risks. As part of the standard process for considering such applications, the General Counsel’s office was consulted and provided its guidance to the Division 

and the Commissioners’ offices on a range of questions and on the 

action that the Commission ultimately undertook. 

Q.3. Did you consider proceeding with a rulemaking to amend Regulation NMS rather than proceeding with a de facto amendment to 

Regulation NMS by approving the IEX’s application to allow for intentionally delayed price quotations? 

A.3. In connection with its order granting IEX’s exchange registration application, the Commission did not amend any definition or 

rule of Regulation NMS. Rather, in response to technological and 

market developments since Regulation NMS was adopted in 2005, 

the Commission issued an updated interpretation of the word ‘‘immediate’’ as used in the definition of automated quotation in Rule 

600(b)(3) of Regulation NMS. 

While the Commission did afford an opportunity for notice and 

comment by publishing a draft interpretation for comment, and did 

take the comments it received into consideration, it was not required to undertake a notice and comment rulemaking when updating its prior interpretation of its own regulation. 

Q.4. The SEC’s proposed rule to limit the use of derivatives in registered investment companies includes a requirement to calculate 

86 

a fund’s use of derivatives based on gross notional exposure. There 

is concern that this form of risk measurement may lead to the unintended consequence of overweighting to certain equities and moving away from commodities markets. Commodities markets are 

critical for owners of actual commodities who need liquid markets. 

Will you commit to addressing this concern as part of the rulemaking process? 

A.4. The Commission will carefully consider all of the comment letters received as we work to finalize the proposed rule, including 

comment letters addressing the proposed rule’s use of gross notional exposure. The proposed rule did not provide differing treatment for equity and commodity derivatives. In addition, as described in the proposing release, the Commission staff’s analysis indicated that it should be possible for funds to pursue, in some form, 

almost all existing types of investment strategies in compliance 

with the proposed rule. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER 

FROM MARY JO WHITE 

Q.1. Shareholder voting practices have changed dramatically over 

the last decade. There is an increased use of proxy advisory firms 

to provide analysis and proxy voting recommendations. Today, two 

firms dominate the proxy advisory industry. In 2014, the SEC 

issued guidance creating oversight of proxy advisory firms for the 

first time. 

I would like to know what activities the SEC is undertaking to 

ensure this guidance is being followed? 

A.1. Since the issuance of Staff Legal Bulletin 20, SEC staff has 

been monitoring the changes that have been implemented by proxy 

advisory firms and investment advisers in response to the staff 

guidance. 

The two largest proxy advisory firms now provide a description 

of their policies with regard to the disclosure of potential conflicts 

on their Web sites. In addition, while the Commission does not 

comment on specific examinations, the SEC’s Office of Compliance 

Inspections and Examinations (OCIE) announced examination priorities for 2015, which, among other things, sought to examine select proxy advisory service firms, and how they make recommendations on proxy voting and how they disclose and mitigate potential 

conflicts of interest. OCIE’s examination priorities for 2015 also included reviewing investment advisers’ compliance with their fiduciary duty in voting proxies on behalf of investors. OCIE’s efforts 

regarding this priority were incorporated into the ongoing NeverBefore-Examined Investment Company (NBE IC) Initiative 

launched in April 2015. The NBE IC Initiative was conducted as 

focused, risk-based examinations in a number of higher-risk areas, 

including compliance programs. As one of the areas to be reviewed 

within the compliance program, OCIE announced that it would review the funds’ portfolio proxy voting policies and procedures. 

Q.2. Do you believe proxy advisory firms use sufficient resources to 

perform proper due diligence in their research and vote recommendations? 

87 

A.2. The nature and amount of resources a firm uses to perform 

research and make recommendations is largely a business decision 

of the particular firm. A proxy advisory firm provides advice to investors about securities, not unlike numerous other types of analysts and advisors in the financial markets. 

As you know, some registered investment advisers may choose to 

retain proxy advisory firms to assist with the advisers’ proxy voting 

duties. When considering whether to retain or continue retaining 

any particular proxy advisory firm to provide proxy voting recommendations, the SEC staff has stated that an adviser should ascertain, among other things, whether the proxy advisory firm has 

the capacity and competency to adequately analyze proxy issues, 

which could include, among other things, the adequacy and quality 

of the proxy advisory firm’s staffing and personnel. 

Q.3. How can SEC inspectors work to further ensure proxy advisory firms and their work receive proper examination, scrutiny, 

and is free of any conflicts of interest? 

A.3. Proxy advisory firms that are registered investment advisers 

under the Investment Advisers Act of 1940 are subject to examination by OCIE. The SEC staff has historically conducted, and continues to conduct, examinations of registered investment advisers, 

evaluating many issues, including advisers’ compliance with their 

fiduciary obligations and how they disclose and mitigate potential 

conflicts of interest. 

Q.4. There has been several meetings conducted by the advisory 

committee the SEC has set up to look at equity market structures. 

Do you believe that reforms to the market structures should be 

comprehensive and significant or do you support a small and piecemeal reform approach? 

Are you satisfied with the advisory committee’s results so far? 

What are the current goals of the advisory committee and how 

and when will you complete those goals? 

A.4. Addressing the issues of our current market structure demands a continuous and comprehensive review that integrates targeted enhancements with an expansive consideration of broader 

changes. In February 2015, as part of our broader market structure 

work, the Commission established the Equity Market Structure Advisory Committee, comprised of diverse experts to consider specific 

initiatives and potential structural changes. The Committee was 

established to assist the Commission in its comprehensive reviews 

of the structure of the equity markets, and I have been very 

pleased with the progress of the Committee’s work over the past 

year. 

The Committee as a whole has met six times to consider issues 

such as the operation of Regulation NMS, the impact of access fees 

and rebates widely used by stock exchanges, the regulatory structure of trading venues, and the impact of various market structure 

issues on customers. At the July meeting, the full Committee voted 

on recommendations from two of its subcommittees for an access 

fee pilot program and trading venue regulatory reforms related to 

NMS plan governance and self-regulatory organization proposals 

requiring technology changes. I expect that the staff will be considering all of these items and preparing its own recommendations for 

88 

how the Commission should take account of the Committee’s work 

in these areas. In particular, I expect that the staff will be working 

to develop plans for an access fee pilot program for the Commission’s consideration. 

