U.S. GOVERNMENT PUBLISHING OFFICE

34–221 PDF WASHINGTON : 2019

S. HRG. 115–429 

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

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

EXCHANGE COMMISSION 

DECEMBER 11, 2018 

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

( 

Available at: https://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

JONATHAN GOULD, Chief Counsel 

JENN DECI, Professional Staff Member 

LAURA SWANSON, Democratic Deputy Staff Director 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

TUESDAY, DECEMBER 11, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Prepared statement .......................................................................................... 24 

Opening statements, comments, or prepared statements of: 

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

Prepared statement ................................................................................... 24 

WITNESS 

Jay Clayton, Chairman, U.S. Securities and Exchange Commission .................. 4 

Prepared statement .......................................................................................... 25 

Responses to written questions of: 

Senator Brown ........................................................................................... 50 

Senator Sasse ............................................................................................ 53 

Senator Cotton ........................................................................................... 59 

Senator Rounds ......................................................................................... 60 

Senator Reed .............................................................................................. 61 

Senator Menendez ..................................................................................... 63 

Senator Warner ......................................................................................... 66 

Senator Warren ......................................................................................... 68 

Senator Cortez Masto ................................................................................ 75 

(III)

(1) 

OVERSIGHT OF THE U.S. SECURITIES AND 

EXCHANGE COMMISSION 

TUESDAY, DECEMBER 11, 2018 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:04 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. This hearing will come to order. 

Today we will receive testimony from Securities and Exchange 

Commission Chairman Jay Clayton regarding the work and agenda 

of the SEC. 

Your appearance before the Committee, Mr. Chairman, is appreciated, and it is essential to the oversight of the SEC. I thank you 

for your willingness to testify today. 

The SEC has a critical mission to protect investors; maintain 

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

The SEC plays an important role in public confidence and trust 

in our Nation’s capital markets. It provides information to investors to ensure that as Americans prepare for their futures, they 

have the information necessary to make informed investment decisions. I commend the SEC for its work to advance these missions. 

Last week, this Committee held a hearing to discuss the appropriate role of proxy advisory firms, the shareholder proposal process, and the level of retail shareholder participation. 

Many Members expressed interest in continuing the discussion 

on the appropriate relationship between proxy advisory firms and 

market participants as it relates to shareholder proposals and corporate governance. 

I am concerned about the misuse of the proxy voting process and 

other aspects of the corporate governance system to prioritize environmental, social, or political agendas over the economic interests 

of end investors. 

Last week, you stated your intent to address aspects of our proxy 

system, including proxy ‘‘plumbing,’’ ownership and resubmission 

thresholds for shareholder proposals, and proxy advisory firms. 

Many of the rules governing our proxy system have not been examined for decades, and I encourage the SEC to take an aggressive 

approach assessing the scope and appropriateness of previous regulatory actions. 

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Capital markets are also vital to facilitating job growth and expanding American investment opportunities. This Committee 

worked hard in the 115th Congress to pass a number of bipartisan 

securities and capital formation bills. 

I will continue to work with Members to identify additional legislative proposals that encourage capital formation and reduce burdens for small businesses and communities. 

The SEC has also taken a number of steps this year to make it 

easier for emerging companies to go public while not discouraging 

the availability of capital in the private market. 

Additionally, this year the SEC proposed Regulation Best Interest and a related interpretation to establish standards of conduct 

for broker-dealers and investment advisers. This is a significant 

step forward, and I look forward to seeing a final rule in the near 

term. 

Finally, the SEC has been proactive in addressing 

cryptocurrencies and coin offerings. For example, the Enforcement 

Division created a new Cyber Unit this year, which led efforts to 

counter fraud against retail investors involved in initial coin offerings and brought charges against a bitcoin-denominated platform 

operating as an unregistered securities exchange. 

I look forward to receiving updates on these and other SEC initiatives, including your views on when we can expect final rules in 

these areas. 

Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Chairman Crapo. Welcome, Chair 

Clayton. Nice to see you again. Thank you for your service. 

Since I assume this will be the last Banking Committee hearing 

for this Congress, I would like to express my thanks and appreciation for the work of Senators Donnelly and Heitkamp and Corker 

and Heller over the years. So thanks to all of them. 

We have discussed the SEC’s enforcement program in previous 

hearings and our recent meeting, Chairman Clayton. As you have 

highlighted, the SEC has worked hard to return money to harmed 

investors. I agree that is an important goal, but enforcement can 

begin and end with protecting wealthy investors. 

Ten years ago today, Bernie Madoff was arrested. His giant 

Ponzi scheme was exposed. There is no doubt that Ponzi schemes 

still exist. Your enforcement report shows that SEC is focused on 

finding them and punishing the wrongdoers, as you should. 

We also know a decade ago Bernie Madoff was far from the biggest threat to most families. It was Wall Street firms that had just 

wrecked our economy. And just as the SEC will continue to pursue 

Ponzi schemes, it must also continue to pursue in many ways the 

harder, the complex cases against the big banks when they break 

the rules and threaten families’ homes and savings. I have said to 

this Committee a number of times that my Zip code, 44105, where 

Connie and I live in Cleveland, had more foreclosures in the first 

half of 2007 than any Zip code in the United States, so I still see 

the remnants of inaction and wrong actions by regulators and by 

Wall Street. 

3 

The big banks have not turned into angels over the last 10 years. 

Last month, German authorities conducted a 2-day raid of Deutsche Bank’s headquarters in a money-laundering and tax evasion 

investigation. Last year, both the Fed and New York State regulators imposed fines totaling more than $500 million on Deutsche 

Bank’s U.S. entity for anti– money-laundering violations. And 

Deutsche Bank is not alone. Similar problems persist at other 

banks. 

Looking at your Strategic Plan, I see a lot missing. There is nothing about stock buybacks. There is nothing about excessive corporate debt. Take a look at what has happened since the Republican tax overhaul. 

Since last year, corporations have announced more than $1 tril- lion in stock buybacks, $1,000 billion, $1 trillion in stock buybacks. 

Take one example. GM has spent more than $10 billion on stock 

buybacks since 2015. Last month, on the same day it announced— 

last month, it announced it is laying off 14,000 workers and closing 

five plants, including the Chevy Cruze plant in Lordstown, Ohio. 

Close to 5,000 lost jobs, 5,000 more jobs in the supply chain at 

least, and probably another 10,000 jobs in Mahoning Valley. The 

same day they laid off shift two several months ago, they announced they were expanding production in Mexico. Yet the stock 

buybacks continue, and executive compensation continues to go up. 

The priority of these corporations are clear. Buying back shares 

boosts companies’ stock prices, which means even bigger bonuses 

for corporate executives. Investing in a company’s workers supports 

the long-term health of the company, but that is not what Wall 

Street rewards. 

Our economy functioned fine without massive stock buybacks. 

The SEC rule facilitating buybacks was adopted 36 years ago, but 

since then, the size, the use, the frequency of stock buybacks has 

increased dramatically. My colleagues and I have asked you to take 

a look at that rule and ask probing questions as you do it. It is 

time to question whether it is too easy for companies to buy back 

their shares. The GM case shows us the risks to workers and communities when companies think only about short-term profits. We 

should be looking at the record levels of risky corporate debt and 

leveraged loans, how that debt is packaged in collateralized loan 

obligations, the complex securities that allow investors to trade 

pools of loans. The Fed and the OCC are looking at banks’ exposure 

to leveraged loans, but they say the risks are manageable and they 

are not worried. 

We have heard that one before. It was a little over 10 years ago 

before the economy came crashing down. Leveraged lending CLO 

investors include hedge funds, mutual funds, other market participants under SEC oversight. As the shadow banking market plays 

a larger role in leveraged lending, watchdogs cannot just focus on 

the big banks. It is your job to worry when it seems like there is 

nothing to worry about. And I will say that again. It is your job 

to worry when the public seems to think there is nothing to worry 

about. That is what consumers and investors expect so that risks 

do not buildup across the financial system. 

A decade ago, the regulators in the Bush administration failed 

the country, and the price was enormous. The SEC needs to be 

4 

closely watching this market not just to make sure disclosures and 

credit ratings are adequate, but to complement the work of the 

banking regulators. We know the financial system is more interconnected than ever and the systemic risks are more likely. Main 

Street cannot afford for you to stand by watching Wall Street greed 

again, every decade perhaps, grow out of control. Any Strategic 

Plan for any agency guiding our economy needs to focus on the 

American workers who drive growth, not just wealthy investors. 

Thank you. 

Chairman CRAPO. Thank you, Senator Brown. 

And, again, Chairman Clayton, we appreciate you being with us. 

You may proceed. 

STATEMENT OF JAY CLAYTON, CHAIRMAN, U.S. SECURITIES 

AND EXCHANGE COMMISSION 

Mr. CLAYTON. Chairman Crapo, Ranking Member Brown, Members of the Committee, thank you for the opportunity to testify before you today about the work of the Securities and Exchange Commission. On behalf of my fellow Commissioners and the 4,500 

women and men of the SEC, I would like to thank this Committee 

for its support. 

Congress’ funding of the agency enables us to improve our tools 

and expertise relating to our markets, capital formation, and protecting Main Street investors. Further, your interest in and engagement on our rulemaking and other initiatives have helped us 

refine and improve these initiatives, often to the benefit of our 

long-term Main Street investors. Thank you for your input. 

From a day-to-day management perspective, I see our job as having four principal areas of focus: One, protecting investors through 

forward-looking policies and rulemakings and through inspections 

and strong enforcement of our securities laws; two, monitoring our 

disclosure-based capital markets and the numerous market participants, including through oversight of issuers, gatekeepers, and 

intermediaries; three, ensuring that our trading markets function 

effectively and fairly, including during times of volatility and price 

discovery; and, four, identifying, evaluating, and addressing emerging market risks. 

With regard to the fourth category, I want to note several key 

risks that are front of my mind. 

First, cybersecurity continues to be a pressing threat to our capital markets and many market participants. The SEC deals with 

cybersecurity risk through a number of perspectives, both within 

and outside the agency. Combating these challenges will continue 

to require significant resources and attention as well as an understanding that this is both an entity-specific and a systemic risk. 

Second, the potential effects of Brexit on U.S. investors and securities markets and on global financial markets more broadly is a 

matter of increased focus for me and my colleagues at the SEC. In 

short, I believe that the potential adverse effects of a poorly executed Brexit are not well understood and, in some areas where 

they are understood, are underestimated. The SEC’s responsibility 

is primarily related to the effects of Brexit on our capital markets, 

and I have directed the staff to focus on the disclosures companies 

5 

make about Brexit and the functioning of our market utilities and 

infrastructures. 

Third, managing the transition from LIBOR to a new rate such 

as SOFR is a significant issue for many market participants, including Main Street investors, as borrowers, for example, have consumer credit tied to LIBOR. We and our colleagues at the Federal 

Reserve, Treasury Department, and other financial regulators are 

monitoring this issue and working to facilitate a reasonable transition. However, an effective transition requires participants to take 

actions well ahead of year-end 2021 when the bank’s itment to submitting the information used to set LIBOR ends. 

Finally, the process for developing and implementing the Consolidated Audit Trail, or CAT, remains slow and cumbersome and 

significantly behind deadlines. According to the SROs, substantial 

delivery of the first phase of CAT is now not expected until 16 

months after the initial deadline. While I believe the CAT should 

be completed with deliberate speed, protection of CAT data, particularly any form of PII, remains a threshold issue for me. 

As the SROs continue to make progress in the development and 

implementation and operation of the CAT, I believe that the Commission, the SROs, and the plan processor must continuously 

evaluate their approach to the collection, retention, and protection 

of PII and other sensitive data. More generally, I have stated before that the SEC will not retrieve sensitive information from the 

CAT unless we need it and believe appropriate protections are in 

place to safeguard it. 

In closing, I would like to again thank the Committee for its continued support of the SEC, its mission, and its people. I would also 

like to note that my colleague Commissioner Kara Stein will be 

leaving us at the end of this year, and I thank her for her contributions to the Commission and to investors. 

I look forward to answering your questions. Thank you. 

Chairman CRAPO. Thank you, Chairman Clayton. 

I will start out on the proxy voting process. That has been a 

focus of both the SEC and this Committee recently. In your testimony, you note that there is consensus on the need for major overhaul of certain aspects of the proxy voting process, including proxy 

plumbing and proxy advisory firms. As staff recommends comprehensive overhaul proposals, what reforms can you enact in the 

short term, if any? 

Mr. CLAYTON. So with respect to proxy, I put this into three categories, Chair Crapo. First is proxy plumbing. Our proxy plumbing, 

the voting from end investor back to the company, is very complex, 

and the verification of that process, the facilitation of that process, 

does not work as well as it should. We are looking for short-term 

fixes. We are looking to the industry to propose them, so in that 

area I am looking for short-term fixes. We do need a long-term 

overhaul. 

In the area of shareholder voting, I believe there are things that 

we can do to that process that will not in any way diminish engagement, but will, what I would say, eliminate unnecessary processes. 

And then in the area of proxy advisers, I think that there is 

broad agreement that there are elements of the proxy advisory, 

6 

what I will call, ecosystem that can be improved fairly quickly. And 

I would be happy to discuss more detailed views. 

Chairman CRAPO. All right. I appreciate that. And one last question from me. The SEC has devoted significant time and resources 

to issues surrounding digital assets and cryptocurrencies. Do you 

feel that the regulatory framework is sufficiently in place to provide certainty and predictability for market participants? 

Mr. CLAYTON. So I want to thank this Committee for holding a 

hearing, I think it may have been 9 months ago, on this very issue 

as the emergence of ICOs and cryptocurrencies became, I would 

say, of broad interest to our investment community. At the time, 

Chairman Giancarlo and I noted that we thought the securities 

laws functioned well for securities, the commodities laws functioned well for commodities, and that to the extent there were 

cryptoassets that fell outside either of those—for example, we 

talked about bitcoin at that hearing—we should continue to monitor whether other laws such as anti– money-laundering laws needed to be supplemented. We are continuing to monitor that, but I 

very much appreciate this Committee’s attention to it and vigilance. 

Chairman CRAPO. All right. Thank you very much. 

I am going to yield back my time. We do have a vote coming up 

sometime after 11, maybe 11:15 or 11:30, so I am going to yield 

back 2 minutes to help us meet that deadline. Senator Brown. 

Senator BROWN. Not that that is going to spread. 

Chairman CRAPO. Yeah. 

[Laughter.] 

Chairman CRAPO. No, actually, I am setting a new standard, 3 

minutes. 

Mr. CLAYTON. I can hope. 

Senator BROWN. Thank you, Chairman Crapo. 

Recently, banking regulators have noted the risks in the leveraged lending market, but only well after the market has reached 

record highs. We have seen lending move outside the banking system and fuel the significant increase in collateralized loan obligations. What is the SEC doing to monitor the growth of risky loans 

outside the traditional banking system? 

Mr. CLAYTON. So what I could say is many months ago—and I 

do not want to say too many, but 4 or 5—we started looking at this 

issue in detail, and you touched on a number of things that we 

should be looking at in your opening remarks, so kind of from beginning to end, you have got issuers on the one hand, which, you 

know, do we have too much leverage at the issuer end of the spectrum, companies borrowing too much money, too much increased 

leverage, all the way through to the end investors, whether it is 

mutual funds, pension funds, and the like. And there are entities 

in between, including rating agencies, banks which originate loans, 

and then what I will call the CLO packagers who buy the loans 

from the banks, form the CLOs, and send them to the end investors. 

We are looking at each component of that, and we are looking at 

it with two ideas in mind. One is systemic risk. Are there elements 

of this market that are going to cause the kind of systemic issues 

that you discussed, you know, knock-on effects? 

7 

One thing that we are looking at in particular is will the change 

in ratings for these types of securities trigger substantial selling 

that would not be picked up by ordinarily expected demand. If you 

go from investment grade to below investment grade, do things like 

investment restrictions cause selling where the credit really has 

not changed that much but there is nobody there to pick it up? 

That is one of the many issues we are looking at. 

I can go on for a long time. I do not want to take more of your 

time. 

Senator BROWN. Let me shift. FSOC does not seem as engaged 

as many of us would like it to be. They have moved in the wrong 

direction by de-designating the insurance companies that were 

deemed systemically important, as you know. As a member of 

FSOC, what are you doing to push a greater focus on leveraged 

lending and the interconnectedness of banks and shadow banks? 

Mr. CLAYTON. Well, the discussion that I was going through, I 

would say the components of the CLO—I will call it the CLO ecosystem—the leveraged lending that is outside of—the traditional 

high-yield debt market, bringing our knowledge and, what I would 

say, continued analysis of that market to the other members of the 

FSOC is one of the things that we are doing. 

Senator BROWN. Well, and I am hopeful that—I guess I will ask 

you on the record: Will you commit to pursue these interests with 

the rest of FSOC? Is that something you will absolutely plan to do? 

Mr. CLAYTON. I think it is—I generally try not to commit, but it 

is easy to commit for that because I am already doing it. 

Senator BROWN. OK. I cannot underemphasize the importance of 

that. Yesterday former Federal Reserve Chair Janet Yellen said 

that corporate debt is at high levels and would prolong the damage 

of an economic downturn if it were to come or whenever it comes, 

leading to more corporate bankruptcies. I am inclined to believe 

her. I hope you and other regulators take the appropriate action as 

corporate debt seems to continue to mount and continues to play 

the role that it has in this economy. 

Mr. CLAYTON. Thank you. 

Senator BROWN. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. 

Mr. Chairman, thanks for coming back. Good to see you again. 

You know, we have discussed in the past, including at a public 

hearing, that we have had this amazing decline in the number of 

public companies in America, the number of IPOs that we launch 

in the United States. I for one think it is a terrible thing if people 

are choosing to finance their business through private capital because of the costs and regulatory implications of going public. Obviously, a public company creates an investment opportunity for a 

Main Street investor. It creates another vehicle for capital raising. 