At the Committee’s most recent meeting on August 2, the other 

two subcommittees presented their preliminary recommendations 

to the full Committee. Specifically, the Market Quality Subcommittee’s recommendations focused on various market quality and safety features, such as limit up–limit down mechanisms and 

marketwide circuit breakers. The Customer Issues subcommittee 

focused on issues concerning retail investors, such as investor sentiment of equity market structure and modifications to Rules 605 

and 606 of Regulation NMS. 

Maintaining and enhancing the high quality of the U.S. equity 

markets is one of the Commission’s most important responsibilities. 

The Committee’s work is an important part of that and is of great 

assistance in our efforts to ensure that the equity markets optimally meet the needs of investors and public companies. 

Q.5. A few months ago Senator Crapo and I held a hearing looking 

at changes in the fixed-income markets and looking at how regulators should work to keep the fixed-income markets open and liquid. There are early signs that fixed-income markets are becoming 

more fragile and less liquid than they used to be. The U.S. Treasury Department has issued a request for information from industry 

participants to deepen their understanding about what is happening in the fixed-income markets and the Federal Reserve is also 

examining this issue. 

Because the mission at the SEC is to maintain fair, orderly, and 

efficient markets, I would like to know if the SEC recognizes the 

changes occurring in the fixed-income markets and do you believe 

that future rules and regulations should be evaluated for potential 

impacts on liquidity in the bond markets before implementation? 

A.5. Commission staff actively monitors developments in the fixedincome markets, including changes in liquidity conditions, whether 

driven by market conditions, regulatory changes, or competitive 

forces. For example, in connection with implementation of the 

Volcker Rule, Commission staff, along with staffs of the Office of 

the Comptroller of the Currency, Federal Reserve Board, Federal 

Deposit Insurance Corporation, and the CFTC, monitors liquidity 

in the corporate bond market and provides quarterly reports to the 

House Committee on Financial Services. 

Before the Commission adopts or implements any rule or regulation, the initiative is carefully considered and evaluated, taking 

into account public input to inform our efforts. Among other things, 

this process allows for market participants to identify concerns 

they may have about the impact on liquidity. Any potential future 

rules or regulations impacting the fixed income markets under the 

Commission’s jurisdiction would be subject to a similar process and 

would be considered and evaluated in light of the Commission’s ongoing monitoring of evolution and developments in those markets. 

89 

1 ‘‘Office Of Credit Ratings, SEC, Annual Report on Nationally Recognized Statistical Rating 

Organizations’’ (Dec. 2015), https://www.sec.gov/ocr/reportspubs/annual-reports/2015-annualreport-on-nrsros.pdf. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT 

FROM MARY JO WHITE 

Q.1. Do you agree that competition among Nationally Recognized 

Statistical Rating Organizations (NRSROs) is important to protecting investors and that the SEC should seek to prevent entrenchment of the largest incumbent rating agencies in investor 

guidelines? 

A.1. The Office of Credit Ratings, established pursuant to the 

Dodd-Frank Act, assists the Commission in executing its responsibility for protecting investors, promoting capital formation, and 

maintaining fair, orderly, and efficient markets. Congress stated 

that one of the objectives of the Credit Rating Agency Reform Act 

is to improve ratings quality by fostering competition in the credit 

rating agency industry, and we support Congress’ objective in a 

number of ways. Pursuant to the Credit Rating Agency Reform Act, 

the staff reports on the state of competition annually as part of the 

Annual Report to Congress on NRSROs. As noted in the staff’s December 2015 Annual Report to Congress on NRSROs, 1 comparing 

the number of ratings outstanding for established NRSROs and 

newer (smaller) NRSROs may not provide a comprehensive picture 

of the state of competition as ‘‘outstanding’’ ratings may not fairly 

reflect ‘‘new issue’’ rating activity. Instead, information relating to 

recent market share developments in the asset-backed securities 

rating category may provide a better gauge of how effectively 

newer entrants are competing with more established rating agencies. In that regard, some of the smaller NRSROs have built significant market shares in the asset-backed securities rating category, including U.S. commercial mortgage-backed securities. Additionally, some of the smaller NRSROs are rating newer asset classes, such as single-family rental securitizations and marketplace 

lending securitizations. With respect to preventing entrenchment of 

rating agencies in investor guidelines, as discussed below, to reduce 

investors’ reliance on credit ratings, the Commission has adopted 

final amendments to remove references to credit ratings in approximately 30 rules or forms. 

Q.2. Will you commit to changing Rule 2a-7 to require a reversion 

in investor guidelines to the term ‘‘any NRSRO’’? 

A.2. On September 16, 2015, the Commission adopted amendments 

to remove credit rating references in the principal rule that governs 

money market funds, Rule 2a-7 of the Investment Company Act of 

1940, and in Form N-MFP, the form that money market funds use 

to report information to the Commission each month about their 

portfolio holdings. The amendments implemented section 939A of 

the Dodd-Frank Act, which requires the Commission to review its 

rules that require the use of an assessment of creditworthiness of 

a security or money market instrument and any references to or requirements in the rule regarding credit ratings, remove any reference to or requirement of reliance on credit ratings, and substitute in those rules other standards of creditworthiness that are 

determined as appropriate by the Commission. Under amended 

90 

Rule 2a-7, a money market fund may invest in a security only if 

the fund’s board of directors (or its delegate, typically the fund’s adviser) determines that the security presents minimal credit risks 

after analyzing, to the extent appropriate, certain prescribed factors. 

The amendments to Form N-MFP require a money market fund 

to disclose NRSRO ratings that the fund uses in its evaluations of 

portfolio securities. Specifically, a fund must disclose for each portfolio security any NRSRO rating that the fund’s board of directors 

(or its delegate) considered in making its minimal credit risk determination, as well as the name of the NRSRO providing the rating. 

According to data submitted on Form N-MFP as of June 30, 2016, 

approximately 16 percent of money market funds report that they 

used NRSRO ratings in their credit risk evaluations of the funds’ 

portfolio securities. 

Q.3. What is your authority to regulate the investor guidelines of 

mutual funds and pension funds? 

A.3. The Investment Company Act of 1940 (1940 Act) regulates the 

organization of investment companies, including mutual funds, 

which engage primarily in investing, reinvesting, and trading in securities, and whose securities are offered to the investing public. 

The 1940 Act was designed to protect investors from certain abuses 

and requires full and fair disclosure to the investing public of information about the fund, including about its investment objectives, 

financial condition, and its structure and operations, and prohibits 

an investment company from changing its fundamental investment 

policies without shareholder approval. The 1940 Act also limits 

funds’ issuance of debt and other senior securities, and includes requirements related to valuation, redemptions of fund shares, and 

dealings with service providers and other affiliates. The Commission does not regulate pension funds. 

Q.4. What other authorities does the SEC have to create a ratings 

environment that fosters access to the best research instead of allowing the entrenchment of incumbent NRSROs through outdated 

investor guidelines? 

A.4. The Commission began removing references to credit ratings 

in Commission rules and forms in 2009 and accelerated that process after the enactment of section 939A of the Dodd-Frank Act. To 

date, the Commission has adopted final amendments to remove references to credit ratings in approximately 30 rules or forms. For 

example, as noted above, the Commission on September 16, 2015, 

adopted amendments to remove credit rating references in the 

principal rule that governs money market funds, Rule 2a-7 under 

the Investment Company Act of 1940, and Form N-MFP, the form 

that money market funds use to report information to the Commission each month about their portfolio holdings. In these amendments, the Commission eliminated requirements that limited 

money market funds to investing in securities that had received 

certain NRSRO ratings and instead requires that a money market 

fund invest only in securities that the fund’s board of directors (or 

its delegate, typically the fund’s adviser) has determined present 

minimal credit risks after analyzing, to the extent appropriate, certain prescribed factors. 

91 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM MARY JO WHITE 

Q.1. I’d like to ask about the SEC’s recent grant of exchange status 

to IEX. 

Does the SEC expect that other exchanges will respond to the 

newly approved speed bump with similar innovations? 

If so, how will this impact the securities market? 

In approving IEX’s application, the SEC issued staff guidance 

stating that ‘‘delays of less than a millisecond are at a de minimus 

level that would not impair fair and efficient access to a quotation 

. . . ’’ but that some intentional delays could be ‘‘unfairly discriminatory, not an appropriate or unnecessary burden on competition, 

and otherwise consistent with the Act.’’ Given this framework, how 

would the SEC evaluate an intentional delay that did not apply 

consistently and equally to all users of the exchange that implemented a delay? 

Do the issues raised by IEX’s successful application to become an 

exchange merit a review of Regulation NMS that is ‘‘comprehensive 

and part of formal rule making,’’ as former SEC Commissioner 

Paul Atkins has called for? 

A.1. In light of IEX’s exchange registration application and technological and market developments since the adoption of Regulation 

NMS, the Commission decided to revisit its interpretation of the 

term ‘‘immediate’’ under Regulation NMS. The interpretation is applicable to all exchanges and provides that, solely in the context of 

determining whether a trading center maintains an ‘‘automated 

quotation’’ for purposes of Rule 611 of Regulation NMS, the Commission does not interpret the term ‘‘immediate’’ by itself to prohibit a trading center from implementing an intentional access 

delay that is de minimis—i.e., a delay so short as to not frustrate 

the purposes of the trade-through rule of Regulation NMS by impairing fair and efficient access to the exchange’s quotations. While 

I cannot predict how other exchanges will react, the Commission’s 

interpretation is equally applicable to them. Whether and, if so, 

how multiple access delays will impact the securities markets is 

something that the Commission’s staff will monitor and consider, 

if such delays are ultimately implemented. The Commission’s interpretation noted that a study will be completed by Commission staff 

within two years regarding the potential effects of intentional access delays on market quality, including price discovery. 

As noted in the interpretation, any exchange that proposes to 

adopt an intentional access delay must do so through a rule filing 

of the exchange, which must be filed with the Commission and 

published for notice and comment by the public. Importantly, the 

interpretation does not change the existing requirement that, prior 

to being implemented, an intentional delay of any duration must 

be fully disclosed and codified in a written rule of the exchange 

that has become effective pursuant to section 19 of the Securities 

Exchange Act of 1934 (Exchange Act), where the exchange met its 

burden of articulating how the purpose, operation, and application 

of the delay is consistent with the Exchange Act and the rules and 

regulations thereunder applicable to the exchange. If the Commission cannot find that a proposed access delay is consistent with the 

Exchange Act, it would disapprove the proposal, rendering moot 

92 

the issue of whether a quotation with such a delay is protected. 

Generally, the Commission would be concerned about access delays 

that were imposed only on certain market participants or intentional access delays that were relieved based upon payment of certain fees. 

The general issues surrounding IEX’s exchange application, notably whether exchanges with intentional access delays can maintain 

protected quotations, has been addressed by the Commission’s interpretation. Nevertheless, based on the results of the staff’s study 

or earlier as it determines, the Commission will reassess whether 

further action is appropriate. 

Q.2. I’d like to talk about the SEC’s rulemaking schedule. The 

SEC’s mission is to ‘‘protect investors, maintain fair, orderly, and 

efficient markets, and facilitate capital formation.’’ Unfortunately, 

as former SEC Commissioner Dan Gallagher has said, ‘‘issues specific to small business capital formation too often remain on the 

proverbial back burner. This lack of attention doesn’t just harm 

small business; it also harms investors and the public at large.’’ Is 

there a danger that the SEC’s focus on completing its various mandated rulemakings makes it difficult to fulfill its mission to facilitate capital formation? 

What is the SEC currently doing to focus on the ‘‘capital formation’’ prong of its mission, in particular for smaller businesses? 

Where are new areas that the SEC can explore to expand access 

to capital? For example, many have sensibly called to expand the 

definition of ‘‘accredited investor’’ to encompass sophisticated investors. 

While the SEC does have an annual Government-Business 

Forum on Small Business Capital Formation, the SEC rarely acts 

on these recommendations, especially without Congressional prodding. Can you commit that the SEC will seriously evaluate every 

recommendation from the forum next year? 

A.2. The Commission is deeply committed to the priority of facilitating capital formation for small businesses. The SEC’s rules provide small and emerging companies with a range of options for 

raising capital, and it is important to assess whether those options 

are meeting their needs, in light of their business models and capital needs, while providing strong investor protections that promote 

confidence in the markets. 

As I mentioned in my written testimony, the SEC has completed 

all of the rulemakings directed by the JOBS Act, which resulted in 

significant changes to the avenues for capital formation in the securities markets, especially for smaller issuers. In addition to 

statutorily mandated rulemakings, we also engage in discretionary 

rulemakings and other initiatives to promote capital formation. For 

example, the Commission last year issued a proposal to amend 

rules for smaller and intrastate securities offerings that would help 

facilitate State-based crowdfunding and smaller regional securities 

offerings by smaller companies. 