The competition between the public markets and the private markets has the effect of lowering the cost of capital. So in any way 

I can think about it, very robust public equity markets is a very 

good thing for our economy. 

I think in the past you have acknowledged that the regulatory 

costs of being a public company are probably a contributing factor 

8 

to the relative decline and the absolute decline in public companies. 

Is that still your view that that is a contributing factor? 

Mr. CLAYTON. Yes, it is. 

Senator TOOMEY. One of my concerns is that, as we all know, 

there is a subset of activist shareholders who engage in forcing 

votes, shareholder votes, sometimes repeatedly on issues that they 

have no chance of succeeding on. Other times it is an effort to impose an ESG agenda on a company. Does this activity contribute, 

do you think, in any way to companies’ reluctance to go public? 

Mr. CLAYTON. So, look, I think the answer to that question is do 

the decision makers who decide whether a company should go public or not, when they look at that kind of activity, is it a check 

mark in the negative box? Yes. 

Senator TOOMEY. OK. That is what I was getting at. Vanguard 

is headquartered in Pennsylvania. It is a great, great American 

success story, great innovative institution that has made investing 

affordable for millions of Main Street investors. But Jack Bogle, the 

founder, recently made an interesting observation. He warned, and 

I quote, ‘‘If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every 

large U.S. corporation.’’ 

Now, if the trend continues, which is Bogle’s caveat, wouldn’t 

that be a bad thing if a handful of institutional investors had voting control of virtually every large company in America? 

Mr. CLAYTON. The short answer to your question is yes. The 

broader answer is a continued reduction in the number of public 

companies has, I would say, negative effects—I believe has negative effects that go beyond just opportunities for Main Street investors to invest. A vibrant public capital market has a number of 

other benefits to our society. 

Senator TOOMEY. Yes, I mentioned some of them. I totally agree. 

But I do have this concern that we have this regime that is discouraging companies from going public, and when they do go public, we have got processes that may result in votes being cast that 

are not really well aligned with the interests of the investors. 

One thing just by point of clarification. Former SEC Commissioner Dan Gallagher was here just last week, and he reminded us 

that it is perfectly permissible under existing law and regulation 

for a fund manager to come to the conclusion that it is not in the 

best interest of their investor clients to be voting on every proxy 

matter. That is factually correct, right? It is not required to have 

those votes. 

Mr. CLAYTON. I saw former Commissioner Gallagher’s testimony, 

and I think he described the staff position appropriately, yes. 

Senator TOOMEY. So one idea that has been floated as a way to 

increase the likelihood that when votes are cast they actually reflect the wishes of the investor who is the ultimate shareholder is 

client-directed voting. Do you have an opinion on the merits of 

that? And is it your view, are there any regulatory changes the 

SEC would need to make in order to facilitate client-directed voting? 

Mr. CLAYTON. So I do not have a specific opinion today on clientdirected voting. On the core question of are the intermediaries, 

fund managers or others, voting shares in the interests of their cliVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
9 

ents, that is something that was the subject of our roundtables. It 

goes to the question of regulation of proxy advisers, and it is something that I intend for the Commission to continue to look at. And 

I think we can improve it. 

Senator TOOMEY. So you do not have an opinion on client-directed voting? Is that what I hear you saying? 

Mr. CLAYTON. I do not have one here today, Senator. 

Senator TOOMEY. That is something I would like to pursue with 

you. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Thank you, Senator Toomey. And before I 

move to Senator Reed, I would like to notify the Committee the 

vote has now been moved up to 11. I would like to finish by then. 

I want to congratulate Senator Brown for giving back a minute and 

a half and encourage everybody to really stay tight on your questions. 

Senator Reed. 

Senator REED. So you want me to be short. 

Chairman CRAPO. Yeah. See if you can beat my record. I gave 2 

minutes back. 

Senator REED. I will try. Thank you, Mr. Chairman. Thank you, 

Chairman Clayton. 

Following up on some of the comments that Senator Brown made 

about share buybacks, not only is it difficult to look at GM buy 

back significant stock and then lay off thousands of workers, but 

your whole approach has been for the long-term Main Street investor. And one of the options that GM had was investing in innovation, investing in more sophisticated products, and effectively they 

chose not to do that. They gave the money back. So this issue of 

stock buybacks has several dimensions, one of which is not investing in the long-term future of the company. Is that something that 

concerns you? And is that something that the SEC can take steps 

to try to correct? 

Mr. CLAYTON. Senator Reed, I want to be clear about the SEC’s 

authority. We do not have authority over capital allocation, over 

whether a company chooses to allocate its capital by distributing 

it to its shareholders or investing. But I agree with a number of 

observers that, in terms of how companies should communicate 

what they intend to do with their capital, we can do a better job 

around disclosure. So you have—what are your capital allocation 

decisions? Our disclosure rules are based on, I think, historic facts, 

plant, property, equipment, how am I going to spend my money on 

plant, property, and equipment? In today’s economy, I think we 

should be driving disclosure more toward human capital, intellectual property, and the types of advantages we have from things 

like supply chain management, distribution management, and our 

relationships with other vendors. Those are the things that drive 

companies’ value today, and I would like to see our disclosures 

evolve toward that. 

Senator REED. But in terms of the SEC’s role, as I understand 

it—and please correct me—36 years ago you could not have these 

stock buybacks under SEC rules. Is that—— 

Mr. CLAYTON. I do not think that is correct. What happened 36 

years ago was the SEC said if you are going to buy back stock in 

10 

the market, here is a way you can do it where, if your intent is 

not to manipulate—there is no safe harbor if you are trying to manipulate. But if your intent is not to manipulate and you do it this 

way, you can feel comfortable that the buyback is being done without subjecting you to a claim of manipulation. 

Senator REED. Essentially what you did is provide a pathway to 

buyback which previously was considered somewhat risky because 

of the implications of inside information, of timing, of the self-aggrandizement by the CEOs. So you do have the authority to look 

at that rule again. 

Mr. CLAYTON. We do, but I just want to be clear what authority 

we have, which is the authority over whether to provide a pathway 

where you will not be—you will be presumed not to be manipulating the stock. 

Senator REED. Well, again—— 

Mr. CLAYTON. It is not prohibiting or allowing buybacks. 

Senator REED. Again, I think given what we have seen, you have 

to go back and sort of reroute that pathway, not only for modernization and innovation, but also because the choice for many individuals, I presume—and if I was in that position, I would certainly be thinking of this—is if I do a stock buyback, my stock options suddenly are hugely beneficial to me, oh, and by the way, my 

pay based each year is on the value of the stock, so this could be 

nothing to do with the shareholders, nothing to do with the workers, nothing to do with the future of the company, but it is a very 

good payday for me. And that I think goes against, you know, the 

notion 36 years ago of manipulation. 

Mr. CLAYTON. Let me say I agree that if the purpose of the 

buyback is to drive the price up for the benefit of an individual, 

that is a problematic situation. And I just want to say I would encourage compensation committees who set compensation and structure compensation to look at that issue. 

Senator REED. Well, I have to give at least 20 seconds back, so 

I would encourage the SEC, not deferring to the compensation committees, which are not that rigorous in many cases, to take strong 

and appropriate action. Thank you. 

Mr. CLAYTON. Thank you. 

Senator BROWN [presiding]. Good question. Good assertion. 

Senator Rounds. 

Senator ROUNDS. Thank you, and in the interest of following the 

Chairman’s lead, I will ask just one question, and I will submit 

several for the record. 

In your written testimony, you discuss the impact of Brexit on 

the American markets. From a securities standpoint, I have been 

following how Brexit could complicate the ability of American clearinghouses to compete in the EU and the U.K. markets. For U.S. 

clearinghouses to operate in the EU, EU authorities must determine that U.S. regulatory regimes are equivalent to the EU’s; otherwise, market participants would face higher capital charges for 

accessing American markets. 

Although the U.S. and the EU agreed that the CFTC’s regime 

was equivalent in 2016, there has yet to be any determination for 

the SEC’s regime. Progress in these areas is under threat thanks 

to Brexit and legislation pending in the European Parliament. If 

11 

that legislation passes, large American clearing firms would only 

be allowed to continue operating in the EU if the EU regulators 

could jointly supervise them. Such legislation would violate the 

2016 agreement, hurt American companies and taxpayers by making the market for U.S. Treasury bonds less liquid and increase the 

cost of trading derivatives for farmers and ranchers. 

My question is: Can you share your thoughts on the U.S.–EU 

clearinghouse issue? And do you foresee any other regulatory challenges associated with Brexit and clearing securities? And if so, 

how would we work to resolve them? 

Mr. CLAYTON. So, Senator, I think your premise described the 

issue very well. It is complicated. It requires international cooperation and recognition, and if we fail to identify what I will call a 

smooth path forward, there will be costs. I have made that clear, 

Chairman Giancarlo has made that clear to our European counterparts. I know that they recognize it. This is part of a broader issue. 

It is one of the reasons I am worried about Brexit—there are a 

number of issues just like the issue that you describe that seem to 

get kicked down the road as the broader issue unfolds. 

Senator ROUNDS. Do you see a format for resolving the issues? 

Mr. CLAYTON. Pursuing several. Pursuing several. 

Senator ROUNDS. Can you share any thoughts? 

Mr. CLAYTON. I think I should leave it at that out of respect for 

the international nature of the negotiations, but this is very much 

front of mind. 

Senator ROUNDS. Very good. Thank you. And I will yield back my 

2 minutes and 8 seconds. 

Senator BROWN. Thank you, Senator. 

Senator Menendez. 

Senator MENENDEZ. Thank you. Can I take Senator Rounds’ 2 

minutes and 8 seconds? 

[Laughter.] 

Senator MENENDEZ. No. Mr. Chairman, thank you for being here. 

In your testimony, you state that you have made protecting Main 

Street investors a key guiding principle of your tenure at the SEC. 

So let me ask you, do you agree that Main Street investors were 

harmed by excessive risk taking on Wall Street in the years leading up to the financial crisis? 

Mr. CLAYTON. I do. I think that excessive risk taking in our markets—let me just say this: Excessive risk taking in our markets 

from my perspective is more likely to have an adverse effect on 

Main Street investors than just about any other class of people. 

Senator MENENDEZ. I agree with you. Do you agree that pay 

practices at big banks and financial institutions have at times ignored long-term consequences in favor of rewarding risky behavior 

to make short-term gains? 

Mr. CLAYTON. I do not want to make a general statement about 

this, but what I will agree with you on this: I think that your concept is when you take someone’s activity and you bring forward the 

benefits—so let us say I am working somewhere and I do something that is going to last for 5 years, and then I say to you, hey, 

over the 5 years this is going to make 100, so pay me based on 100 

today—that type of incentive drives short-term behavior. 

12 

Senator MENENDEZ. Do you think Main Street investors might object to the fact that Wells Fargo CEO Tim Sloan was paid $17.4 

million last year, the same year other regulators investigated and 

took actions on scandals relating to the bank’s auto lending, mortgage lending, and investment management practices? 

Mr. CLAYTON. Senator, I am not going to comment about a specific institution here in this forum. 

Senator MENENDEZ. Well, OK. So do you think Main Street investors might object to the fact that any CEO would be paid, you 

know, tens of millions of dollars after they faced all of those investigations and all of those consequences for fraudulent behavior at 

their institution? 

Mr. CLAYTON. I do think that investors in companies should have 

clear disclosure of what the senior executives of those companies 

are making, and they should have input through various engagement processes, including some of the processes that we have discussed here today. 

Senator MENENDEZ. So with that in mind—— 

Mr. CLAYTON. Senator, in a word—I am sorry. In a word, there 

should be accountability. 

Senator MENENDEZ. Good. Why is it then that the Commission 

has not made it a priority to finish congressionally mandated rules 

to rein in pay practices that put Main Street investors at risk? 

Mr. CLAYTON. You are speaking about the Dodd–Frank mandates 

around pay practices, I believe. 

Senator MENENDEZ. Yes. 

Mr. CLAYTON. Yes, I am aware of those. I keep track of the 

Dodd–Frank mandates. I am pursuing them, working with my fellow Commissioners. We proposed rules around some of those. We 

are reviewing the comments. We received a number of comments. 

Some of them raised very significant issues. 

Senator MENENDEZ. Can you give me a timeframe in which you 

would expect the Commission actually to be able to promulgate 

rules in this regard? 

Mr. CLAYTON. I have the hedging rule on our near-term agenda. 

I expect that in the near term. The others I cannot be as precise. 

Senator MENENDEZ. Well, let me just say that if we agree in 

principle that runaway executive pay which rewards risk taking 

can be harmful to investors and you have a mandate from Congress 

to do something about it, it just seems to me that this should be 

a priority. It falls right in line with your Main Street investor priorities, so I hope you will make it such at the end of the day, and 

I hope the next time you come before the Committee, we will have 

rules promulgated. 

Let me ask you one other question. I read your statement issued 

on Friday regarding the SEC’s difficulties assessing information 

about Chinese companies that are listed on U.S. exchanges. There 

are 224 companies listed on U.S. exchanges with a combined market capitalization of $1.8 trillion that are located in countries, primarily China, that make it difficult for U.S. regulators to review 

their financial reporting. This presents a major risk to U.S. investors who may assume that the financial reporting of these companies is in line with U.S. requirements. Moreover, it is fundamentally unfair for Chinese companies to take advantage of the 

13 

strength and liquidity of U.S. capital markets but do not have to 

play by the rules. 

The U.S.–China Economic and Security Review Commission recommended that Congress consider legislation providing authority 

to ban and de-list companies that have refused to sign reciprocity 

agreements with the Public Company Accounting Oversight Board. 

Despite the SEC and the Board’s best efforts to reach an agreement, it appears unlikely that Beijing will cooperate. 

Would such authority strengthen your hand in negotiations with 

your Chinese counterparts? 

Mr. CLAYTON. Let me say this, Senator: I think your characterization of where we are, where there are information barriers to us 

receiving what I would say is the same information and the 

PCAOB receiving the same information that we would expect to receive in other jurisdictions that exist today, yes. Are we working 

through those? Yes. I am not prepared to support a specific remedial action in this forum, but we need to make progress. 

Senator MENENDEZ. I will just close with this. We cannot con- tinue this process, $1.8 trillion, investors under your own previous 

statement about our other line of questions about transparency, 

should have transparency to know that these companies are living 

up to the standards for which investors rely upon to make investment decisions. 

Mr. CLAYTON. And that transparency is why we put the statement out. People should know where we sit today and know that 

we need to improve. 

Senator MENENDEZ. Yeah, but all I will say is that we do not 

know exactly what their accountability is. We just know that there 

is an accountability. So at the end of the day, you should—I would 

hope the Commission would embrace us giving you the tools to get 

the Chinese and other companies similarly situated to disclose. 

Thank you, Mr. Chairman. 

Senator BROWN. Senator Kennedy. 

Senator KENNEDY. Mr. Chairman, thanks for being here. I think 

you are doing a great job. 

Mr. Chairman, would you buy a bond issued by a State if you 

did not know whether they were broke or not? 

Mr. CLAYTON. No, I would not. 

Senator KENNEDY. OK. I read you gave a speech recently. I was 

reading it the other night. It was very good. One of your statistics 

says the issuers in States, municipalities, et cetera, who file either 

annual financial information or audited financial statements within 

12 months of their fiscal year do so on an average of 188 and 200 

days after the end of the fiscal year. So their financial statements 

are between 188 and 200 days left. Why is MSRB allowing that to 

happen? Are they doing anything over there other than standing 

around and sucking on their teeth? 

Mr. CLAYTON. What I will say is this—the reason I gave that 

speech is I think this is an area that needs to improve. The first 

step in improving it is to make sure that investors understand that 

the financial statements they are looking at in some cases are 18 

months old. 

Senator KENNEDY. Yeah, well, let me—— 

Mr. CLAYTON. That is pretty old. 

14 

Senator KENNEDY. Let us suppose that you are an individual investor and you want to research the bonds. Aside from the fact 

MSRB, which is supposed to regulate themselves, you want some 

information about the bond issue or about the State. Are you aware 

MSRB charges 60,000 bucks to download bulk data? 

Mr. CLAYTON. Actually, I was not aware of that, Senator. 

Senator KENNEDY. Would you look into that for me? 

Mr. CLAYTON. I would be happy to. 

Senator KENNEDY. OK. Do you need disgorgement of ill-gotten 

gains to do your job? 

Mr. CLAYTON. I think you are referring to the effects of the 

Kokesh Supreme Court decision. 

Senator KENNEDY. Yes. 

Mr. CLAYTON. I believe that the Kokesh Supreme Court decision—we need some help. We need some help, because what it did 

was it said basically Ponzi schemes and other types of frauds like 

that that go on beyond 5 years, we are not able to reach back and 

get the money back for people who were a victim of those schemes, 

because disgorgement was viewed in that case as a penalty subject 

to the 5-year statute of limitations. 

Senator KENNEDY. And you do not have that authority now? 

Mr. CLAYTON. We do not have the authority in those—— 

Senator KENNEDY. Only Congress can give you that authority. 

Mr. CLAYTON. I am not going be a lawyer here, but yes. 

Senator KENNEDY. OK. Let me ask you one final question. Are 

you familiar with the Stanford case where Allen Stanford stole $7.2 

billion in a Ponzi scheme from about 21,000 people? 

Mr. CLAYTON. Yes. 

Senator KENNEDY. OK. Well, we are doing great getting the 

money back from Bernie Madoff and his people. We have collected 

over 75 cents on the dollar. We are not doing as well with Stanford. 

We have clawed back $431 million, and the lawyers took $226 million. 