Another important initiative is the pilot program to widen the 

minimum quoting and trading increments—or tick sizes—for stocks 

of some smaller companies. Following a study directed by the JOBS 

Act, the Commission last year approved a proposal, submitted in 

93 

response to a Commission order, by the national securities exchanges and the Financial Industry Regulatory Authority (FINRA) 

for a 2-year pilot program. The SEC plans to use the pilot program 

to assess whether wider tick sizes enhance the market quality of 

these stocks for the benefit of issuers and investors. The pilot is 

scheduled to begin on October 3, 2016. 

We are committed to our mission of facilitating capital formation 

for all businesses, large and small, and we understand it is particularly important to hear the views of small business owners, investors, and other stakeholders in the small and emerging business 

community. As you note, the SEC hosts an annual forum focusing 

on small business capital formation, called the Government-Business Forum on Small Business Capital Formation (Small Business 

Forum). This forum has assembled annually since 1982, as mandated by the Small Business Investment Incentive Act of 1980, and 

provides a platform to highlight concerns related to small business 

capital formation and to consider the ways in which these concerns 

can be addressed. Every year, the Small Business Forum seeks to 

develop recommendations for Government and private action to facilitate small business capital formation. 

Further, twice during my time as Chair, the SEC has renewed 

the charter for its Advisory Committee on Small and Emerging 

Companies (ACSEC). The ACSEC includes expert members from 

across the small business spectrum and provides the SEC with valuable recommendations and input. Pursuant to its charter, the 

ACSEC provides advice on our rules, regulations, and policies as 

they relate to: 

• capital raising by emerging privately held small businesses 

and publicly traded companies with less than $250 million in 

public market capitalization through securities offerings, including private and limited offerings and initial and other public offerings; 

• trading in the securities of emerging companies and smaller 

public companies; and 

• public reporting and corporate governance requirements of 

emerging companies and smaller public companies. 

Both the Small Business Forum and the ACSEC help ensure 

that the views of small businesses, investors, and other stakeholders in this community are clearly heard here at the SEC, and 

their recommendations are considered thoroughly. For example, we 

recently proposed amendments to the ‘‘smaller reporting company’’ 

definition that would expand the number of companies that qualify 

as smaller reporting companies, thus enabling them to provide certain existing scaled disclosures under Regulation S-K and Regulation S-X. This change was a recommendation of both the Small 

Business Forum and the ACSEC. 

You also asked about the ‘‘accredited investor’’ definition. In another important step for modernizing the private offering market, 

the SEC published a staff report in December 2015 regarding this 

definition. The report analyzes various approaches for modifying 

the accredited investor definition and provides staff recommendations for potential updates and modifications. The report recommends that the SEC consider additional measures of sophisticaVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00097 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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tion for individuals to qualify as accredited investors (other than 

looking solely at income and net worth). The report also evaluates 

the impact that potential changes to the definition would have on 

the size of the accredited investor pool. 

In July 2016, the ACSEC provided recommendations to the SEC 

regarding the accredited investor definition. I have directed the 

staff to prepare recommendations for the SEC on whether and how 

the definition should be modified, and the recommendations provided by the ACSEC and the SEC’s Investor Advisory Committee, 

as well as all of the comments we are receiving in response to the 

report, will help inform the next steps. 

In addition to our rulemaking initiatives and our continued engagement with the Small Business Forum and ACSEC and their 

respective recommendations, SEC staff routinely engages with the 

public and companies on questions of small business capital formation. For example, staff in the Division of Corporation Finance’s Office of Small Business Policy answers questions from market participants on a daily basis about disclosure and other issues relating 

to smaller public companies and about limited, private, and intrastate offerings of securities. This exchange is an important part of 

the work we do on behalf of investors and issuers involved in 

smaller businesses. 

Q.3. I’d like to discuss the marketplace online lending ecosystem, 

which has grown significantly as of late. 

My understanding is that SEC regulations require online marketplace lenders such as Proper and Lending Tree to update their 

regulatory filings with the SEC every week or so. Do you believe 

this is the most effective way to regulate these companies? 

A.3. The Federal securities laws are designed to protect investors 

in connection with the offer and sale of securities. Those investor 

protections include disclosure requirements and antifraud provisions that hold companies responsible for providing false or misleading information to investors. 

Obtaining money from investors to fund borrower loans through 

an online lending platform involves the offer and sale of securities. 

These offers and sales are subject to the same registration provisions of, and can take advantage of the same exemptive provisions 

from, the Securities Act of 1933 as any other company engaging in 

an offering of their securities, including ‘‘brick and mortar’’ lenders. 

The requirements for updating the information provided to investors is the same as those for other companies engaged in the offer 

and sale of securities. 

Commission staff has worked with online marketplace lenders to 

help them meet registration and disclosure requirements. For example, staff in the Division of Corporation Finance consulted with 

online marketplace lenders as they crafted a structure to fund 

loans and sell notes in a manner compliant with the Federal securities laws. As with other companies engaging in continuous registered offerings of securities under the Federal securities laws, 

these companies have an obligation to provide disclosure to investors about the securities being acquired. 

Q.4. Is the SEC exploring alternative means of regulating online 

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quirement? Would any of these changes require statutory authorization? 

A.4. The Commission and the Federal securities laws provide a 

number of ways companies can raise capital, with different disclosure and reporting standards depending on who they sell to and 

how much they raise. To date, the need for an alternative system 

to regulate online marketplace lenders is not apparent based on the 

practices we have observed in the industry. 

When marketplace lenders seek to access the public capital markets, as with any other company, they must comply with the registration and disclosure requirements of the Federal securities 

laws. I believe that investors need certain disclosures, including 

about the risk of loss of all principal and interest upon a borrower’s 

default, to make an informed investment decision. 

Q.5. Would there be merit to creating a broad safe harbor for marketplace online lenders which scales registration requirements to 

reflect their unique business model? 

A.5. I believe the Federal securities laws provide a number of options already, and it is not clear to me at this time that the business model of marketplace lenders would merit its own registration 

regime. Marketplace lenders are currently able to raise capital in 

private and public markets. 