SEC took a position to oppose a motion to eliminate the restriction to file involuntary bankruptcy which will help the people get 

their money back. Why did the SEC do that? And would you reconsider? I know I am catching you cold. Just trust me. It would be 

a good idea. 

[Laughter.] 

Mr. CLAYTON. How about I say I trust you? 

Senator KENNEDY. OK. I am going to yield back 1 minute and 

17 seconds, Mr. Chairman. 

Chairman CRAPO [presiding]. Thank you, Senator Kennedy. 

Before I go on, for some of those who have just arrived, we have 

a vote at 11 o’clock, and I am encouraging all Members to shrink 

down their questioning. Three of them have given back a minute 

or two—counting me, four of them have given back a minute or 

two. So you do not have to, but please help us get there. 

Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. It is good to see you 

again, Chairman Clayton. 

As you know, right now investment advisers are subject to what 

is called a fiduciary standard. That means they are legally required 

15 

to put the financial interests of their clients ahead of their own interests. 

Brokers who get a commission for every trade that they make 

follow different rules, and, in fact, they can recommend a product 

that boosts their own commission even if it is not the best deal for 

the customer. And we also know that brokerage firms artificially 

create all sorts of perverse incentives to encourage brokers to make 

certain recommendations that are very profitable for the firm or for 

the broker, even if they are not real good for the customers. So that 

is a problem, and in April, the SEC proposed some new rules for 

brokers. 

Now, Mr. Clayton, as you have told me before, the idea behind 

these new rules is to help regular retail investors—you like to call 

them ‘‘Mr. and Mrs. 401(k)’’—to make informed choices, right? 

Mr. CLAYTON. That is one component of it. There are several 

components of the rules. 

Senator WARREN. OK, but it is trying to help investors make informed choices, right? That is what this is about. 

Mr. CLAYTON. Absolutely. 

Senator WARREN. OK. So one option would simply be to make 

brokers subject to the same fiduciary standard that investment advisers are subject to, but you did not do that. Instead, the SEC’s 

proposal says that brokers have to act in the best interests of the 

client, but then you never define what ‘‘best interest’’ actually 

means. 

So here is where I am stuck. For the proposal to help customers 

make good decisions, they need first to understand the difference 

between a broker and an investment adviser; and, second, how the 

fiduciary standard for investment advisers is different from the 

best interest standard for brokers, which is something you do not 

define. Do I have that right so far? 

Mr. CLAYTON. I do not think so. I think we are pretty clear on 

what the best interest standards—and we are going to be clear 

on—— 

Senator WARREN. You are saying you do define it in the rules? 

Mr. CLAYTON. The best interest standard as we have proposed 

means that you as a—— 

Senator WARREN. I am sorry. Is it defined in the rules? 

Mr. CLAYTON. Is there a specific definition that says this is what 

it means? No. But there is no specific definition that says this is 

what the investment adviser standard means. 

Senator WARREN. So I just want to be clear then. Anybody who 

is trying to figure this out first has to figure out do you have a 

broker or an investment adviser, and then, second, they have to figure out, depending on which one you have, what the difference is 

between the fiduciary rule and the best interest test. Is that right? 

Otherwise, you cannot—— 

Mr. CLAYTON. Almost, because you also have to understand the 

relationship. You have got it right, but there are three components 

to it. The adviser relationship, the reason it is important to understand who you are dealing with, whether it is a broker or an adviser, is the adviser relationship is a portfolio relationship. 

Senator WARREN. OK. You have got two, and you are just telling 

me it is even more complex than that. All I want to get to—— 

16 

Mr. CLAYTON. That is where we sit today. 

Senator WARREN. ——you cannot start—I know. And we could 

have fixed that by just giving everybody the same rule, but we did 

not. So here is the question: You have got to start with the difference between an investment adviser and a broker. The SEC has 

done a study on this, and your own data show that a lot of investors have no idea what the difference between brokers and investment advisers is and the legal standards that are different for each 

of them. Your Office of the Investor Advocate commissioned a study 

of whether investors could figure out these differences based on the 

standard disclosures that you gave them, and the bottom line was 

they cannot. 

I do not have time to go through every example in the study, but 

I picked one out. One participant told an interviewer, after reading 

side-by-side descriptions of the best interests and the fiduciary 

standards, ‘‘I do not know. It is basically the same language, but 

the same, they just kind of word it differently. Yeah, so it is pretty 

much the same.’’ 

But, of course, the standards are not the same, which is the 

whole point here. When your own study shows that disclosures do 

not work to help regular investors make informed decisions, will 

you move away from a disclosure-based approach in your final rule 

and just adopt a uniform fiduciary standard for both advisers and 

brokers as Congress instructed in Section 913 of Dodd–Frank? 

Mr. CLAYTON. That is a good summary of where we are. 

Senator WARREN. Good. Thank you. 

Mr. CLAYTON. Let me tell you what we are doing. It is very good. 

Let me tell you what we are doing. The adviser standard—and I 

am going to call it the baseline adviser standard because advisers 

are allowed to contract around this standard. It is not well known. 

This is something that we want people to understand. The baseline 

adviser standard is the adviser cannot put their interests ahead of 

the client’s interests. Now, they are able to say, you know, but I 

am going to do these things, and within informed consent they can 

cut back on that standard. That is not well understood. We want 

that to be understood. But on the broker side, the fundamental 

duty is going to be that the broker cannot put her or his interests 

ahead of the client’s. So it is the same, but it is a different—— 

Senator WARREN. Well, if it is the same—— 

Mr. CLAYTON. ——type of relationship. 

Senator WARREN. Let me suggest, Mr. Chairman, if it is the 

same, just use the same words. 

Mr. CLAYTON. We may do that. 

Senator WARREN. Because when you are not using the same 

words and, in fact, trying to give a description so that people have 

to sort out which of the two kinds of people they are dealing with 

and how the standards differ from each other, it means the disclosure is not working. 

Look, we have had study after study after study that shows that 

pages of disclosures do not work. And even if people read the disclosures, they cannot make heads nor tails from it. Now your own 

study reaches exactly the same conclusion. You know, the inference 

I draw from this is that we need a clear, uniform fiduciary standard for advisers and brokers. It is the only way to make sure that 

17 

people who are trying to save for their kids’ college education or 

their retirement are getting the advice that is best for them, instead of what is most profitable for the person giving the advice. 

Mr. CLAYTON. I believe—oh, sorry. 

Senator WARREN. OK. 

Chairman CRAPO. We need to shut it down. 

Senator WARREN. Thank you, Mr. Chairman. 

Mr. CLAYTON. OK. Thank you. 

Chairman CRAPO. Senator Corker. 

Senator BROWN. I just want to thank Senators Donnelly and 

Corker for their service on this Committee, so thank you, Joe, very 

much. 

Chairman CRAPO. And I join in that. 

Senator CORKER. Thank you. It has been a great privilege. It 

really has. 

I am going to be very brief and defer to Senator Cotton because 

I know the Chairman and Ranking Member want to have this end 

at an appropriate time, and we have got a lot of other things happening. I have had the opportunity to get to know our Chairman, 

both prior to him being confirmed and throughout the process. I 

just want to say I am really proud of what he is trying to do at 

the SEC. I am proud of his leadership. I know that he is acting in 

an independent manner, which I appreciate very much, and I wish 

him well as he continues, and all those on the Committee as you 

continue to wrestle with issues relative to our financial system. 

And with that, thank you, and I will defer to Cotton. 

Chairman CRAPO. Thank you. 

Senator Cotton. 

Senator COTTON. Did not know we get to work that way. Thank 

you, Senator Corker. 

Chairman Clayton, I want to discuss with you the SEC gag rule 

on settlements. It was addressed in a Wall Street Journal opinion 

piece on November 14th. Here is how Judge Jed Rakoff from the 

Southern District referred to them in 2011: ‘‘The result is a stew 

of confusion and hypocrisy unworthy of such a proud agency as the 

SEC. The defendant is free to proclaim that he has never remotely 

admitted the terrible wrongs alleged by the SEC, but by gosh, he 

had better be careful not to deny them either. Here an agency of 

the United States is saying, in effect, although we claim that these 

defendants have done terrible things, they refuse to admit it, and 

we do not propose to prove it, but will simply resort to gagging 

their right to deny it. The disservice to the public inherent in such 

a practice is palpable.’’ 

Would you explain to the Committee what public interest the gag 

order on discussing settlements with the Commission serves? 

Mr. CLAYTON. It has been an effective means to reach a settlement that is in the interests of the public. Let me just say that if 

we can settle matters quickly, we can move on to look at other matters. And the no-admit/no-deny approach has enabled us to get to 

settlements, to get people their money back, get bad actors out of 

the marketplace, and draw a line under that matter. So it has been 

an effective means of pursuing remedies. 

18 

Senator COTTON. One might also say it allows a company and an 

agency who have both failed in a particular matter to conceal that 

failure from the public as well. 

Mr. CLAYTON. It is not the right approach in every matter. 

Senator COTTON. So there is a wrinkle in the roll that says if a 

defendant who has reached a settlement and is under one of these 

orders testifies in a court of law that he is no longer bound by that 

gag order, which implies that the gag order might require him to 

say something untruthful, what are your thoughts on that wrinkle? 

Mr. CLAYTON. I think that is a—how would I say this? It is a result of the unique nature of testifying in those types of situations. 

Senator COTTON. So it is OK to have defendants who have 

reached a settlement with the SEC to say things to the public that 

might be untruthful but not to say them in court? We are talking 

about a prior restraint on speech that is also content-based, the 

most disfavored kind of regulations under Supreme Court First 

Amendment precedent. They require a compelling Government interest in the most narrowly tailored means. 

Mr. CLAYTON. Look, we all know that the First Amendment, you 

know, does not permit all speech without sanction. You cannot 

commit fraud, you know, using words. I think this was developed 

in part to restrict somebody who had done prior wrong or we think 

had done prior wrong from telling people, ‘‘Pay no attention to 

that.’’ And when you are dealing with somebody in the securities 

industry, their history is something that is of relevance. 

Senator COTTON. Well, they can say that they did not commit 

what was alleged against them. They just cannot deny the allegations that were made. I know this is not a Jay Clayton initiative. 

It goes back since before I was born, but it has come under criticism for a very long time. I mean, do you think that this gag order 

has First Amendment problems? You personally. 

Mr. CLAYTON. Me personally? I think that we have a long history 

of people agreeing to restrict certain things that they can say in the 

commercial arena. 

Senator COTTON. OK. My time has almost expired. Thanks for 

the exchange. I think the SEC probably—— 

Mr. CLAYTON. I did not know this was going to be a con law 

class. I am struggling. 

Senator COTTON. I think the SEC should probably reconsider it. 

I mean, it was passed at a time in 1972 when First Amendment 

precedent was much different and, frankly, more favorable to the 

Government than it probably should have been. I understand the 

points that you are making about public interest, but I do think it 

is quite overbroad. It is not at all narrowly tailored anymore, and 

it can undermine other legitimate public interest. 

Mr. CLAYTON. I understand. 

Senator COTTON. Thank you, Mr. Clayton. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. Welcome, Mr. 

Chairman. 

I want to pursue some of the questions Senator Reed had on 

stock buybacks because the claim that many made at the time that 

the big tax cut was passed was that companies were going to use 

19 

all this extra money that they got from their tax cuts to invest in 

more plant and equipment and wages increasing for their workers. 

And the evidence is overwhelming that, in fact, they are using that 

money for stock buybacks. We are up to $800 billion in stock 

buybacks today since the passage of the bill. 

Now, we can all debate the merits of a stock buyback, but as I 

understand your testimony, you agree that if executives are using 

stock buybacks to elevate the price of their stock and then quickly 

cash out their own compensation, that would be a problem from 

your perspective. Am I understanding you correctly? 

Mr. CLAYTON. Let me be clear on what I said. Senator Reed and 

also others said, you know, if the motivation is driven by a compensation scheme, I think that is something—— 

Senator VAN HOLLEN. So let me ask you this—— 

Mr. CLAYTON. I think that is something compensation committees ought to—— 

Senator VAN HOLLEN. Well, let me ask you this: So there is 

mounting evidence that executives are cashing out more frequently 

after a stock buyback than before. Well, I mean, there has been 

evidence that, in fact, twice as many companies have insider selling 

in the 8 days after a buyback announcement as sell on an ordinary 

day. Would that trouble you if that was a pattern? 

Mr. CLAYTON. I saw that stat, and it is kind of interesting. The 

question there is: Are the announcements coincident for the window where they are actually permitted to sell their stock? So, you 

know, I think a little more work needs to be done on that. So if 

the only time you can sell as an executive is right after earnings 

are announced, which is most—then if you needed to sell as part 

of your planning, it is going to be coincident—— 

Senator VAN HOLLEN. I just—it is possible the data is wrong, but 

if the data is correct—— 

Mr. CLAYTON. No, I think the data are correct. 

Senator VAN HOLLEN. ——you are finding though—but those—in 

other words, if it is happening a lot more frequently in this period 

in the 8 days after stock buybacks, I think that would be a problem. But let me just ask you this: Would you be willing to host a 

roundtable discussion to look into this issue? 

Mr. CLAYTON. Let me say this: I am happy to continue to discuss 

this issue. I do not want to commit to a roundtable, but the SEC’s 

role in this is clearly something that people are focused on. I want 

to be as clear as I can about what our role is, so I am happy to 

continue the conversation to bring clarity—— 

Senator VAN HOLLEN. But I understood—and a number of us 

wrote you a letter on this. I understand your position with respect 

to decisions that have to be made by corporations for the benefit 

of their shareholders. But what we appear to be seeing is a pattern 

where more executives are cashing out when they have had stock 

buybacks, which boosts the price. And that would be decisions 

made for their own benefit as opposed to the stockholders. So I 

would like to pursue this—— 

Mr. CLAYTON. I would be happy to. 

Senator VAN HOLLEN. ——because you have, as you know, 

hosted a roundtable on something which I think is a lot less of a 

priority, which is proxy shareholding. And, you know, where you 

20 

have chosen to focus your efforts I think is a little bit troublesome. 

But let me just ask you this on shareholder voting, proxy shareholder voting, because we had an earlier hearing on this, and I 

mentioned a statement from T. Rowe Price, which is a Marylandbased company, that is on both sides of the shareholder proxy 

issue. They are an institutional client to proxy advisory firms, but 

they are also an issuer where others use proxies to decide whether 

to purchase—how to cast their votes with respect to T. Rowe Price. 

And what they say very clearly in this letter is that they think that 

the requirements that proxy firms run their advice or proposals or 

concerns through the corporations first would actually significantly 

diminish the value of that advice to T. Rowe Price. 

Do you agree that we should not be dictating to the market that 

these proxy advisers have to somehow show the executives or the 

corporations their information before they give it to the clients who 

are paying for it? 

Mr. CLAYTON. So I am certainly not wedded to that method of 

improving the process. There is an issue in the process, which is 

the proxy advisory firm comes out with their analysis, and the company wants to respond, and you have to look all over the place. It 

would be nice if you could see the responses side by side, or something else like that. But I am not wedded to running it through the 

company before it is published. 

Senator VAN HOLLEN. OK. I just find it curious. We have had 

people advocating here that a firm like T. Rowe Price just does not 

know what it is doing and it needs this extra step in order to make 

good decisions. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. We have 10 minutes left in the 

vote. I will be glad to recess and come back for those that want 5 

minutes, but I understand that a number of you are willing to 

avoid that by just going a couple of minutes. 

Senator MORAN. Mr. Chairman, I will ask just one question. 

Chairman CRAPO. OK. Go ahead. 

Senator MORAN. Chairman Clayton, thank you for being here. 

The Consolidated Audit Trail will be the second largest database 

in the world, and it will be a repository for both personally identifiable information and sensitive trade data. As such, the CAT will 

be a major target for cybercriminals and other bad actors. Brokerdealers will be required to report consumers’ personally identifiable 

information to the CAT and then rely upon the security measures 

set up by CAT operators. 

What is the SEC doing to require that CAT operators will provide prompt and accurate notification of a data breach? And how 

will the SEC assure that broker-dealers are not held liable by their 

customers for data breaches caused by the CAT? 

Mr. CLAYTON. What I can tell you, Senator, is I think all three 

significant issues in your question are things we are focusing on, 

including whether retail customer PII is actually going to go into 

the CAT or whether we are going to do something, a ‘‘hashing’’ is 

the technical term, and that is about as much as I know about 

hashing, to ensure that the data that goes into the CAT is not PII 

for those retail investors. And in terms of issues around liability, 

21 

I am not going to speak about who owes what to whom and what 

the law applies, but we are sensitive to those issues. 

Senator MORAN. With the time constraints, perhaps we can have 

this conversation in my office or your office as well. 

Mr. CLAYTON. Happy to. 

Senator MORAN. Thank you, Mr. Chairman. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Thanks, Senator Moran. 

Senator Schatz. 

Senator SCHATZ. Thank you, Mr. Chairman. Thank you, Chairman, for being here. 

I want to follow up on a conversation we had just about a year 

ago. The SEC issued guidance in 2010 on climate risk. Many in the 

investment community like BlackRock and Bloomberg have called 

these disclosures inadequate. Currently, less than half of America’s 

largest companies even make these disclosures. In October, a group 

of investors representing $5 trillion in assets, 15 leading securities 

law professors sent a petition to the SEC arguing that improved 

disclosure rules would increase market efficiency and that the SEC 

has the authority to issue such rules. Yesterday a group of 415 investors that represent $32 trillion in 

assets wrote that Governments need to act on climate change, and 

they specifically say it is vital that Governments commit to improve climate-related financial reporting standards. 

I thought we had a good conversation about this. I thought you 

expressed a willingness to work on this. I have seen no evidence 

that you are working on this, and what little evidence I have seen 

goes to the contrary in terms of the shareholder proposals which 

are putatively not about climate; it is just that every example given 

in raising thresholds for shareholder action is about climate. 

So what are you going to do to make sure that publicly traded 

companies disclose climate risk? 

Mr. CLAYTON. So our Division of Corporation Finance, which reviews public company filings, this is one of the issues that they are 

reviewing filings for. They make company-specific comments, ask 

company-specific questions. We are doing that. I have been in discussions with our head of Corp. Fin., Bill Hinman, about whether 

we should do more, what that would be. 

Senator SCHATZ. They are sandbagging, and I will leave it there. 

We will follow up for the record, and I would like a meeting in person. I understand that they are working in good faith, but they 

view this as an ideological question, and 8 years later, this is very 

clearly an issue of economics. And there was a point at which you 

could say, well, you know, we cannot measure this, we cannot know 

this, this is not short term. None of that is true anymore. All of 

this is proveably an economic question, and in the interest of 

time—I do not mean to cut you off—I will yield back. 

Chairman CRAPO. Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you. Chairman, it is good to see 

you again. I want to jump back to the best interest standard that 

you were talking with Senator Elizabeth Warren about. First of all, 

I supported the Department of Labor’s fiduciary standard, and if 

you do not know, Nevada is the first, I think, State in the country 

that passed a State statute for a fiduciary requirement for brokerVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
22 

dealers. I am curious with respect to the proposed regulation that 

was just introduced by the SEC. Under that proposed regulation, 

can brokers create sales incentives for recommending certain products to its customers, to their customers? 

Mr. CLAYTON. The short answer to your question is some sales 

incentives, like growing assets under management or total assets, 

you would think you would compensate somebody for bringing in 

new customers and growing assets just like happens in the investment advisory space. But there are some activities like that that 

I believe—and I am speaking for myself, not for the Commission— 

That I believe are inconsistent with—not putting your interests 

ahead of the client’s. High-pressure products, specific sales contests, I have been clear, they do not work for me. Get this out the 

door. 

Senator CORTEZ MASTO. And I agree with you because—in the 

interest of time, I agree with you, but isn’t it true that just any incentive works against the best interest of the client? 

Mr. CLAYTON. Well, I do not think so because if what you are doing is saying to a broker, ‘‘Hey, if you now have $100 million, for 

example, and you grow it to $200 million, you should make more 

money.’’ I think that is OK. That is the way the investment advisory firm works. If you are managing a pension plan for someone 

and you get another pension plan to manage, you may get paid 

more. I think that is OK. 

Senator CORTEZ MASTO. OK. Let me ask you this: Does the proposal—can brokers create bonuses for recommending certain products to customers under this proposal? 

Mr. CLAYTON. I think it depends on the structure. 

Senator CORTEZ MASTO. Again, there is another opportunity for 

somebody to make money that really, in reality, they are supposed 

to be looking at the best interest of the client, but there is now an 

incentive for them to make money. And I have always found—and 

I was a former Attorney General—that when you put those incentives there, it really erodes looking out for the best interest of the 

client, and that is my concern. 

So let me jump to one final thing because in the conversation 

with Senator Warren, you talked about the potential—did I hear 

you correctly that when she talked about defining the best interest 

standard and looking out for that fiduciary relationship, you said 

that this proposal may use the same words for defining a fiduciary? 

Is that correct? What did you mean by that? 

Mr. CLAYTON. What I mean is what I just said to you, that the 

bedrock principle is that I cannot put my interests ahead of my client’s interests. 

Senator CORTEZ MASTO. But that to me is pretty clear, and so 

that means no bonus, no incentive, nothing should be looking out 

for your own interests over somebody else’s. That is my concern. 

Mr. CLAYTON. They have to get paid. 

Senator CORTEZ MASTO. Well, that is different. That is different. 

Mr. CLAYTON. And I have engaged a lot with investors around 

this just to hear what they think, and they recognize that people 

should get paid. What they do not want are hidden incentives or 

incentives that are clearly inconsistent with making a recommendation that is in the interest of the client. 

23 

Senator CORTEZ MASTO. OK. In the interest of time, I appreciate 

you coming here today. Thank you. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Senator Jones. 

Senator JONES. Thank you, Mr. Chairman. Chairman Clayton, 

thank you for coming today. 

Real quickly, you have been outspoken about the need for disclosures for companies that face unpredictable risk, such as Brexit, 

which seems to be becoming more unpredictable by the hour. Cybersecurity is also another one. Recently, the SEC issued guidance 

on cybersecurity disclosures, and I am hoping that the SEC does 

not lose focus. 

What I want to ask you, there were a couple of your colleagues 

that thought that the guidance did not quite go far enough, and I 

am just wondering if you could talk briefly about what you are seeing from companies after the guidance was issued and if there are 

other improvements for these disclosures that you think might be 

prudent going forward. 

Mr. CLAYTON. I have discussed those issues with my colleagues 

and understand—I think that they understand how difficult it 

would be to be more precise. For a long time, I thought that disclosure was not where it should be in terms of what the real risk was. 

I think we have seen improvement. We have seen improvement in, 

OK, here is the general risk, and we have seen some improvement 

in reporting when you have an issue. And when I say the general 

risk, how that general risk applies to your company. I would like 

to see more disclosure around what companies are doing to minimize that risk. Are we collecting less data? Are we looking at how 

we operate our business so that, you know, you are less susceptible 

and are now not just looking inside the company, but looking at 

your vendors and suppliers and data that comes in from the outside that, if corrupted, creates a risk for you. It is increasing in 

terms of sophistication, but we have a ways to go. 

Senator JONES. This can be just yes or no. I am assuming it is 

a work in progress for the SEC. 

Mr. CLAYTON. This is a work in progress for our economy. 

Senator JONES. OK. That is all. Thank you, Mr. Chairman. 

Thank you, Chairman Clayton. 

Mr. CLAYTON. Thank you. 

Chairman CRAPO. Thank you, Senator Jones. 

That does wrap up the questioning. Thank you for being here 

today, Mr. Chairman. We appreciate the work that you are doing. 

For Senators who wish to submit questions for the record, those 

questions are due on Tuesday, December 18th, and I encourage 

you, Mr. Chairman, to respond to them promptly. 

This is our last hearing for this Congress. We have had a lot of 

productive hearings, and I thank all of our Senators for making 

that happen. I especially want to, as has already been done, thank 

Senators Corker, Heller, Heitkamp, and Donnelly for all the work 

they have done on this Committee. We will miss them. 

With that, this hearing is adjourned. 

[Whereupon, at 11:16 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

24 

PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO 

Today we will receive testimony from Securities and Exchange Commission Chairman Jay Clayton regarding the work and agenda of the SEC. 

Your appearance before the Committee is essential to our oversight of the SEC. 

I thank you for your willingness to testify today. 

The SEC has a critical mission to protect investors; maintain fair, orderly, and 

efficient markets; facilitate capital formation; and enforce securities laws. 

The SEC plays an important role in public confidence and trust in our Nation’s 

capital markets. 

It provides information to investors to ensure that as Americans prepare for their 

futures, they have the information necessary to make informed investment decisions. 

I commend the SEC for its continued work to advance these missions. 

Last week, this Committee held a hearing to discuss the appropriate role of proxy 

advisory firms, the shareholder proposal process and the level of retail shareholder 

participation. 

Many Members expressed interest in continuing the discussion on the appropriate 

relationship between proxy advisory firms and market participants as it relates to 

shareholder proposals and corporate governance. 

I am concerned about the misuse of the proxy voting process and other aspects 

of corporate governance to prioritize environmental, social, or political agendas over 

the economic interests of end-investors. 

Last week, you stated your intent to address aspects of our proxy system, including proxy ‘‘plumbing,’’ ownership, and resubmission thresholds for shareholder proposals and proxy advisory firms. 

Many of the rules governing our proxy system have not been examined for decades, and I encourage the SEC to take an aggressive approach assessing the scope 

and appropriateness of previous regulatory actions. 

Capital markets are vital to facilitating job growth and expanding American investment opportunities. 

This Committee worked hard in the 115th Congress to pass a number of bipartisan securities and capital formation bills. 

I will continue to work with Members to identify additional legislative proposals 

that encourage capital formation, and reduce burdens for small businesses and communities. 

The SEC has also taken a number of steps this year to make it easier for emerging companies to go public while not discouraging the availability of capital in the 

private market. 

Additionally, this year the SEC proposed Regulation Best Interest and a related 

interpretation to establish standards of conduct for broker-dealers and investment 

advisers. This is a significant step forward, and I look forward to seeing a final rule 

in the near term. 

Finally, the SEC has been proactive in addressing cryptocurrencies and coin offerings. 

For example, the Enforcement Division created a new Cyber Unit this year, which 

led efforts to counter fraud against retail investors involved in initial coin offerings 

and brought charges against a bitcoin-denominated platform operating as an unregistered securities exchange. 

I look forward to receiving updates on these and other SEC initiatives, including 

your views on when we can expect final rules in these areas. 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Thank you Chairman Crapo, and welcome to Chair Clayton. 

As I believe this will be the last Banking Committee hearing for this Congress, 

I would like to express my thanks and appreciation for the work of Senators 

Heitkamp, Donnelly, Corker, and Heller over the years. 

Chair Clayton, we’ve discussed the SEC’s enforcement program in previous hearings and in our recent meeting. As you’ve highlighted, the SEC has worked hard 

to return money to harmed investors. I agree that is an important goal, but enforcement can’t begin and end with protecting wealthy investors. 

Ten years ago today, Bernie Madoff was arrested and his giant Ponzi scheme was 

exposed. There’s no doubt that Ponzi schemes still exist, and your enforcement report shows the SEC is focused on finding them and punishing the wrongdoers. 

But, we also know that a decade ago, Bernie Madoff was far from the biggest 

threat to most families. It was Wall Street firms that had just wrecked our economy. 

And just as the SEC will continue to pursue Ponzi schemes, it must also continue 

25 

1The views expressed in this testimony are those of the Chairman of the U.S. Securities and 

Exchange Commission and do not necessarily represent the views of the President, the full Commission, or any Commissioner. 

to pursue complex cases against the big banks when they break the rules and 

threaten families’ homes and savings. 

The big banks have not turned into angels over the past 10 years. Last month, 

German authorities conducted a 2-day raid of Deutsche Bank’s headquarters in a 

money laundering and tax evasion investigation. 

Last year, both the Federal Reserve and New York State regulators imposed fines 

totaling more than five hundred million dollars on Deutsche Bank’s U.S. entity, for 

anti– money-laundering violations. And Deutsche Bank is not alone—similar problems persist at other banks. 

Looking at your strategic plan, I frankly see a lot missing—there’s nothing about 

stock buybacks, and nothing about excessive corporate debt. 

Take a look at what has happened since the Republican tax overhaul. Since last 

year, corporations have announced more than one trillion dollars in stock buybacks. 

To take one example, GM has spent more than 10 billion dollars on stock 

buybacks since 2015, and last month it announced it’s laying off 14,000 workers and 

closing five plants, including the Chevy Cruze plant in Lordstown, Ohio. At the 

same time, it’s expanding production in Mexico. 

The priorities of these corporations are clear—buying back shares can boost a 

company’s stock price, which can mean even bigger bonuses for corporate executives. 

Investing in a company’s workers supports the long-term health of the company— 

but that’s not what Wall Street rewards. 

But there’s nothing intrinsic to our economy about stock buybacks. The SEC rule 

facilitating buybacks was adopted 36 years ago, and since then, the use, size, and 

frequency of stock buybacks has increased dramatically. 

My colleagues and I have asked you to take a hard look at that rule. 

It is time to question whether it is too easy for companies to buy back their 

shares. The GM case shows us the risks to workers and communities when companies think only about short-term profits. 

We should also be looking at the record levels of risky corporate debt and leveraged loans, and how that debt is packaged into collateralized loan obligations—the 

complex securities that allow investors to trade pools of loans. 

The Federal Reserve and the OCC are looking at banks’ exposure to leveraged 

loans, but they say the risks are manageable and they are not worried. 

We’ve heard that one before—it was a little over 10 years ago, before the economy 

came crashing down. 

Leveraged lending and CLO investors include hedge funds, mutual funds, and 

other market participants under SEC oversight. As the shadow banking market 

plays a larger role in leveraged lending, watchdogs can’t just focus on the big banks. 

It’s your job to worry when it seems like there is nothing to worry about. That’s 

what consumers and investors expect, so that risks don’t build up across the financial system. 

The SEC needs to be closely watching this market—not just to make sure disclosures and credit ratings are adequate, but to complement the work of the banking 

regulators. We know the financial system has become more interconnected and that 

systemic risks are more likely. 

Main Street cannot afford for you to stand by watching Wall Street greed grow 

out of control. And any ‘‘strategic plan’’ for any agency guiding our economy needs 

to focus on the American workers who drive growth—not just wealthy investors. 

Thank you Mr. Chairman. 

PREPARED STATEMENT OF JAY CLAYTON 

CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION

DECEMBER 11, 2018 

Chairman Crapo, Ranking Member Brown, and Senators of the Committee, thank 

you for the opportunity to testify before you today about the work of the U.S. Securities and Exchange Commission (SEC or Commission or Agency). Chairing the Commission is a great privilege, and I am fortunate to be able to observe firsthand the 

incredible work done by the agency’s almost 4,500 dedicated staff, approximately 41 

percent of whom are outside of Washington, DC, in our 11 regional offices. 1

Our people are our greatest assets, and they are our direct connection to the investors we serve. None of the important work described in this testimony would 

26 

2See U.S. Sec. and Exch. Comm’n Strategic Plan: Fiscal Years 2018–2022 (Oct. 2018), available at https://www.sec.gov/files/SEClStrategiclPlanlFY18-FY22lFINAL.pdf. 3 Board of Governors of the Federal Reserve System, 2016 Survey of Consumer Finances 

(2016). 4See Jesse Bricker et al., ‘‘Changes in U.S. Family Finances From 2013 to 2016: Evidence 

From the Survey of Consumer Finances’’, Federal Reserve Bulletin, vol. 103 (September 2017), 

available at https://www.federalreserve.gov/publications/files/scf17.pdf; see also Rel. No. 34- 

83063, Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in 

have been achieved without the solutions-oriented attorneys, accountants, examiners and economists at the SEC, whose work, in turn, is made possible thanks to 

the important, often behind-the-scenes work of the agency’s administrative and operations personnel. The agency’s supervisors and program managers also play a critical role in ensuring effective and efficient operations and activities. 

Across the SEC, we recognize the importance of our capital markets to the U.S. 

economy and millions of diverse American households. Our people are skilled and 

committed. They accomplish a great deal with the resources at their disposal, and 

they are proud to serve. This testimony embodies the record of their work over the 

past year in pursuit of the SEC’s tripartite mission of protecting investors, maintaining fair, orderly, and efficient markets and facilitating capital formation. 

New Strategic Plan 

We recently released our Strategic Plan for 2018–2022, which outlines three goals 

that will guide the work of the SEC moving forward. 2 I hope you will agree that 

we have made meaningful progress over the past year toward satisfying these goals. 

Our first goal, which has been a priority of mine since I became Chairman, is focusing on the interests of our long-term Main Street investors. The past year has 

presented many opportunities for me, my fellow Commissioners and SEC staff to 

interact directly with investors from across the country. Those discussions allowed 

us to better answer the question we ask ourselves every day: how does our work 

benefit the Main Street investor? Each proposal or action we take is guided by that 

principle. 

Our second goal—to be innovative and responsive—reflects the changing nature 

of our markets. As technological advancements and commercial developments have 

changed how our securities markets operate, the SEC’s ability to remain an effective 

regulator requires that we continually monitor the market environment and adapt 

our rules, regulations and oversight. This maxim applies to nearly every facet of 

what we do at the SEC. For example, it drove the establishment of a Cyber Unit 

in the Division of Enforcement (Enforcement or Division) in September 2017, a 

Fixed Income Market Structure Advisory Committee in November 2017, and more 

recently, our new Strategic Hub for Innovation and Financial Technology (FinHub). 

Our third goal—elevating the agency’s performance through technology, data analytics and human capital—embodies our commitment to maintaining an effective 

and efficient operation. We are using technology, analyzing data and promoting information-sharing and collaboration across the agency, while also maintaining the 

work environment that has resulted in consistent high levels of employee satisfaction. Maintaining a high level of staff engagement, performance and morale is critical to our ability to execute the SEC’s mission. We are committed to continued investment in both new technology and human capital. 

The Commission’s Fiscal Year 2018 Initiatives and Upcoming Agenda 

I am proud of what our people have accomplished in Fiscal Year (FY) 2018 and 

look forward to building on this work as we continually review and recalibrate our 

approach to accomplishing the SEC’s mission. Overall, America’s historic approach 

to our capital markets has produced a remarkably deep pool of capital with unprecedented participation. It is our Main Street investors and their willingness to commit 

their hard-earned money to our capital markets for the long term that have ensured 

that the U.S. capital markets have long been the deepest, most dynamic and most 

liquid in the world. Their capital provides businesses with the opportunity to grow 

and create jobs, and supplies the capital markets with the funds that give the U.S. 

economy a competitive advantage. In turn, our markets have provided American 

Main Street investors with better investment opportunities than comparable investors in other jurisdictions. 