Q.6. Some have criticized the SEC’s treatment of machine-readable, open data, including for its implementation of a dual-filing requirement for both XBRL and old fashioned documents, and a slow 

transition toward allowing the filing of inline XBRL, which is both 

human-readable and machine-readable. In addition to this step, 

how does the SEC plan to modernize its treatment of Government 

data and transition toward open-data? 

A.6. The Commission has a longstanding commitment to using developments in technology and electronic data communications to facilitate easier access to information. Machine-readable financial 

market data enhances our rulemaking and market-monitoring activities and makes disclosures more usable for the public. 

What to disclose, and how to disclose it, are vital questions that 

we ask in any rulemaking that involves the reporting of information to the Commission. Thus, in several recent rulemakings, the 

Commission has either proposed or adopted disclosures that would 

be made in a structured format. For example, in adopting Regulation Crowdfunding, the Commission required Form C (containing 

issuer disclosures) to be filed in eXtensible Markup Language 

(XML). Similarly, the final rule amendments to Regulation AB required asset-level disclosures in XML. In addition, in the recently 

issued Regulation S-K concept release, the Commission specifically 

sought comment on whether to require registrants to provide additional disclosures in a structured format. 

I am also committed to exploring other ways to enhance the 

availability and usability of structured data. For example, staff has 

posted on the Commission’s Web site reformatted financial information that was reported by companies in their filings in XBRL 

format. Specifically, staff has combined and organized as-reported 

XBRL data into structured file sets to facilitate improved data 

analysis by the public. 

96 

Finally, in addition to promoting the public availability and 

usability of structured data, the SEC has been proactively incorporating structured data into its own internal processes. Structured 

data enhances our rulemaking and market-monitoring activities; 

for example, it is a valuable input into several risk assessment 

tools that our Division of Economic and Risk Analysis, Division of 

Enforcement, and Office of Compliance Inspections and Examinations have been jointly developing and deploying to enhance the effectiveness of Commission staff in detecting wrongdoing. 

Q.7. Australia has created a Standard Business Reporting regime 

(SBR) that allows a company to complete one filing to comply with 

multiple regulatory disclosure requirements. This has extensively 

reduced the amount of required data fields, saving the Australian 

economy more than $1 billion annually by one estimate. Could a 

similar regulatory regime be possible in the United States? Have 

you discussed this possibility with other regulators? 

A.7. It is my understanding that Standard Business Reporting 

(SBR) is an Australian Government initiative that was introduced 

in 2010 to simplify the business reporting obligations of companies 

that report to the Australian Government. SBR uses standard 

terms that are built into software technologies to facilitate the dissemination of business and accounting information across participating Government agencies. While it may be possible to implement a similar regulatory regime among regulatory authorities in 

the United States, such a regime likely would involve significant 

planning and close coordination among various regulatory agencies 

with different missions and priorities and may require statutory 

changes to implement. I have not discussed this possibility with fellow regulators. 

The SEC’s disclosure rules require companies that offer and sell 

securities to the public and that are required to file periodic reports 

with the Commission to provide information about their business 

and financial condition, among other things. The staff of the Division of Corporation Finance is engaged in a broad-based review of 

our disclosure rules to determine how we can make our requirements more effective for investors and companies. The Commission 

has issued releases resulting from this review on a variety of topics, including a concept release on business and financial disclosures required by Regulation S-K. Among the topics addressed in 

the concept release is the use of data tagging to facilitate disclosure 

and review of information. The staff is currently considering the 

comments received on the concept release. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM MARY JO WHITE 

Q.1. Are you concerned by the fact that issuance of private stock 

has now outstripped public shares sold to all retail investors, in 

terms of new issuance? He asked this question during the hearing 

but would like to follow up with QFRs on the same topic with the 

following two questions. 

What are the long term implications of this shift? 

What if anything is the SEC doing about this trend, to try to 

stimulate IPOs? 

97 

A.1. As you note, in recent years, the size of the private capital 

raising market in terms of the total number of offerings conducted 

and dollar amounts raised has outpaced the size of registered securities offerings. While the long term implications of the current 

trend are not entirely clear, it is the responsibility of the Commission to ensure that investors are protected, whether in public or 

private markets, and that issuers have a range of means to raise 

the capital they need to fuel their businesses. 

Specifically, a robust private capital raising market must provide 

all investors—irrespective of their income or net worth—with investment opportunities and strong investor protections. In implementing its JOBS Act mandates, the SEC created new and revitalized existing exemptions for capital raising options for companies 

and investment opportunities for investors, including rules that 

allow companies to generally solicit investors in certain private offerings, conduct securities-based crowdfunding offerings, and raise 

capital pursuant to an updated and expanded Regulation A. The 

fact that companies are increasingly relying on these and other 

avenues for capital is consistent with our goal of promoting capital 

formation by providing issuers a diverse range of capital-raising 

mechanisms backed with strong investor protections. 

In addition to creating new avenues for capital formation, the 

JOBS Act included provisions that created a new category of companies in registered offerings, called ‘‘emerging growth companies’’ 

(EGCs). These provisions provided a number of accommodations for 

companies that qualify as EGCs. 

Since enactment of the JOBS Act, SEC staff has issued detailed 

guidance on the EGC-related provisions and procedures to assist 

companies in navigating the so-called IPO on-ramp. To date, the 

SEC has received over 1,100 confidential submissions of draft registration statements by EGCs seeking to conduct a registered initial public offering. 

Having an effective disclosure regime is critical for capital formation and investor protection. In late 2013, based in part on the results of a JOBS Act mandated report on the disclosure requirements for companies included in Regulation S-K, I directed SEC 

staff to develop specific recommendations for updating our rules 

that dictate what a company must disclose in its filings. The overall goal of the disclosure effectiveness initiative is to comprehensively review our disclosure requirements and to make recommendations to update those requirements to make disclosure 

more meaningful, accessible, and efficient for investors. Last year, 

as part of this review, the SEC published a request for comment 

on what investors, companies, and market participants would like 

to see with respect to the form and content of financial statement 

disclosures by entities other than the registrant under Regulation 

S-X. Additionally, this year as part of the disclosure effectiveness 

initiative, as well as to facilitate implementation of the Fixing 

America’s Surface Transportation (FAST) Act, the SEC issued a 

broad-based concept release seeking input from investors, issuers, 

and other affected market participants on our business and financial disclosure requirements, proposed rules to modernize the SEC’s 

disclosure requirements and policies for mining properties, and, 

most recently, proposed amendments to address outdated and reVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00101 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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dundant disclosure requirements while continuing to require companies to provide investors with the information they need to make 

informed decisions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM MARY JO WHITE 

Q.1. Chair White, last year, NASDAQ and NYSE filed petitions for 

rulemaking asking the SEC to promulgate rules to increase transparency around short selling. Other groups supported those petitions as well. While short selling can be important for liquidity and 

hedging, it is also important to ensure an equitable disclosure regime for short and long investors. As you know, there is currently 

more disclosure required for long positions. 