To place this historic achievement in perspective, I note that the United States 

has approximately 4.4 percent of the world’s population, yet the U.S. markets are 

the primary home to 56 of the world’s 100 largest publicly traded companies, and 

U.S. households have over $22.4 trillion invested in the world’s equity markets. 3

More significantly, at least 52 percent of U.S. households are invested directly or 

indirectly in our capital markets. 4 This level of retail investor participation stands 

27 

Retail Communications and Restrictions on the use of Certain Names or Titles (Apr. 18, 2018) 

(for statistics except the mutual fund data); 2018 Investment Company Fact Book (mutual fund 

statistics), available at https://www.ici.org/pdf/2018lfactbook.pdf. 5The agenda for 2019 rulemaking was published in the Federal Register on August 7, 2018, 

available at https://www.reginfo.gov/public/do/eAgendaMain?operation=Operation-Get-AgencyRule-List¤tPub=true&agencyCode=&showStage=active&agencyCd=3235.; see also Appendix B. 6See Appendix A. Over the past 10 years, the Commission completed, on average, approximately one-third of the rules listed on the near-term agenda. 7See Press Release 2018-22, ‘‘SEC Adopts Statement and Interpretive Guidance on Public 

Company Cybersecurity Disclosures’’ (Feb. 21, 2018), available at https://www.sec.gov/news/ 

press-release/2018-22. 8 Rule 701—‘‘Exempt Offerings Pursuant to Compensatory Arrangements’’, 83 Federal Register 34,940 (July 24, 2018); see also, ‘‘Concept Release on Compensatory Securities Offerings 

and Sales’’, 83 Federal Register 34,958 (July 24, 2018). 9See Press Release 2018-202, ‘‘SEC Provides Regulatory Relief and Assistance for Hurricane 

Victims’’ (Sept. 19, 2018), available at https://www.sec.gov/news/press-release/2018-202. 10See Press Release, ‘‘Commission Staff Provides Regulatory Guidance for Accounting Impacts of the Tax Cuts and Jobs Act’’ (Dec. 22, 2017), available at https://www.sec.gov/news/ 

press-release/2017-237. 

out against other large industrialized countries and is especially important to keep 

in mind as our Main Street investors—whether they participate in our markets directly or through an intermediary such as an investment adviser or broker-dealer— 

now, more than ever, have a substantial responsibility to fund their own retirement 

and other financial needs. As a result of increased life expectancy and a shift from 

defined benefit plans (e.g., pensions) to defined contribution plans (e.g., 401(k)s and 

IRAs), the interests and needs of our Main Street investors have changed. 

We are responding to that change. It is our obligation to preserve, foster, and 

build on the successful history of our capital markets, and history and experience 

demonstrate our work is never complete. Markets change, and new risks to our markets and investors will emerge. We know we must continuously assess whether we 

are focused on the right areas and doing the right things, keeping the interests of 

our long-term Main Street investors top of mind. 

My testimony summarizes our important FY2018 initiatives, grouping them in 

five areas: (1) the regulatory and policy agenda; (2) enforcement and compliance; (3) 

enterprise risk and cybersecurity; (4) increasing our engagement with investors and 

other market participants; and (5) emerging market risks and trends. It also discusses a number of forward-looking initiatives that we are pursuing as our 2019 

near-term agenda is now publicly available. 5 Continuing with the themes of transparency, accountability, and clarity of mission, the 2019 near-term agenda focuses 

on the initiatives we reasonably expect to complete over the next 12 months. I welcome feedback from all interested parties on areas in need of focus and how we can 

best allocate our resources. 

Regulatory and Policy Agenda 

During my September 2017 testimony, I noted that the near-term Regulatory 

Flexibility Act agenda would be streamlined to increase transparency and accountability to the public and Congress, as well as to provide greater clarity to our staff. 

The 2017 agenda embodied a collective effort, benefiting from the input of my fellow 

Commissioners, our division and office heads and many members of our staff on key 

questions, including: (1) what initiatives the agency could reasonably expect to complete over the next 12 months, and (2) of those initiatives, which ones would have 

the most positive impact on our Main Street investors. 

During the last year, the Commission advanced 23 of the 26 rules in the nearterm agenda, a good result on both a percentage basis (88 percent) and an absolute 

basis. 6

In addition, the Commission responded to major events and changes in the broader regulatory landscape by advancing several other initiatives not in the original 

agenda. For example, we issued guidance to public companies about disclosures of 

cybersecurity risks and incidents. 7 During FY2018, the Commission also responded 

to a new congressional mandate from the Economic Growth, Regulatory Relief, and 

Consumer Protect Act by expanding a key registration exemption used by nonreporting companies to issue securities pursuant to compensatory arrangements, 8 and 

provided relief for those affected by Hurricane Florence. 9 In addition, to facilitate 

more accurate, clear, and timely communications between issuers and shareholders, 

the staff released guidance on how to approach near-term financial reporting uncertainties resulting from tax law changes on the same day the bill was signed by the 

President. 10

28 

11See Press Release 2018-68, ‘‘SEC Proposes To Enhance Protections and Preserve Choice for 

Retail Investors in Their Relationships With Investment Professionals’’ (Apr. 18, 2018), available 

at https://www.sec.gov/news/press-release/2018-68. 

To be sure, statistics—such as an 88 percent completion rate—often fail to tell 

more than a narrow story. Main Street investors—the market participants we have 

at the front of our minds—will not assess our work by the number or percentage 

of rules and initiatives we complete, but rather will be looking at what our efforts 

substantively do for them. With this metric—the interests of our long-term Main 

Street investors—in mind, I will discuss in more detail a few examples of our work 

in 2018. 

Standards of Conduct Proposals 

In April 2018, the Commission proposed for public comment a significant rulemaking package designed to serve Main Street investors that would: (1) require 

broker-dealers to act in the best interest of their retail customers; (2) reaffirm, and 

in some cases clarify, the fiduciary duty owed by investment advisers to their clients; and (3) require both broker-dealers and investment advisers to state clearly 

key facts about their relationship, including their financial incentives. 11 This package of rulemakings is intended to enhance investor protection by applying fiduciary 

principles across the spectrum of investment advice, bringing the legal requirements 

and mandated disclosures of financial professionals in line with investor expectations. 

Broker-dealers and investment advisers both provide investment advice to retail 

investors, but their relationships are structured differently and are subject to different regulatory regimes. However, it has long been recognized that many investors 

do not have a firm grasp of the important differences between broker-dealers and 

investment advisers—from differences in the types of services that they offer and 

how investors pay for those services, to the regulatory frameworks that govern their 

relationships. This confusion could cause investor harm if, for example, investors 

fail to select the type of service that is appropriate for their needs or if conflicts of 

interest are not adequately understood and addressed. Our proposals would work 

together to better align the standards of conduct and mandated disclosures for both 

broker-dealers and investment advisers with what investors expect of these financial 

professionals, while preserving investor access and investor choice. 

Specifically, proposed Regulation Best Interest would enhance broker-dealer 

standards of conduct by establishing an overarching obligation requiring brokerdealers to act in the best interests of the retail customer when making recommendations of any securities transaction or investment strategy involving securities. Simply put, under proposed Regulation Best Interest, a broker-dealer cannot put her or 

his interests ahead of the retail customer’s interests. The proposal incorporates that 

key principle and goes beyond and enhances existing suitability obligations under 

the Federal securities laws. To meet this requirement, the broker-dealer would have 

to satisfy disclosure, care, and conflict of interest obligations. 

Among other things, the obligations under proposed Regulation Best Interest 

would put greater emphasis on costs and financial incentives as factors in evaluating the facts and circumstances of a recommendation. Additionally, the proposed 

standard would require broker-dealers to establish, maintain and enforce written 

policies and procedures reasonably designed to identify and eliminate material conflicts of interest, or disclose and mitigate, material conflicts of interest related to financial incentives. This is a significant and critical enhancement as today the Federal securities laws largely center on conflict disclosure rather than conflict management. 

Proposed Regulation Best Interest and its ‘‘best interest’’ standard draw upon fiduciary principles in other contexts, including those underlying an investment adviser’s fiduciary duty, recognizing that while their relationship models differ, both 

broker-dealers and investment advisers often provide advice in the face of conflicts 

of interest. These common principles are easier to compare given that we issued as 

another part of our reform package a proposed interpretation reaffirming—and, in 

some cases, clarifying—the fiduciary duty that investment advisers owe to their clients. This interpretation is designed to provide advisers and their clients with a reference point for understanding the obligations of investment advisers to their clients 

and, specifically, reaffirms that an investment adviser also must act in the best interests of her or his client. 

While the two standards are based on common principles, under the proposal, 

some obligations of broker-dealers and investment advisers will differ because the 

relationship models of these financial professionals differ. But—importantly—the 

principles are the same, and I believe the outcomes under both models should be 

29 

12See Press Release 2018-257, ‘‘Investor Testing of the Proposed Relationship Summary for 

Investment Advisers and Broker-Dealers’’ (Nov. 7, 2018), available at https://www.sec.gov/ 

news/press-release/2018-257. 13See Comments on ‘‘Proposed Rule: Regulation Best Interest’’, available at https:// 

www.sec.gov/comments/s7-07-18/s70718.htm. Of the more than 6,000 comment letters, approximately 3,000 were unique letters. 14See Press Release 2018-116, ‘‘SEC Expands the Scope of Smaller Public Companies That 

Qualify for Scaled Disclosures’’ (June 28, 2018), available at https://www.sec.gov/news/pressrelease/2018-116. 15See Press Release 2018-143, ‘‘SEC Proposes Rules To Simplify and Streamline Disclosures 

in Certain Registered Debt Offerings’’ (July 24, 2018), available at https://www.sec.gov/news/ 

press-release/2018-143. 

the same: retail investors receive advice provided with diligence and care that does 

not put the financial professional’s interests ahead of the investor’s interests. I believe our proposals are designed to make investors get just that whether they choose 

a broker-dealer or an investment adviser. 

In order to hear first-hand from retail investors who will be directly impacted by 

the rulemaking package, the staff organized seven roundtables across the country 

to provide Main Street investors the opportunity to speak directly with me, my fellow Commissioners and senior SEC staff to tell us about their experiences and views 

on what they expect from their financial professionals. I had the opportunity to lead 

five of these discussions—in Houston, Atlanta, Miami, Denver, and Baltimore—and 

attend another in Washington, DC. These candid, experience-based conversations 

were incredibly valuable and are informing our work moving forward. The transcripts from these roundtables are included in our public comment file. We also have 

invited investors to view samples of the proposed disclosure form to share their insights and feedback with the Commission by going to https://www.sec.gov/tell-us. 

In addition, our Office of the Investor Advocate engaged RAND Corporation to perform investor testing of the proposed disclosure form. The results of the investor 

testing are available on the SEC’s website in order to allow the public to consider 

and comment on this supplemental information. 12

The staff of the Division of Trading and Markets and the Division of Investment 

Management are reviewing all of this information, and the more than 6,000 comment letters, 13 as they work diligently together to develop final rule recommendations. 

Facilitating Capital Formation 

The SEC took meaningful steps during FY2018 to encourage capital formation for 

emerging companies seeking to enter our public capital markets while maintaining, 

and, in many cases, enhancing investor protections. Doing so provides greater investment opportunities for Main Street investors, as it is generally difficult and expensive for them to invest in private companies. As a result, Main Street investors 

may not have the opportunity to participate in the growth phase of these companies 

if they choose not to enter our public markets or do so only later in their life cycle. 

Additionally, it is my experience that companies that go through the SEC public 

registration and offering process often come out as better companies, providing net 

benefits to the company, investors, and our capital markets. 

As a result of the July 2017 expansion of the draft registration statement submission process to all first-time registrants and newly public companies conducting initial public offerings (IPOs) and offerings within one year of an IPO, the Division of 

Corporation Finance (Corporation Finance) has received draft submissions for more 

than 40 IPOs and from more than 75 existing reporting companies that have utilized the expanded accommodation. This change has given companies more control 

over their offering schedules and has limited their exposure to market volatility and 

competitive harm—providing a benefit to their shareholders without diminishing investor protection. 

Additionally, in June 2018, the Commission voted to adopt amendments to the 

‘‘smaller reporting company’’ definition that expand the number of companies that 

can qualify for certain existing scaled disclosure requirements. 14 The new definition 

recognizes that a one-size regulatory structure for public companies does not fit all 

and will allow approximately 1,000 additional companies to benefit from smaller reporting company status. The amended definition should benefit both smaller companies, by making the option to join our public markets more attractive, and Main 

Street investors, who, in turn, will have more investment options. 

The Commission also has taken steps to simplify and update financial disclosures. 

In July 2018, we proposed amendments to financial disclosures to encourage guaranteed debt offerings to be conducted on a registered rather than a private basis. 15

30 

16See Press Release 2018-156, ‘‘SEC Adopts Amendments To Simplify and Update Disclosure 

Requirements’’ (Aug. 17, 2018), available at https://www.sec.gov/news/press-release/2018-156. 17See ‘‘Amendments to Smaller Reporting Company Definition’’, 83 Federal Register 31,992 

(July 10, 2018). 18See ‘‘Remarks on Capital Formation at the Nashville 36/86 Entrepreneurship Festival’’ 

(Aug. 29, 2018), available at https://www.sec.gov/news/speech/speech-clayton-082918. Since 

these rules have gone into effect, small businesses have conducted over 900 offerings that reported raising more than $90 million collectively using Regulation Crowdfunding. And there 

have been over 300 offerings that reported raising a total in excess of $1 billion pursuant to 

Regulation A. Those amounts, however, are eclipsed by the $147 billion reportedly raised in 

2017 using Rule 506(c) of Regulation D, the new exemption that lifted the ban on general soliciI believe these measures have the potential to save issuers significant time and expense, enhance the quality of disclosure and increase investor protection. 

Further, in August 2018, the Commission adopted final rules that simplify and 

update disclosures by eliminating requirements that are outdated, overlapping or 

duplicative of other Commission rules or U.S. GAAP. 16 These amendments were 

part of a larger initiative by Corporation Finance to review disclosure requirements 

applicable to issuers and consider ways to improve the requirements for the benefit 

of investors and issuers. While these rule changes may appear technical, I anticipate that they will yield substantial benefits for public companies and investors, especially when taken together with other capital formation initiatives at the Commission. Importantly, they will not adversely affect the availability of material information and, in many cases, will enhance the quality of available information and increase investor protection. 

Corporation Finance has several proposals on the horizon designed to encourage 

capital formation for emerging companies seeking to enter our public capital markets. Specifically, I anticipate the Commission will consider a proposal to amend the 

definition of ‘‘accelerated filer’’ that triggers Section 404(b) of the Sarbanes–Oxley 

Act of 2002, which requires registrants to provide an auditor attestation report on 

internal control over financial reporting, that if adopted will have the effect of reducing the number of companies that need to provide the auditor attestation report, 

while maintaining appropriate investor protections. 17 While Section 404(b) has become a familiar, and in many cases important, component of our public company 

regulatory regime, we have heard from market participants and our former Advisory 

Committee for Small and Emerging Companies that, particularly for smaller companies, the costs associated with this requirement can divert significant capital from 

the core business needs of companies without a corresponding investor benefit. I 

look forward to considering the staff’s recommendations. 

Additionally, I anticipate that the Commission will consider expanding the ability 

of companies that are contemplating raising capital to ‘‘test-the-waters’’ by engaging 

in communications with certain potential investors prior to or following the filing 

of a registration statement for an IPO. I have seen firsthand how this has benefited 

companies considering an IPO, as they are able to engage investors earlier to explain their business and obtain feedback in advance of an offering. This also benefits 

investors and shareholders as companies are better able to determine the appropriate time for an offering and to more effectively size and price the offering. I look 

forward to the Commission considering this initiative in the coming year. 

Further, I expect that the Commission will consider a proposal, as required by the 

Economic Growth, Regulatory Relief, and Consumer Protection Act, to expand Regulation A offering eligibility to public reporting companies. 

Finally, I believe it is important to encourage long-term investment in our country. I expect that the Commission will soon consider a release soliciting input on 

how we can reduce compliance burdens on reporting companies with respect to 

quarterly reports while maintaining, and in some cases enhancing, investor protections. There is an ongoing debate regarding our approach to mandated quarterly reporting and the prevalence of optional quarterly guidance, and whether our reporting system more generally drives an overly short-term focus. I encourage all market 

participants to share their views and to let us know if there are other aspects of 

our regulations that drive short-termism inappropriately. 

Beyond our public markets, I anticipate the Commission will take a fresh look at 

the exempt offering framework to consider whether changes should be made to harmonize and streamline the framework. Congress and the SEC have taken a number 

of steps to expand the options that small businesses have to raise capital. Small 

businesses today have more options to reach investors within their State using the 

intrastate exemption, or tap the ‘‘crowd’’ using the power of the Internet through 

Regulation Crowdfunding offerings. Small businesses can decide to limit their offerings to sophisticated investors in reliance on Regulation D, or open those offerings 

to retail investors using Regulation A. 18

31 

tation. And even that is dwarfed by use of the traditional private placement exemption in Rule 

506(b) of Regulation D to raise over $1.7 trillion in 2017. Id. 19See Press Release 2018-135, ‘‘SEC Adopts Final Rules and Solicits Public Comment on 

Ways To Modernize Offerings Pursuant to Compensatory Arrangements’’ (July 18, 2018), available at https://www.sec.gov/news/press-release/2018-135. 20 As we embark on this project, I believe there are several things we should consider. We 

should evaluate the level of complexity of our current exemptive framework for issuers and investors alike, and consider whether changes should be made to rationalize and streamline the 

framework. For example, do we have overlapping exemptions that create confusion for companies trying to navigate the most efficient path to raise capital? Are there gaps in our framework 

that impact the ability of small businesses to raise capital at key stages of their business cycle? 

We also should consider whether current rules that limit who can invest in certain offerings 

should be expanded to focus on the sophistication of the investor, the amount of the investment, 

or other criteria rather than just the wealth of the investor. And we should take a look at 

whether more can be done to allow issuers to transition from one exemption to another and, 

ultimately, to a registered IPO, without undue friction. 21See November 15, 2018: ‘‘Roundtable on the Proxy Process’’, available at https:// 

www.sec.gov/proxy-roundtable-2018. 

Additionally, pursuant to the Economic Growth, Regulatory Relief, and Consumer 

Protection Act, the SEC recently expanded the exemption that permits private companies to issue securities to employees, consultants and advisors as compensatory 

awards—a transaction that preserves cash for the company’s operations and aligns 

the incentives of employees with the success of the company—and solicited comment 

on further ways to modernize the rules related to these compensatory arrangements. 19 The so-called ‘‘gig economy’’ has changed how companies and individuals 

design alternative work arrangements, and, therefore, individuals may not be ‘‘employees’’ eligible to receive securities as compensatory awards under our current exemption. 

While the options to raise capital in exempt offerings have grown significantly 

since the JOBS Act, there has not been a comprehensive review of our exemptive 

framework to ensure that the system, as a whole, is rational, accessible, and effective. In fact, I doubt anyone would have come up with anything close to the complex 

system we have today if they were starting with a blank slate. So, I believe we 

should take a critical look at our exemption landscape, which can be fairly described 

as an elaborate patchwork. 20 The staff is working on a concept release that I expect 

will bring to the forefront these and other topics on how we can harmonize exempt 

offerings. Receiving input from investors, startups, entrepreneurs and other market 

participants who have first-hand experience with our framework is extremely important to make sure we get it right. 

Improving the Proxy Process 

Another significant initiative for 2019 is improving the proxy process. Last month, 

the SEC staff held a proxy roundtable to discuss: (1) the proxy solicitation and voting process; (2) shareholder engagement through the shareholder proposal process; 

and (3) the role of proxy advisory firms. 21 I was pleased with this solutions-oriented 

event, which included a diverse group of panelists representing the views of investors, companies and other market participants. While we heard a wide range of 

views, we saw more agreement than disagreement, and I believe that we should act 

to improve each of these areas. 

There was consensus among the panelists that the proxy ‘‘plumbing’’ needs a 

major overhaul. I encourage market participants to explore what such an overhaul 

would entail and to consider how technology, including distributed ledger technology, could improve the proxy plumbing. I realize a major overhaul could take 

time. So, I believe we should focus on what the Commission can do in the interim 

to improve the current system. The comment box for the roundtable remains open, 

and I encourage all those interested in improving the proxy plumbing to share their 

thoughts, particularly regarding actionable, interim improvements. 

I also believe it is clear that we should consider reviewing the ownership and resubmission thresholds and related criteria for shareholder proposals. The current 

$2,000 ownership threshold and related criteria were adopted 20 years ago in 1998, 

and the resubmission thresholds have been in place since 1954. A lot has changed 

since then. We need to be mindful of these changes, and make sure our approach 

to the very important issue of shareholder engagement reflects the realities of today’s markets and today’s investors. As I have said before, when looking at the ownership and resubmission thresholds and related criteria, we need to consider the interests of the long-term retail investors who invest directly in public companies and 

indirectly through mutual funds, ETFs and other products. With these long-term, 

retail investors in mind, we also should consider whether there are factors, in addition to the amount invested and the length of time shares are held, that reasonably 

32 

22See Press Release 2018-136, ‘‘SEC Adopts Rules To Enhance Transparency and Oversight 

of Alternative Trading Systems’’ (July 18, 2018), available at https://www.sec.gov/news/pressrelease/2018-136. 23See Press Release 2018-253, ‘‘SEC Adopts Rules That Increase Information Brokers Must 

Provide to Investors on Order Handling’’ (Nov. 2, 2018), available at https://www.sec.gov/news/ 

press-release/2018-253. 24See Press Release 2018-43, ‘‘SEC Proposes Transaction Fee Pilot for NMS Stocks’’ (Mar. 

14, 2018), available at https://www.sec.gov/news/press-release/2018-43. 25See ‘‘Equity Market Structure Advisory Committee, Recommendation for an Access Fee 

Pilot’’ (July 8, 2016), available at https://www.sec.gov/spotlight/emsac/recommendation-accessfee-pilot.pdf. 

demonstrate that the proposing shareholder’s interests are aligned with those of a 

company’s long-term investors. 

For proxy advisory firms, I believe there is growing agreement that the current 

dynamics among four parties, (1) proxy advisory firms, (2) investment advisers who 

employ those firms and have a fiduciary duty to their investors, (3) issuers, and (4) 

investors at large, including our Main Street investors, can be improved. For example, there should be greater clarity regarding the division of labor, responsibility and 

authority between proxy advisors and the investment advisers they serve. We also 

need clarity regarding the analytical and decision-making processes advisers employ, including the extent to which those analytics are company or industry specific. 

On this last point, it is clear to me that some matters put to a shareholder vote 

can only be analyzed effectively on a company-specific basis, as opposed to applying 

a more general market or industrywide policy. 

Finally, there were other issues raised at the roundtable that we should consider, 

including: (1) the framework for addressing conflicts of interests at proxy advisory 

firms, and (2) ensuring that investors have effective access to issuer responses to 

information in certain reports from proxy advisory firms. 

The staff is looking at these and other issues, and I have asked them to formulate 

recommendations for the Commission’s consideration. On timing, it is clear to me 

that these issues will not improve on their own with time, and I intend to move 

forward with the staff recommendations, prioritizing those initiatives that are most 

likely to improve the proxy process and our markets for our long-term Main Street 

investors. 

Modernizing Trading and Market Structure 

Another area of focus for the Commission is ensuring fair and efficient trading 

markets for our Main Street investors. We know that transparency is a bedrock of 

healthy and vibrant markets, and I am pleased to report that we have taken significant steps to make our trading markets more transparent. 

In July 2018, we adopted amendments that enhance the transparency requirements governing alternative trading systems, commonly known as ‘‘ATSs.’’ 22 These 

amendments provide investors, brokers and other market participants—and the 

Commission—with increased visibility into the operations of these important markets for equity trading. Additionally, last month, the Commission adopted amendments to Regulation NMS to provide investors with greater transparency concerning 

how brokers handle and execute their orders. 23

Further, in March 2018, the Commission proposed a transaction fee pilot for National Market System (NMS) stocks, which, if adopted, would provide the Commission with data to help us analyze the effects of exchange fees and rebates on order 

routing behavior, execution quality and our market structure generally. 24 This topic 

has received significant attention ever since the implementation of Regulation NMS. 

More recently, the development of a pilot program on transaction fees was one of 

the SEC’s Equity Market Structure Advisory Committee’s most prominent recommendations to the Commission. 25 In my view, the proposed pilot—which I expect 

the Commission to consider for adoption in the near future—would lead to a more 

thorough understanding of these issues, which would help the Commission make 

more informed and effective policy decisions in the future, all to the benefit of retail 

investors. 

Our fixed income markets are also critical to our economy and Main Street investors, though historically, less attention has been focused on these relative to the equity markets. With large numbers of Americans retiring every month and needing 

investment options, fixed income products attract more and more Main Street investors. Yet, many of those investors may not appreciate that fixed income products 

are part of markets that differ significantly from the equity markets. 

In November 2017, the SEC created the Fixed Income Market Structure Advisory 

Committee (FIMSAC) to provide diverse perspectives on the structure and operations of the U.S. fixed income markets, as well as advice and recommendations on 

33 

26See ‘‘Fixed Income Market Structure Advisory Committee’’, available at https:// 

www.sec.gov/spotlight/fixed-income-advisory-committee. FIMAC’s recommendations include the 

following: (1) the development of a pilot program to delay public dissemination for 48 hours of 

trades in any investment grade corporate bond above $10 million and any high-yield corporate 

bond above $5 million (requires Financial Industry Regulatory Authority (FINRA) rulemaking); 

(2) the formation of a joint SEC, FINRA, and Municipal Securities Rulemaking Board (MSRB) 

working group to review the regulatory framework for electronic trading platforms in corporate 

and municipal bonds; (3) the adoption of a comprehensive classification scheme for exchange 

traded products; (4) for the SEC to encourage the formation of an industry group to promote 

investor education and work towards the establishment of a centralized and widely accessible 

database of key ETF data; and (5) that the SEC, in conjunction with FINRA, establish a new 

issue reference data service for corporate bonds that would be widely accessible on commercially 

reasonable terms. 

fixed income market structure. The Committee has held four public meetings and 

has provided the Commission with five thoughtful recommendations on ways to improve our fixed income markets. 26 I look forward to an equally successful second 

year. 

Finally, new FINRA and MSRB requirements regarding the disclosure of corporate and municipal bond mark-ups and mark-downs went into effect, and I am 

pleased that investors now have substantially greater transparency into the costs 

of participating in those markets. I believe this transparency will increase competition and reduce trading costs, all to the benefit of Main Street investors. 

Consolidated Audit Trail 

Another market structure initiative that is garnering significant staff attention is 

the implementation of the Consolidated Audit Trail (CAT). The CAT is designed to 

provide a single, comprehensive database that, when fully implemented, will allow 

regulators to more efficiently and accurately track trading in equities and options 

throughout the U.S. markets. Among other things, the CAT is intended to allow the 

Commission to better carry out its oversight responsibility by improving our ability 

to reconstruct trading activity following a market disruption or other event, which 

in turn would allow us to more quickly understand the causes of such an event and 

respond appropriately. 

Under the CAT NMS Plan, the self-regulatory organizations (SROs)—the national 

securities exchanges and FINRA—are responsible for developing and implementing 

the CAT and were required to begin reporting data to the CAT by November 15, 

2017. The SROs missed that deadline. While the CAT has now begun receiving equity and options data with limited functionality, the SROs remain out of compliance 

with the CAT NMS Plan today. 

The SROs are making some progress, but the development and implementation 

process remains slow and cumbersome due largely to what I believe are project governance and project management issues experienced by the SROs. While, pursuant 

to SEC staff requests, the SROs recently set forth a revised timeline with detailed 

milestones, more recently Thesys (the plan processor) informed the SROs that it 

does not plan to deliver full functionality of CAT’s first phase in accordance with 

these milestones. The SROs have reported to our staff that they currently expect 

to deliver the first phase of CAT (which, again, was required to be delivered by November 15, 2017) by March 31, 2019. We remain frustrated with failure of the SROs 

to meet their obligations and the delays in the development of the CAT. 

I know there are substantial concerns about the protection of investors’ personally 

identifiable information (PII) that would be stored in the CAT. I have the same concerns and continue to make the protection of CAT data, particularly any form of PII, 

a threshold issue. In November 2017, I asked the Commission staff to evaluate the 

need for PII in the CAT. This evaluation includes consideration of, among other 

things, what PII data elements need to be collected and retained in the CAT in 

order to achieve the regulatory goals of the CAT, and how PII in the CAT would 

be used by the SEC and the SROs. We are considering what alternatives to the 

scope of PII that would be collected and retained by the CAT under the current plan 

could provide the Commission and the SROs with the market surveillance and reconstruction data necessary to conduct our regulatory and enforcement functions. As 

I have stated before, as the SROs continue to make progress in the development, 

implementation and operation of the CAT, I believe that the Commission, the SROs 

and the plan processor must continuously evaluate their approach to the collection, 

retention and protection of PII and other sensitive data. More generally, I have 

made it clear that the SEC will not retrieve sensitive information from the CAT unless we have a regulatory need for the information and believe appropriate protections to safeguard the information are in place. 

34 

27See William Hinman, ‘‘Digital Asset Transactions: When Howey Met Gary’’ (Plastic) (June 

14, 2018), available at https://www.sec.gov/news/speech/speech-hinman-061418. 28See Press Release 2018-102, ‘‘SEC Names Valerie A. Szczepanik Senior Advisor for Digital 

Assets and Innovation’’ (June 4, 2018), available at https://www.sec.gov/news/press-release/ 

2018-102. 29See ‘‘Statement on Digital Asset Securities Issuance and Trading’’ (Nov. 16, 2018), available 

at https://www.sec.gov/news/public-statement/digital-asset-securites-issuuance-and-trading. 

30See Press Release 2018-240, ‘‘SEC Launches New Strategic Hub for Innovation and Financial Technology’’ (Oct. 18, 2018), available at https://www.sec.gov/news/press-release/2018-240. 31See Press Release 2018-118, ‘‘SEC Proposes New Approval Process for Certain ExchangeTraded Funds’’ (June 28, 2018), available at https://www.sec.gov/news/press-release/2018-118. 

Distributed Ledger Technology, Digital Assets, and Initial Coin Offerings 

The Commission and its staff have been focusing a significant amount of attention 

and resources on digital assets and initial coin offerings (ICOs). I am optimistic that 

developments in distributed ledger technology can help facilitate capital formation, 

providing promising investment opportunities for both institutional and Main Street 

Investors. Overall, I believe we have taken a balanced regulatory approach that 

both fosters innovation and protects investors. For example, our staff meets regularly with entrepreneurs and market professionals interested in developing new and 

innovative investment products in compliance with the Federal securities laws. Recently, Corporation Finance’s Director, Bill Hinman, outlined factors for participants 

to consider when evaluating whether a digital asset is a security 27 and also named 

a new Associate Director in Corporation Finance to serve as the Senior Advisor for 

Digital Assets and Innovation and coordinate efforts in this area across the agency. 28 SEC staff is also meeting regularly with staff from other regulatory agencies 

to coordinate efforts and identify any areas where additional regulatory oversight 

may be needed. Divisions and offices across the Commission have worked together, 

as well as with other regulators, to issue public statements regarding ICOs and virtual currencies. 29

In an effort to further coordinate the Commission’s work on these important 

issues, in October of this year the SEC announced the formation of a FinHub within 

the agency. 30 Staffed by representatives from across the Commission, the FinHub 

will serve as a public resource for FinTech-related issues at the SEC, including matters dealing with distributed ledger technology, automated investment advice, digital marketplace financing, and artificial intelligence/machine learning. In addition 

to serving as a portal for public engagement, FinHub will also serve as an internal 

resource within the SEC, coordinating the agency staff’s work on these and other 

FinTech-related issues. As the work of FinHub and our other activities demonstrate, 

the agency is focused on issues presented by new technologies, and our door remains 

open to those who seek to innovate and raise capital in accordance with the law. 

Unfortunately, while some market participants have engaged with our staff constructively and in good faith with questions about the application of our Federal securities laws, others have sought to prey on investors’ excitement about 

cryptocurrencies and ICOs to commit fraud or other violations of the Federal securities laws. Enforcement has recently brought a number of landmark cases in this 

area, and I have asked the Division’s leadership to continue to police these markets 

vigorously and recommend enforcement actions against those who conduct ICOs or 

engage in other actions relating to digital assets in violation of the Federal securities laws. The Commission acted swiftly to crack down on allegedly fraudulent activity in this space, particularly where the misconduct has targeted Main Street investors. Regardless of the promise of this technology, those who invest their hardearned money in opportunities that fall within the scope of the Federal securities 

laws deserve the full protections afforded under those laws. 

Modernizing Asset Management Regulations 

In June 2018, the Commission proposed for public comment a new rule to replace 

the process of individually issued orders for exemptive relief for certain exchange 

traded funds (ETFs). 31 The proposal is designed to create a consistent, transparent, 

and efficient regulatory framework for ETFs would facilitate greater competition 

and innovation among these products. The ETF market, which has a volume of approximately $3.6 trillion, currently operates under more than 300 individually 

issued exemptive orders that have varied over time in wording and terms. I anticipate that the Commission will consider recommendations to adopt a final ETF rule 

in the coming year, which will enable staff to focus more time and attention on 

novel or unusual ETF products instead of more routine ETF-related issues. 

The agency is working to promote research in the ETF market and provide investors greater access to that research. On November 30, 2018, the Commission adopted rules and amendments that are intended to reduce obstacles to providing reVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00038 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
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32 ‘‘2018 Investment Company Fact Book’’, supra note 4, at ii. 33See Press Release 2018-103, ‘‘SEC Modernizes the Delivery of Fund Reports and Seeks Public Feedback on Improving Fund Disclosure’’ (June 5, 2018), available at https://www.sec.gov/ 

news/press-release/2018-103. 34 Id. 

search on investment funds in furtherance of the Fair Access to Investment Research Act of 2017. The adopted rules seek to harmonize the treatment of investment fund research with research on other public companies by establishing a safe 

harbor for a broker-dealer to publish or distribute research reports on investment 

funds under certain conditions. Overall, these rules aim to promote research on mutual funds, ETFs, registered closed-end funds, business development companies 

(BDCs) and similar covered investment funds and provide investors with greater access to research to aid them in making investment decisions. 

Additionally, the Small Business Credit Availability Act directs the Commission 

to revise certain securities offering and proxy rules in order to harmonize existing 

registration and reporting requirements to allow BDCs to be treated in the same 

manner as public corporate issuers. The Economic Growth, Regulatory Relief, and 

Consumer Protection Act similarly directs the Commission to issue rules to allow 

certain registered closed-end funds to use the securities offering and proxy rules 

that are available to public corporate issuers. The Division of Investment Management is working to develop rule recommendations related to these two bills. 

Improving the Investor Experience 

The Division of Investment Management is leading a long-term project to explore 

modernization of the design, delivery and content of fund disclosures and other information for the benefit of investors. These initiatives are an important part of how 

the Commission can serve investors in the 21st century. Fund disclosures are especially important because millions of Americans invest in funds to help them reach 

personal financial goals, such as saving for retirement and their children’s educations. As of the end of 2017, over 100 million individuals representing nearly 60 

million households, or 45 percent of U.S. households, owned funds (generally ETFs 

or open-ended mutual funds). 32

In June 2018, the Commission issued a request for comment on enhancing disclosures by mutual funds, ETFs and other types of investment companies to improve 

the investor experience and to help investors make more informed investment decisions (Fund Disclosure RFC). 33 The Fund Disclosure RFC seeks input from retail 

investors and others on how they use fund disclosures and how they believe funds 

can improve disclosures to aid investment decision making. In order to facilitate retail investor engagement and comment on improving fund disclosure, the Commission has provided a short Feedback Flier on Improving Fund Disclosure, which can 

be viewed and submitted at www.sec.gov/tell-us. 