Can you please comment on the status of these petitions? Does 

the SEC plan to act on this issue? 

A.1. Extensive short sale data is currently publicly available, free 

or on a fee basis, including daily short sale volume and transaction 

data, short interest data, and fails to deliver data. The Commission 

staff has worked with the self-regulatory organizations (SROs) to 

make short sale data available to the public, including aggregate 

daily short selling volume in individual equity securities; on a 1- 

month delayed basis, information regarding individual short sale 

transactions in exchange-listed equity securities; and semimonthly 

statistics on short interest. The Commission also publishes on its 

web site ‘‘fail-to-deliver’’ information semimonthly for all equity securities. 

I am committed to ensuring that short sale data strikes the right 

balance between disclosures necessary to protect investors while 

preserving the benefits of price discovery and liquidity that short 

selling can bring to the market. In comparing disclosure regimes 

for short and long investors, it is important to consider the different purposes that such requirements would seek to address. 

Most notably, public disclosure of long positions provides information regarding persons that may have potential influence over, or 

control of, the issuer. Similar disclosure of short positions would 

not provide such information. 

The Commission staff continues to consider, as part of DoddFrank Act section 929X and in conjunction with the June 2014 

staff study of real-time short sale disclosure required by the DoddFrank Act, whether additional transparency may be warranted. In 

that context, the Commission staff also takes into account feedback 

from all market participants, including the petitions from NASDAQ 

and NYSE. 

Q.2. Over the past few years, investors and market participants 

have experienced disruptions in the timely dissemination of public 

market data via the Securities Information Processors or SIPs, operated by various exchanges, including at NASDAQ in 2013. After 

the NASDAQ glitch, which shut down trading on NASDAQ listed 

stocks for three hours, you convened a meeting with exchange 

CEOs to discuss how to improve resiliency. These same entities sit 

on the governance committee overseeing our current market structure. Yet SIP outages affect the entire stock and options markets, 

and so it seems to me that entities who must make the decisions 

99 

1The recommendations can be found at the Equity Market Structure Advisory Committee’s 

spotlight page. See ‘‘Equity Market Structure Advisory Committee Telephone Meeting’’, SEC.gov 

(July 8, 2016), https://www.sec.gov/video/webcast-archive-player.shtml? 

documentlid=070816emsac. 2See id. 

about whether or not to invest in the public data feeds and make 

necessary improvements to vital market infrastructure ought to not 

be the only voice in the room. While the current set of recommendations may be insufficient, the Equity Market Structure 

Advisory Committee has recommended changes to the governance 

structure. Would you agree that it is time to update the governance 

structure for NMS Plans and the operating committee? 

A.2. NMS plan governance is one of the many important topics the 

Commission currently is assessing as part of its broad-based review 

of equity market structure. For example, the Equity Market Structure Advisory Committee at its July 8, 2016, meeting recently 

made a number of recommendations to the Commission relating to 

trading venues regulation. 1 Those recommendations include expanding the role of NMS plan advisory committees to provide them 

with a formal vote on any matter on which the operating committee votes, as well as to initiate their own recommendations to 

the operating committee, so as to make NMS plan advisory committees more significant, formalized, and uniform. 2 I expect the 

Commission will give these recommendations full consideration as 

it considers governance structure changes in NMS plans. 

As we assess possible changes to the governance structure for 

NMS plans, it is important to bear in mind that such plans serve 

important regulatory purposes, such as ensuring that accurate and 

reliable consolidated market data is widely available to investors, 

that our markets have robust mechanisms to protect against excessive volatility, and that SROs can effectively surveil the markets. 

At the same time, I recognize the importance of incorporating the 

views of broker-dealers and other stakeholders in the operation of 

an NMS plan at an early stage of the decision-making process. 

Early-stage engagement may, among other things, enhance the 

quality of the proposals developed by the NMS plans as well as facilitate more swift adoption and implementation. Accordingly, enhancements to the governance of NMS plans designed to ensure 

that the views of key stakeholders are taken into account are 

among the significant issues under consideration. 

Q.3. Chair White, you previously announced as part of the Regulatory Flexibility agenda for the Spring of 2016 that a potential 

rulemaking to shorten the settlement time for securities would be 

complete by the end of June of this year. Can you please give me 

an update on the status of this rulemaking? 

A.3. I and my fellow Commissioners have publicly stated our support for efforts to shorten the settlement cycle from the third business day after the trade date to no later than the second business 

day (T+2). Shortening the settlement cycle should yield important 

benefits, including reduced counterparty risk, decreased clearing 

capital requirements, reduced procyclical margin and liquidity demands, and increased global harmonization. While current SEC 

rules do not prevent the implementation of T+2, updates to those 

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pants, as well as to shorter settlement cycles potentially in the future. I therefore have instructed Commission staff to develop a proposal to amend SEC Rule 15c6-1(a) to require settlement no later 

than T+2 for Commission consideration this year. In developing the 

proposal, Commission staff has been working with various market 

participants regarding the key issues surrounding shortening the 

settlement cycle to T+2. I expect that the proposal will be published in the fall of this year. 

While this initiative complements the work of the securities industry and the SROs, it should not be seen as a precondition or an 

impediment to the ongoing industry progress to shorten the settlement cycle. There has been a tremendous amount of work done to 

date by a broad range of market participants toward achieving the 

transition to T+2, and this effort must continue expeditiously to 

completion. 