The Commission also adopted a new rule that creates an optional ‘‘notice and access’’ method for delivering fund shareholder reports. 34 The reforms include protections for those without internet access or who simply prefer paper by preserving the 

ability to continue to receive reports in paper. Under the rule, a fund may deliver 

its shareholder reports by making them publicly accessible on a website, free of 

charge, and sending investors a paper notice of each report’s availability by mail. 

To inform investors in advance of this new delivery method, there is an extended 

transition period so that the earliest a fund could begin to rely on the rule would 

be January 1, 2021. During this time, funds that choose to implement the new delivery method must provide prominent disclosures in prospectuses and certain other 

shareholder documents that will generally notify investors of the upcoming change 

in delivery format on a recurring basis for a period of 2 years. 

Security-Based Swaps and Other Interagency Efforts 

With respect to our security-based swap regime, the Commission has finalized 

many, but not all, of the security-based swap rules mandated by Title VII of the 

Dodd–Frank Act. In the coming year, I anticipate that the Commission will continue 

with our efforts to lay out a coherent package of rules to finalize our statutory security-based swap rulemaking obligations. 

As part of this effort, our staff has been actively engaged with our counterparts 

at the Commodity Futures Trading Commission (CFTC) to explore ways to further 

harmonize our respective security-based swap rules with the swap rules developed 

by the CFTC to increase effectiveness and reduce complexity and costs. I am pleased 

to note that earlier this year CFTC Chairman Giancarlo and I executed a memoVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00039 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
36 

35See Press Release 2018-114, ‘‘SEC and CFTC Announce Approval of New MOU’’ (June 28, 

2018), available at https://www.sec.gov/news/press-release/2018-114. 36See ‘‘Opening Remarks at the Securities Regulation Institute’’ (Jan. 22, 2018), available at 

https://www.sec.gov/news/speech/speech-clayton-012218. 37For example, several companies already have made public their policies regarding compensation clawbacks. Some of these policies go beyond what would be required under Dodd– 

Frank. We have seen a few companies attempt to claw back compensation from their executives 

under these policies. 38See U.S. Sec. and Exch. Comm’n, Div. of Enforcement, ‘‘Annual Report: A Look Back at 

Fiscal Year 2018’’ (Nov. 2, 2018), available at https://www.sec.gov/files/enforcement-annual-report-2018.pdf. 

randum of understanding (MOU) between our two agencies. 35 The MOU explicitly 

acknowledges where we have shared regulatory interests, including but not limited 

to Title VII, and reconfirms our commitment to work together to facilitate efficient 

markets for the benefit of all market participants. 

In addition to continued discussions with the CFTC regarding Title VII harmonization, the Commission and staff has engaged with our fellow financial regulators 

to address the key issues in our markets in a holistic, consistent manner. These efforts will continue, including efforts to simplify, tailor, and make more effective the 

Volcker Rule, cooperate on innovative issues like distributed ledger technology and 

digital assets and address emerging risks to the financial sector through the Financial Stability Oversight Council. 

Other Dodd–Frank Act Issues 

The Commission also has several other outstanding mandates from the Dodd– 

Frank Act. Earlier this year, I addressed how I plan to prioritize and tackle these 

remaining responsibilities. 36 Generally speaking, in addition to the Title VII regime, 

there are three categories of Dodd–Frank Act-mandated rules remaining: 

1. Executive compensation rules for both public companies and SEC-regulated entities, for which, as a result of the complexity and scope of the existing executive compensation disclosure regime, as well as the nature of the mandates, I 

believe a serial approach is likely to be most efficient and best serve the SEC’s 

mission; 

2. Specialized disclosure rules, such as resource extraction disclosure, which pose 

additional challenges, including how the SEC can meet its obligations under 

the Administrative Procedure Act and, in the case of resource extraction, the 

Congressional Review Act; and 

3. Mandates, some of which overlap with examples given above, for which market 

developments—including developments resulting from shareholder engagement—have, at least in part, mitigated some of the concerns that motivated 

the statutory requirements. 37 Our rulemaking priorities, as well as the rules 

themselves, should reflect these observable developments. 

Several of these, including hedging disclosure and resource extraction disclosure, 

are on the Commission’s near-term agenda. Overall, it is the SEC’s obligation to 

complete the rules mandated by Congress in Dodd–Frank, and I intend to do so. 

Enforcement and Compliance 

Pursuing Enforcement Matters That Are Meaningful to Main Street Investors 

The ongoing efforts made by Enforcement to deter misconduct and punish securities law violators are critical to safeguarding millions of investors and instilling confidence in the integrity of our markets. The nature and quality of the SEC’s enforcement actions during the last year speak volumes to the hard work of the women 

and men of the agency. The efforts of the Enforcement staff over the past year have 

made our capital markets a safer place for investors to put their hard-earned money 

to work. 

As noted by Enforcement’s Co-Directors, Stephanie Avakian and Steven Peikin, 

in their Annual Report, our success is best judged both quantitatively and qualitatively and over various periods of time. 38 Relevant qualitative factors include, 

among other things, asking whether we are: bringing meaningful actions that target 

the most serious violations, pursuing individual sanctions in appropriate cases, obtaining punishments that deter unlawful conduct and returning money to harmed 

investors. Based on such an evaluation—and in my opinion by any measure—Enforcement has been successful. I can assure you that the Division will continue its 

vigorous enforcement of the Federal securities laws and hold bad actors accountable, 

whether on Main Street or Wall Street. 

37 

39See Press Release 2017-176, ‘‘SEC Announces Enforcement Initiatives to Combat CyberBased Threats and Protect Retail Investors’’ (Sept. 25, 2017), available at https://www.sec.gov/ 

news/press-release/2017-176. 40 Id. 41See Press Release 2018-15, ‘‘SEC Launches Share Class Selection Disclosure Initiative To 

Encourage Self-Reporting and the Prompt Return of Funds to Investors’’ (Feb. 12, 2018), available at https://www.sec.gov/news/press-release/2018-15. 

I would like to highlight the work of four investor-oriented enforcement initiatives 

over the past year that show the Enforcement staff’s commitment to investor protection: (1) the Retail Strategy Task Force, (2) the Cyber Unit, (3) the Share Class Selection Disclosure Initiative and (4) Enforcement’s work in returning funds to 

harmed investors. 

In September 2017, the SEC announced the formation of a Retail Strategy Task 

Force (RSTF), which has two primary objectives: (1) to develop data-driven, analytical strategies for identifying practices in the securities markets that harm retail investors and generating enforcement matters in these areas; and (2) to collaborate 

within and beyond the SEC on retail investor advocacy and outreach. 39 Each of 

these objectives directly impacts the lives of Main Street investors and involves collaboration between many divisions and offices. We anticipate that new data-driven 

approaches will yield significant efficiencies in case generation and resource allocation by targeting enforcement efforts where the risks to Main Street investors are 

the most significant. Although it has been operative for only a little over a year, 

the RSTF has already undertaken a number of lead-generation initiatives built on 

the use of data analytics (i.e., promptly searching for matters to investigate on behalf of retail investors). 

Enforcement also in September 2017 announced the creation of a Cyber Unit to 

combat cyber-related threats. The Cyber Unit focuses the Division’s resources and 

expertise on, among others things, hacking to obtain material, nonpublic information, violations involving distributed ledger technology and cyberintrusions. 40 Together with the FinHub, discussed above, the resources we have dedicated to the 

Cyber Unit’s important work demonstrate the high priority that we continue to 

place on cyber-related issues affecting investors and our markets. In its first year, 

the Cyber Unit led investigations that resulted in several emergency actions to stop 

ongoing alleged frauds against retail investors that involved ICOs, as well as 

charges against a bitcoin-denominated platform and its operator for running an unregistered securities exchange and defrauding users of that exchange. 

Beyond ICOs and digital assets, the Cyber Unit also led important investigations 

that resulted in SEC actions involving alleged cyber-related market manipulations, 

account takeovers and other cyber-related trading violations. The cases brought by 

the SEC in FY2018 included charges for allegedly scheming to manipulate the price 

of a stock by making a phony regulatory filing and for allegedly hacking into over 

100 online customer brokerage accounts and making unauthorized trades to manipulate stock prices and profit from the artificial price movements. 

Additionally, Enforcement expanded its efforts to identify advisers that did not 

disclose conflicts as a result of their receipt of compensation in the form of 12b-1 

fees. Prior efforts by Enforcement and the Office of Compliance Inspections and Examinations (OCIE) suggested that many investment advisers were not disclosing 

conflicts of interest to their retail customers relating to the selection of more-expensive mutual fund share classes, which involved the receipt of 12b-1 fees, when 

cheaper alternatives were available. Enforcement announced a Share Class Selection Disclosure Initiative in February 2018, representing an innovative approach intended to facilitate the efficient return of money to harmed investors and prompt 

remediation of misconduct. 41

Finally, in my view, protecting retail investors also means, whenever possible, 

putting money back in their pockets when they are harmed by violations of the Federal securities laws. In FY2017 and FY2018, the Commission returned $1.07 billion 

and $794 million to harmed investors, respectively. We remain committed to this 

important part of our work, and we expect to continue our efforts to return funds 

to victims this year as well. 

The unanimous Supreme Court decision in Kokesh v. SEC, however, has impacted 

our ability to return funds fraudulently taken from Main Street investors. In 

Kokesh, the Supreme Court found our use of the disgorgement remedy operated as 

a penalty, which time limited the ability of the Commission to seek disgorgement 

of ill-gotten gains beyond a 5-year statute of limitations applicable to penalties. 

I do not believe it is productive to debate the merits of the Kokesh decision. I 

agree that statutes of limitation serve many important functions in our legal system, and certain types of actions as well as penalties and certain other remedies 

38 

42 U.S. Sec. and Exch. Comm’n, Off. of Compliance Inspections and Examinations, ‘‘2018 Nat’l 

Exam Program Examination Priorities’’ (Feb. 7, 2018), available at https://www.sec.gov/about/ 

offices/ocie/national-examination-program-priorities-2018.pdf. 43 U.S. Sec. and Exch. Comm’n, Off. of Compliance Inspections and Examinations, ‘‘Risk 

Alerts’’, available at https://www.sec.gov/ocie. 

should have reasonable limitations periods. Civil and criminal authorities, including 

the SEC, should do everything in their power to bring appropriate actions swiftly, 

and, in our markets, particularly our public markets, the certainty brought by reasonable limitations periods has value for investors. 

However, as I look across the scope of our actions, including most notably Ponzi 

schemes and affinity frauds, I am troubled by the substantial amount of losses that 

we may not be able to recover for retail investors. Said simply, if the fraud is wellconcealed and stretches beyond the 5-year limitations period applicable to penalties, 

it is likely that we will not have the ability to recover funds invested by our retail 

investors more than 5 years ago. Allowing clever fraudsters to keep their ill-gotten 

gains at the expense of our Main Street investors—particularly those with fewer 

savings and more to lose—is inconsistent with basic fairness and undermines the 

confidence that our capital markets are fair, efficient and provide Americans with 

opportunities for a better future. 

I welcome the opportunity to work with Congress to address this issue to ensure 

defrauded retail investors can get their investment dollars back. I believe that any 

such authority should be narrowly tailored to that end while being true to the principles embedded in statutes of limitations. 

Protecting Main Street Investors and Improving Investment Options by Promoting 

Compliance 

Earlier this year, our OCIE published its 2018 examination priorities, which reflected a continued focus on the SEC’s commitment to protecting retail investors. 42

In particular, OCIE has looked closely at products and services offered to retail investors, the disclosures they receive about those investments and the financial services professionals who serve them. OCIE has also focused its attention on several 

other areas that present heightened risks, including: (1) compliance and risks in 

critical market infrastructure, such as exchanges and clearing agencies; (2) the continued growth of cryptocurrencies and ICOs; (3) cybersecurity; and (4) anti– money 

laundering programs. 

OCIE conducts risk-based examinations of SEC-registered entities, including 

broker-dealers, investment advisers, investment companies, municipal advisors, national securities exchanges, clearing agencies, transfer agents, and FINRA, among 

others. During FY2018, OCIE conducted over 3,150 examinations, an overall increase of 11 percent from FY2017. This includes a 17 percent coverage ratio for investment advisers—which increased 13 percent from FY2017, even as the number 

of registered investment advisers increased by approximately 5 percent. OCIE also 

continued to leverage data analysis to identify potentially problematic activities and 

firms as well as to determine how best to scope the examinations of those activities 

and firms. 

In conjunction with our examination activities, OCIE published a number of risk 

alerts to inform registered firms and investors of common compliance issues we observed. 43 This year, OCIE risk alerts addressed topics ranging from municipal advisor examinations to fee and expense compliance issues for investment advisers. 

These alerts sharpen the identification and correction of potentially deficient practices, maximize the impact of our examination program and better protect the interests of Main Street investors. 

Enterprise Risk and Cybersecurity 

Cybersecurity at the SEC continues to be a top priority. The SEC and other agencies are the frequent targets of attempts by threat actors who seek to penetrate our 

systems, and some of those actors may be backed by substantial resources. Recognizing the twin realities that electronic data systems are essential to our mission 

and no system can ever be entirely safe from a cyberintrusion, it is incumbent upon 

us to devote substantial resources and attention to cybersecurity, including the protection of PII. Over the past year, we have been focused on a number of areas for 

improvement, including with respect to IT governance and oversight, security controls, risk awareness related to sensitive data, incident response, and reliance on 

legacy systems—and much work remains to be done. 

We are closely scrutinizing how we can reduce any potential exposure of PII contained in SEC systems, including EDGAR. In this regard, earlier this year, the 

Commission acted to eliminate the collection of social security numbers and dates 

39 

44 Amendments to Forms and Schedules To Remove Provision of Certain Personally Identifiable Information, Rel. Nos. 33–10486, 34–83097, IC–33077 (Apr. 24, 2018), available at https:// 

www.sec.gov/rules/final/2018/33-10486.pdf. 45Press Release 2018-22, supra note 7. 46See Press Release 2018-71, ‘‘Altaba, Formerly Known as Yahoo!, Charged With Failing To 

Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million’’ (Apr. 24, 2018), available 

at https://www.sec.gov/news/press-release/2018-71. 

of birth on a number of EDGAR forms where we concluded that the information was 

not necessary to our mission. 44 Moreover, return copies of test filings are no longer 

stored within the EDGAR system. The staff also continues to explore alternatives 

to the current approach, including the possibility of implementing a new electronic 

disclosure solution. 

The agency has also focused closely on its cybersecurity risk governance structure. 

We now have a Chief Risk Officer who helps coordinate our risk management efforts 

across the agency. We have worked to promote a culture that emphasizes the importance of data security throughout our divisions and offices. The staff has also been 

engaging with outside experts to assess and improve our security controls. For example, on a technical level, these efforts include the deployment of enhanced security capabilities, additional penetration testing and code reviews, investment in new 

technologies and experienced cybersecurity personnel and acceleration of the transition of certain legacy information technology systems to modern platforms. We will 

also continue to coordinate and partner with both other Federal agencies to identify 

and mitigate risks to our information technology environment and assets. 

We also look at cybersecurity from perspectives outside of our internal risk profile. 

From an issuer disclosure perspective, it is important that investors are sufficiently 

informed about the material cybersecurity risks and incidents affecting the companies in which they invest. Earlier this year, the Commission issued interpretive 

guidance to assist public companies in preparing these types of disclosures. 45 The 

guidance also emphasized the importance of disclosure controls and procedures that 

enable public companies to make accurate and timely disclosures about material cybersecurity events, as well as policies that protect against corporate insiders trading 

in advance of company disclosures of material cyberincidents. Further, the guidance 

expanded on prior staff guidance by addressing the board’s oversight functions. Existing SEC rules require a company to disclose the extent of the board’s role in risk 

oversight. The guidance noted that this disclosure should specifically include a discussion of the board’s role in overseeing cybersecurity risk management, to the extent those risks are material. We are monitoring the market’s response to our guidance. From a market oversight perspective, we continue to prioritize cybersecurity in 

our examinations of market participants, including broker-dealers, investment advisers, and critical market infrastructure entities. In assessing how firms prepare 

for a cybersecurity threat, safeguard customer information and detect red flags for 

potential identity theft, for example, we have focused on areas including risk governance, access controls, data loss prevention, vendor management and training, 

among others. And given the interconnectedness of our markets, we will continue 

to work closely with our counterparts at other Federal financial regulatory agencies 

and the international community to discuss cybersecurity risks and coordinate potential response efforts. 

From an enforcement perspective, as previously mentioned, our Cyber Unit is 

dedicated to targeting cyber-related misconduct in our markets, including failures 

by issuers to make material disclosures. 46 And finally, from an investor education 

perspective, our Office of Investor Education and Advocacy has worked hard to inform investors about cybersecurity hygiene and red flags of cyberfraud, in order to 

prevent investors from becoming victims in the first place. 

Increasing Engagement With Investors and Other Market Participants 

To effectively fulfill our responsibility to American investors and markets, it is essential that the SEC maintain an open line of communication with investors and 

other market participants. In FY2018, the SEC substantially increased its engagement with an array of market participants to help us improve our work and better 

focus our resources and efforts. 

Engagement With Main Street Investors 

Over the past year, SEC staff, my fellow Commissioners and I have engaged directly with Main Street investors from around the country through town halls, outreach tours, new digital tools, and other methods. 