Q.4. On July 21, 2015, Sen. Mike Crapo and I wrote to you to ask 

when the Commission would fix its duplicative requirement for 

public companies to file two versions of every financial statement— 

first as a document, then the same information again in the XBRL 

open data format. We pointed out that collecting two versions (1) 

distracted Commission staff from enforcing the quality of the data 

version; (2) delayed the broader modernization of the Commission’s 

whole corporate disclosure system from document-focused to datacentric; and (3) imposed unnecessary costs on public companies, 

who must check the two versions against each other. On August 

19, 2015, you responded that the Commission staff were ‘‘developing recommendations to allow filers to submit XBRL data inline 

as part of their core filings.’’ I was pleased to see that just last 

week, June 13, the Commission issued an order allowing (but not 

requiring) public companies to file a single version of their financial 

statements, using the inline XBRL format, which is both humanreadable and machine-readable. The order expires in March 2020. 

What do you expect the Commission will learn from this temporary 

period of voluntary inline XBRL filing? 

A.4. I believe that inline XBRL has the potential to provide a number of benefits to filers and users of structured financial information. For example, inline XBRL could decrease filing preparation 

costs, improve the quality of structured data, and, by improving 

data quality, increase the use of XBRL data by investors and other 

market participants. 

As the Commission’s exemptive order noted, permitting the voluntary use of inline XBRL allows the Commission to further assess 

the usefulness of inline XBRL and can facilitate further development of inline XBRL preparation and analysis tools, provide investors and companies with the opportunity to evaluate its usefulness, 

and help inform any future Commission rulemaking in this area. 

Additionally, a voluntary period of inline XBRL filing can allow 

the Commission to review and evaluate whether our beliefs regarding the potential benefits of inline XBRL are correct. It can also 

provide us with additional input to inform our consideration of 

whether to adopt a mandatory rule and, if so, whether the rule 

should include certain exemptions or phase-in provisions. A voluntary filing period can also provide an opportunity for any technoVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00104 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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logical or practical issues associated with inline XBRL to be identified and resolved prior to potentially requiring the use of inline 

XBRL. 

Q.5. Although I am pleased to see that the Commission has finally 

announced a pathway toward full open data for corporate financial 

statements, I am disappointed that the Commission did not publish 

the data structure (known as a specification) for inline XBRL filing 

in advance, to give public companies, disclosure management software providers, data consumers and other stakeholders a chance to 

review and comment on it. Instead, the Commission published the 

specification and issued the order simultaneously, leaving public 

companies and software providers scrambling to review the specification, and creating a delay before inline XBRL filing can begin 

and uncertainty about the impact of this change on data consumption. 

This failure to publish a data structure in advance of the legal 

order contrasts with the approach taken by the Treasury Department in implementing the DATA Act of 2014, which I introduced 

in the Senate and which requires the Federal Government to adopt 

a standardized open data structure for its own financial information. The DATA Act requires standardized financial reporting by 

Federal agencies to begin in May 2017, but the Treasury Department has already published several versions of the data structure 

for review and comment by agencies, software firms serving them, 

and other interested parties. 

For future changes to the data structures it uses to collect securities disclosures, will the Commission commit to publishing such 

data structures at least 60 days in advance of any legal order permitting or mandating their use? 

A.5. The Commission seeks to provide the public with adequate notice regarding technical implementation issues associated with 

structured data. For example, when the Commission in December 

2015 proposed a new rule specifying the form and manner with 

which security-based swap data repositories (SDRs) will be required to make security-based swap data available to the Commission—specifically, requiring SDRs to make data available using 

schemas published on the Commission’s Web site and referencing 

international industry standards Financial products Markup Language (FpML) and Financial Information eXchange Markup Language (FIXML)—the Commission also posted for public comment 

the related technical schemas. Similarly, draft copies of amendments to the EDGAR Filer Manual are generally posted on the 

Commission’s Web site in advance of Commission approval to help 

filers, agents, and software developers prepare for potential technical changes related to filing on EDGAR. More generally, Commission staff proactively engages with the software and services vendor community, inquiring about their capabilities and readiness 

with respect to various matters that the Commission has indicated 

an interest in potentially pursuing, such as inline XBRL, the IFRS 

taxonomy, or structuring of data outside the financial statements. 

With respect to the inline XBRL exemptive order, the Commission was permitting voluntary implementation, rather than requiring compliance by a date certain. One of the objectives of this volVerDate Nov 24 2008 14:54 Dec 20, 2016 Jkt 046629 PO 00000 Frm 00105 Fmt 6602 Sfmt 6602 L:\HEARINGS 2016\06-14 OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COM
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untary filing program is to provide investors, preparers, and third 

party service providers a means to assess the technical requirements and provide feedback to staff during the voluntary period, in 

advance of any determination whether to require issuers to file 

using Inline XBRL. Delaying effectiveness of the exemptive order 

to provide advance notice of the technical requirements would have 

impeded issuers and preparers from voluntarily participating in 

the program and providing valuable feedback when ready. In this 

regard, I note that the first inline XBRL filing was submitted to 

the Commission on July 1, three weeks after the exemptive order 

was issued. 

Q.6. Financial statements are filed as part of larger periodic filings 

under the Exchange Act of 1934. Forms 10-K and 10-Q include a 

great deal of information beyond the financial statements that 

today is expressed in plain-text document form, not open data. For 

example, Exhibit 21 to the 10-K requires a public company to identify its subsidiaries. This list of subsidiaries is plain text, not electronic data fields, which makes it very difficult for investors’ software to automatically identify a company’s subsidiaries and link 

them to other databases. But by adopting inline XBRL, the Commission is opening an easy avenue to transform more of the periodic filings from plain text into open data. Companies will be filing 

each Form 10-K and 10-Q as a single human-readable HTML document with embedded electronic tags that identify particular data 

fields. At first, only the financial statements will be tagged, but the 

Commission could add new tags to information such as Exhibit 21 

to make such information electronically searchable as open data. 

Do you expect that the adoption of the inline XBRL approach for 

financial statements will start a broader modernization of the Exchange Act filings, with electronic tags being added for other types 

of information contained in them? 

A.6. What to disclose, and how to disclose it, are vital questions 

that the Commission must ask in any rulemaking that involves the 

reporting of information to the Commission. Thus, in several recent 

rulemakings, the Commission has either proposed or adopted disclosures that would be made in a structured format. For example, 

in Regulation Crowdfunding, the Commission required Form C 

(containing certain issuer disclosures) to be filed in eXtensible 

Markup Language (XML). Similarly, the final rule amendments to 

Regulation AB required asset-level disclosures in XML. In addition, 

a number of recently proposed rules also have included structured 

information, including those on executive compensation and enhanced reporting by investment companies. 

In addition, the Commission has been considering whether to extend structuring requirements in its existing rules. In the recently 

issued Regulation S-K concept release, the Commission specifically 

sought comment on whether to require registrants to provide additional disclosures in a structured format, including whether there 

are categories of information in Parts I and II of Form 10-K or in 

Form 10-Q that investors would want to receive as structured data. 

We look forward to input from commenters to help us assess investor interest in the structuring of existing disclosures outside the financial statements. 

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1 Calculation made using number of public companies that disclose corporate political spending divided by total number of public companies. Dan Strumpf, ‘‘U.S. Public Companies Rise 

Again’’, The Wall Street Journal, Markets, 5 February 2014, http://www.wsj.com/articles/ 

SB10001424052702304851104579363272107177430. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY 

FROM MARY JO WHITE 

Q.1. I am very concerned that the SEC, under your leadership, has 

dropped the issue of political spending from its agenda. 

When it comes to spending on political activity, only roughly 2.2 

percent of all public companies in the United States make such disclosures voluntarily. 1 There’s been a dramatic increase in spending 

by corporations that do not disclose their donors in recent years 

from less than $5.2 million in 2006 to over $300 million in the 2012 

Presidential election cycle. 

As you mentioned in the hearing, 50 percent of the S&P 500 

companies disclose their political spending voluntarily. However, in 

a cursory glance of a handful of those companies, the disclosure of 

this type of spending varies widely. Some public companies disclose 

the topline information about a company’s policy and political priorities while others list specific amounts donated for races that 

range from candidates running for President to officials at the 

State and local level. 

In 2012, included on the Regulatory Plan and Unified Agenda, in 

a Proposed Rule State, was ‘‘the Disclosure Regarding the Use of 

Corporate Resources for Political Activities.’’ 

In the Spring 2013, consideration of the political disclosure rule 

was missing from the Update to the Unified Agenda. Instead, the 

agenda item had been relegated to the list of Spring 2013 Long 

Term Actions. This move coincided with your arrival at the SEC. 

In the Fall of 2013, the political disclosure rule was omitted altogether from both the Unified Agenda as well as the Long Term Actions. This omission was several months into your first year as 

SEC Chair. 

Considering the timeline, it is difficult not to draw a line directly 

from the start of your time at the SEC to the eventual dismissal 

of a political spending disclosure rule. 

While the political spending disclosure rule is no longer on the 

SEC’s agenda for consideration, many Americans believe it should 

be. To date, more than 1.2 million securities experts, individual 

and institutional investors, ranging from former SEC Chairs Levitt 

and Donaldson and SEC Commissioners to mutual funds and State 

Treasurers as well as members of the public have pressed the SEC 

for a rule that would require public companies to disclose this very 

material information. In addition, 44 Senators wrote in support of 

the petition to the SEC to take up the political disclosure rule. 

Former SEC Commissioner Luis Aguilar in a 2012 speech said 

that shareholders of corporations are ‘‘often in the dark as to 

whether the companies they own, or contemplate owning, are making political expenditures. Withholding information from shareholders is a fundamental deprivation that undermines the securities regulatory framework which requires investors receive adequate and appropriate information, so that they can make informed 

decisions about whether to purchase, hold, or sell shares—and how 

to exercise their voting rights.’’ 

104 

2See Gibson Dunn, ‘‘Shareholder Proposal Developments During the 2016 Proxy Season’’ 

(June 28, 2016), http://www.gibsondunn.com/publications/Documents/Shareholder-ProposalDevelopments-2016-Proxy-Season.pdf. 3See Center for Political Accountability, ‘‘The 2015 CPA-Zicklin Index of Corporate Political 

Disclosure and Accountability’’ (Oct. 8, 2015), http://files.politicalaccountability.net/index/CPAZicklinlIndexlFinallwithllinks.pdf. 

The founder of the largest provider of mutual funds, Vanguard’s 

John C. Bogle, said, ‘‘It’s high time that the abuse of corporate political spending comes to an end. Disclosure of corporate political 

contributions to the corporation’s shareholders—its owners—is the 

first step toward dealing with the potentially corrupt relationship 

between corporate managers and legislators. Shareholders must 

not be left in the dark while their money is spent without their 

knowledge.’’ 

As Chair of the SEC, do you believe that shareholders, as owners 

of the company, have the right to know about the corporation’s 

spending for political purposes? 

Do you believe this information is material to investors? If not, 

why not? 

A.1. The subject of corporate political spending (and requiring its 

disclosure) is an important one on which there are strong and differing views. There is no specific statutory or rule-based disclosure 

requirement under the Federal securities laws or other Federal law 

mandating that public companies disclose information relating to 

their political contributions. While there is no specific mandate 

under existing law, if a company’s corporate political spending has 

a material impact on its results of operations or financial condition 

(or if omission of disclosure on this subject would make other disclosure included in a filing materially misleading), disclosure to 

shareholders by the company is required. 

In addition, under the Commission’s Rule 14a-8, a shareholder 

may submit a proposal for inclusion in its company’s proxy materials seeking disclosure or other action on political contributions. 

This avenue has been used by a number of shareholders, with such 

proposals in 2016 averaging support of 26.1 percent of votes cast. 2

As I noted during the hearing, a number of other public companies have also made voluntary disclosures of their political spending. For example, a 2015 Center for Political Accountability report 

found that 87 percent of companies in the S&P 500 have adopted 

policies addressing political spending, 54 percent of S&P 500 companies have a dedicated web page or similar space on their Web 

site for political spending disclosure, and 43 percent of S&P 500 

companies have board oversight of their political contributions and 

expenditures. 3 Further, the study noted that in 2015, 52 percent 

of S&P 500 companies had a detailed policy on their Web sites governing political expenditures with corporate funds, and 60 percent 

of S&P 500 companies provided information on which political entities they will or won’t give money to. These avenues of engagement 

are important and to be encouraged, and I will continue to follow 

them closely. 

As you know, the Consolidated Appropriations Act of 2016 prohibits the Commission from using any funds made available by the 

Act to finalize, issue, or implement any rule, regulation, or order 

regarding the disclosure of political contributions, contributions to 

105 

tax exempt organizations, or dues paid to trade associations. I have 

not committed, and do not plan to commit, staff resources in FY16 

to develop a rule regarding disclosure of political contributions as 

encompassed by the Appropriations Act prohibitions.