In a first-of-its-kind event, on June 13, 2018, the full Commission—all five Commissioners—and SEC leadership met with more than 400 members of the public 

40 

47See Press Release 2018-88, ‘‘The SEC Has an Opportunity You Won’t Want To Miss: Act 

Now!’’ (May 16, 2018), available at https://www.sec.gov/news/press-release/2018-88. 48See Press Release 2018-78, ‘‘SEC Launches Additional Investor Protection Search Tool’’ 

(May 2, 2018), available at https://www.sec.gov/news/press-release/2018-78. 

during an investor town hall at the Georgia State University College of Law in Atlanta, Georgia. This event, organized by the SEC’s Office of the Investor Advocate 

and the Atlanta Regional Office, marked the first time the full Commission met 

with Main Street investors outside of Washington, DC. During the main session of 

the town hall meeting, Commissioners provided a range of information to investors 

and answered questions from attendees. My fellow Commissioners, other SEC leaders and I also participated in break-out sessions with smaller groups of investors 

to hear their views on specific investor-oriented topics such as combating fraud. The 

following day, the agency’s Investor Advisory Committee hosted a meeting at the 

same location, providing another opportunity for the public to engage with the Commission. 

This event kicked off the SEC’s ‘‘Tell Us’’ campaign, which included the additional 

roundtable meetings with retail investors I mentioned in Houston, Miami, Washington, DC, Philadelphia, Denver, and Baltimore. As mentioned, to complement 

these open discussions, the agency also developed a new ‘‘Tell Us’’ website and feedback flier, specifically designed for Main Street investors to provide feedback on the 

proposed disclosures in the standards of conduct proposals without needing to write 

a formal letter. 

The SEC also conducted investor research and surveys in FY2018 in order to better understand how investors interact with markets. The agency conducted eight 

surveys and conducted four rounds of qualitative research involving focus groups 

and one-on-one interviews. In addition to these events, day in and day out the SEC 

staff engages with individual investors as well as with investor groups to promote 

awareness of the SEC’s work and to solicit feedback. 

Empowering Main Street Investors Through Information and Education 

Across our seven investor town halls, one common theme—regardless of demographics and geography—was that investors wished they had known more about investing and our markets earlier in their lives. This sentiment was universal and 

deeply held and, while not entirely within the purview of the Commission to address, will continue to resonate with me during my tenure at the Commission. 

The SEC promotes informed investment decision making through education initiatives aimed at providing Main Street investors with a better understanding of our 

capital markets and the opportunities and risks associated with the array of investment choices presented to them. Our Office of Investor Education and Advocacy 

spearheads these efforts and participation extends throughout our divisions and offices. 

In FY2018, the SEC conducted over 150 in-person investor education events focused toward various segments of the population, including senior citizens, military 

personnel, younger investors and affinity groups. In addition to in-person education 

events, we developed informative, innovative, and accessible educational initiatives. 

A primary focus of our educational efforts is preventing fraud. Unfortunately, it 

does not cost much to finance a scam, and it often is easy for bad actors to reach 

their targets, particularly over the internet. If investors know that, as well as some 

of the hallmarks of fraud and key questions to ask before they invest or provide personal information, they are less likely to become victims. 

We use a variety of channels to deliver this message to investors. For example, 

we created a website to educate the public about frauds involving ICOs and just 

how easy it is for bad actors to engineer this type of fraud—Our HoweyCoins.com 

mock website promoted a fictional ICO. 47 The website was created in-house, very 

quickly and with few resources. It attracted over 100,000 people within its first 

week. We also published a variety of investor alerts and bulletins to warn Main 

Street investors about other possible schemes, including certain using celebrity endorsements, self-directed individual retirement accounts, the risks in using credit 

cards to purchase an investment and the potential harm resulting from sharing 

their personal contact information with online investment promoters. 

We also continued to promote our national public service campaign, ‘‘Before You 

Invest, Investor.gov’’. This initiative encourages investors to research the background of their investment professional. Our experience demonstrates that working 

with unlicensed promoters who have a history of misconduct greatly increases the 

risk of fraud and losses. In May 2018, we supplemented this information service 

with a new online search tool, the SEC Action Lookup for Individuals—or SALI. 48

This tool enables investors to find out if the individual or firm he or she is dealing 

41 

with has been sanctioned as a result of SEC action, for both registered and unregistered individuals. SALI continues to be updated on an ongoing basis, making it an 

ever better resource for Main Street investors. We are encouraged by the fact that 

unique page views on Investor.gov increased by 45 percent compared to FY2017. 

SEC regional offices also engaged in investor initiatives in their local communities. For example, the San Francisco Regional Office has conducted extensive outreach to California teachers through its Teacher Investment Outreach Initiative. 

This project seeks to help teachers make informed decisions on investment portfolio 

options, fees, and risk. Regional staff, many of whom have personal connections to 

the teaching community, created this initiative in response to learning about the 

limitations of the investment options offered to public school teachers under the defined contribution portion of their retirement plans. 

Engagement With Market Participants 

Our capital markets are far different today than they were a decade ago. They 

are increasingly global and highly data dependent. Investments are channeled 

through intermediaries and vehicles, such as mutual funds and ETFs, to a much 

greater extent. Our markets also are ever changing and the pace of that change has 

increased. It is essential that the SEC understand the markets of today and continually prepare for and adjust to market developments. As a result, engagement with 

those who participate in our markets extensively, including public and private companies, institutional investors, broker-dealers and auditors, as well as those who 

monitor and oversee markets, including U.S. and foreign authorities, elected officials 

and academics, is essential. 

In 2018, the SEC held numerous public roundtables at which the Commission and 

SEC staff engaged in an open forum with market participants on some of the most 

salient issues affecting our markets today. 

• In April, the Division of Trading and Markets hosted a roundtable on market 

structure for thinly traded securities, both equities and exchange-traded products. The panelists discussed the challenges faced by participants in the market 

for thinly traded exchange-listed securities, including small and medium-sized 

companies looking to enter our public markets, and potential actions to address 

those concerns. The staff is analyzing a number of the suggestions and comments made at that roundtable, and, more generally, is considering ways to improve secondary market liquidity for smaller companies. 

• In September, the Division of Trading and Markets hosted a roundtable on regulatory approaches to combating retail investor fraud. At this event, a broad 

range of market participants, regulators, and industry experts shared their 

views on potential steps that might be taken to enhance the ability of regulators, broker-dealers, and others to combat retail investor fraud. 

• In October, the Division of Trading and Markets hosted a roundtable on market 

data and market access. At this event, a diverse group of panelists, representative of a broad spectrum of perspectives and views—including those of exchanges, market participants and various industry experts—discussed the current landscape of market data products and market access services. The panelists also provided views on potential steps to improve market data products and 

access services. 

• In November, the Divisions of Corporation Finance and Investment Management held a roundtable, discussed above, focusing on key aspects of the U.S. 

proxy system. 

In addition to events of this type, the leadership in our divisions and offices, as 

well as our dedicated staff, is open to hearing from and meeting with investors and 

market participants on areas where our markets are not working as they should or 

can be improved—particularly as it relates to our long-term Main Street investors. 

Emerging Market Risks and Trends 

I want to briefly discuss two risks, in addition to cybersecurity risks, we are monitoring closely: the impact to reporting companies of the United Kingdom’s exit from 

the European Union, or ‘‘Brexit’’; and the transition away from the London Interbank Offered Rate, or ‘‘LIBOR,’’ as a reference rate for financial contracts. While 

these are not the only areas of market risk that the Commission is monitoring, their 

impacts are likely significant for American investors. 

Brexit 

First, the potential effects of Brexit on U.S. investors and securities markets, and 

on global financial markets more broadly, is a matter of increased focus for me and 

many of my colleagues at the SEC. To be direct, I am concerned that: 

42 

49 Chris Giles and Sylvia Pfeifer, ‘‘BoE Sounds Alarm Over No-Deal Brexit Planning’’, Fin. 

Times, Nov. 29, 2018 (noting that the Bank of England’s Governor Mark Carney says that less 

than half of the businesses in the U.K. are not prepared for the risk of a no-deal Brexit). 50 European Commission Communication, ‘‘Preparing for the Withdrawal of the United Kingdom From the European Union on 30 March 2019: A Contingency Action Plan (Nov. 13, 2018), 

available at https://ec.europa.eu/info/publications/communication-preparing-withdrawalunited-kingdom-european-union-30-march-2019-contingency-action-plan-13-11-2018len. 51These estimates are as of the end of 2016. Of the $200 trillion in notional exposure, ap- proximately 95 percent relates to derivatives products. Over $8 trillion of exposure relates to 

business loans, consumer loans, floating/variable rate notes, and securitizations. See ‘‘Second Report of the Alternative Reference Rates Committee’’ (March 2018), available at https:// 

www.newyorkfed.org/medialibrary/Microsites/arrc/files/2018/ARRC-Second-report.com. 

1. The potential adverse effects of Brexit are not well understood and, in the 

areas where they are understood, are underestimated. 49

2. The actual effects of Brexit will depend on many factors, some of which may 

prove to be beyond the control of the U.K. and EU authorities. 

3. Our markets, at many levels—from multinational companies, to market infrastructure, to investment products and services—are international, and the effects of Brexit will be international, including on U.S. markets and our Main 

Street investors. 

4. The actual effects of Brexit are likely to manifest themselves in advance of implementation dates and, based on corporate disclosures, some of those effects 

are upon us. 

5. The actual effects of Brexit will depend in large part on the ability of U.K., 

EU, and EU member State officials to provide a path forward that allows for 

adjustment without undue uncertainty, disruption, or cost. That is a tall order 

that I believe requires: (a) a broad understanding of market interdependencies—knowledge that goes well beyond the labor and financial markets; (b) 

foresight—people and firms will act in their own interests and the interests of 

their shareholders; and (c) flexibility—miscalculations are inevitable and will 

need to be addressed promptly. More generally, limiting the adverse effects of 

Brexit requires a willingness of governmental authorities to look beyond potential immediate, local economic and other opportunities provided by a blunt 

transition and pursue a course that focuses on broad, long-term economic performance and stability. While many involved in the Brexit process agree with 

this perspective, and some important steps have been taken, 50 I do not yet see 

wide acceptance of this principle. 

To be clear, these are my personal views, but it is appropriate to share them as 

they are reflective of the SEC’s approach to Brexit. The SEC’s responsibility is primarily related to the effects of Brexit on our capital markets. For example, I have 

directed the staff to focus on the disclosures companies make about Brexit and the 

functioning of our market utilities and other infrastructure. 

We have seen a wide range of disclosures, even within the same industry. Some 

companies have fairly detailed disclosures about how Brexit may impact them, while 

others simply state that Brexit presents a risk. I would like to see companies providing more robust disclosure about how management is considering Brexit and the 

impact it may have on the company and its operations. 

With regard to market utilities and infrastructure, following the 2016 Brexit vote, 

SEC staff commenced discussions with other U.S. financial authorities, with our 

U.K. and EU counterparts, and with market participants, all with an eye toward 

identifying and planning for potential Brexit-related impacts on U.S. investors and 

markets. These discussions are ongoing, and I expect their pace to increase. 

Transition Away From LIBOR 

The second risk that I want to highlight relates to the transition away from 

LIBOR as a benchmark reference for short-term interest rates. LIBOR is used extensively in the U.S. and globally as a benchmark for various commercial and financial contracts, including interest rate swaps and other derivatives, as well as floating-rate mortgages and corporate debt. It is likely, though, that the banks currently 

reporting information used to set LIBOR will stop doing so after 2021, when their 

commitment to reporting information ends. The Federal Reserve estimates that in 

the cash and derivatives markets, there are approximately $200 trillion in notional 

transactions referencing U.S. Dollar LIBOR and that more than $35 trillion will not 

mature by the end of 2021. 51

The Alternative Reference Rate Committee (Committee)—a group convened by the 

Federal Reserve that includes major market participants, and on which SEC staff 

and other regulators participate—has proposed an alternative rate to replace U.S. 

43 

52 Relying on daily compounding over a 3-month period, for example, may result in issuers 

not having certainty about the size of their interest payment until the end of the period. Also, 

SOFR does not correspond one-to-one with LIBOR; LIBOR incorporates a credit risk premium 

whereas SOFR is a secured rate. In a transition, a methodology needs to be developed to determine fair spreads between the two rates. 53For example, trading in SOFR futures in the U.S. commenced in May. See ‘‘CME Group 

Announces First Trades of New SOFR Futures’’ (May 8, 2018), available at https:// 

www.cmegroup.com/media-room/press-releases/2018/5/08/ 

cmelgrouplannouncesfirsttradesofnewsofrfutures.html. The market’s first-ever SOFR-linked 

debt securities were issued in July, and since then additional issuances have occurred. See 

‘‘Fannie Mae Pioneers Market’s First-Ever Secured Overnight Financing Rate (SOFR) Securities’’ (July 26, 2018), available at http://www.fanniemae.com/portal/media/financial-news/ 

2018/fannie-mae-pioneers-sofr-securities-6736.html. In addition, central counterparties have 

commenced clearing of SOFR swaps. See ‘‘LCH Clears First SOFR Swaps’’ (July 18, 2018), available at https://www.lch.com/resources/news/lch-clears-first-sofr-swaps. See also ‘‘CME Group 

Announces First OTC SOFR Swaps Cleared’’ (Oct. 9, 2018), available at https:// 

www.cmegroup.com/media-room/press-releases/2018/10/09/ 

cmelgrouplannouncesfirstotcsofrswapscleared.html. 

Dollar LIBOR—the Secured Overnight Financing Rate, or ‘‘SOFR.’’ The Committee 

has identified benefits to using SOFR as an alternative to LIBOR. For example, 

SOFR is based on direct observable transactions and based on a market with very 

deep liquidity, reflecting overnight Treasury repurchase agreement transactions 

with daily volumes regularly in excess of $700 billion. 

A significant risk for many market participants—whether public companies who 

have floating-rate obligations tied to LIBOR, or broker-dealers, investment companies or investment advisers that have exposure to LIBOR—is how to manage the 

transition from LIBOR to a new rate such as SOFR, particularly with respect to 

those existing contracts that will still be outstanding at the end of 2021. Accordingly, although this is a risk that we are monitoring with our colleagues at the Federal Reserve, Treasury Department, and other financial regulators, it is important 

that market participants plan and act appropriately. 

For example, if a market participant manages a portfolio of floating rate notes 

based on LIBOR, what happens to the interest rates of these instruments if LIBOR 

stops being published? What does the documentation provide? Does fallback language exist and, if it exists, does it work correctly in such a situation? If not, will 

consents be needed to amend the documentation? Consents can be difficult and costly to obtain, with cost and difficulty generally correlated with uncertainty. 

In the area of uncertainties, we continue to monitor risks related to the differences in the structure of SOFR and LIBOR. SOFR is an overnight rate, and more 

work needs to be done to develop a SOFR term structure that will facilitate the 

transition from term-based LIBOR rates. 52

To be clear, a lot of progress has been made to facilitate the transition from 

LIBOR to SOFR. We have started to see more SOFR-based debt issuances, and we 

have seen promising developments in the SOFR swaps and futures markets. 53 But 

I want to make sure that market participants are aware of the need to plan for this 

important transition, as a lot of the work will fall on them. 

Conclusion 

Thank you for the opportunity to testify today and for the Committee’s continued 

support of the SEC, its mission and its people. I look forward to working with each 

of you to advance our mission to the benefit of our capital markets and our Main 

Street investors. 

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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM JAY CLAYTON 

Q.1. The Consolidated Audit Trail (CAT) plan processor, Thesys 

CAT LLC, announced last month the initiation of reporting by exchanges and FINRA of order and transaction data. As Trading and 

Markets Division Director Redfearn noted, the Master Plan first 

phase launch on November 15, 2018, reflects a 1-year delay from 

the original plan. 

Thesys CAT’s press release noted that it ‘‘continues to work to 

provide the capabilities required for the first reporting phase,’’ and 

that it expects to complete full functionality on or before March 31, 

2019. 

Given that each successive phase of the CAT was delayed by at 

least one year, please explain the significance of the delay in 

achieving full functionality described by Thesys CAT and whether 

following phases will further delayed. 

A.1. The SROs have missed numerous deadlines relating to the 

CAT required in the CAT NMS Plan, as well as various milestones 

set by the SROs and communicated to the Commission. This failure 

to meet these deadlines and milestones has become a clear pattern 

over the course of the CAT’s development. 

As background, shortly after my arrival at the Commission in 

May 2017, I was informed by the CEO of Thesys, the firm engaged 

by the SROs to build and deliver the CAT, that they were on track 

towards launching the CAT for SRO reporting on November 15, 

2017. The SROs were aware of this information. Similarly, until 

late summer 2017, the Commission was led to believe that the November 15, 2017, deadline for SRO reporting to the CAT was 

achievable. This information proved to be incorrect. 

In the fall of 2017, when it was readily apparent that Thesys and 

the SROs would fail to deliver the CAT as required, I asked for a 

revised time table and work plan. The SROs developed a time table 

and work plan, which contained a number of milestones, including 

SRO reporting to the CAT by November 15, 2018, a year past the 

deadline in the CAT NMS Plan. The SROs subsequently informed 

Commission staff that certain functionalities that were supposed to 

be part of that first phase of reporting would not be available until 

March 31, 2019. Shortly after that, it became clear that Phase 1 

would not be complete in March since the SROs announced that 

they are transitioning away from Thesys and have selected FINRA 

to be the new plan processor. The SROs are currently revising their 

master plan. 

Further, the SROs have not yet begun collecting data from industry members. I expect the SROs to work diligently to ensure that 

industry member reporting begins as soon as possible. I have asked 

the staff to explore potential amendments to the CAT NMS Plan 

in light these significant delays. Compliance with the CAT NMS 

Plan is the legal obligation of the SROs. Separately, I have hired 

Manisha Kimmel, who has a wealth of experience and expertise in 

audit trail reporting, as a Senior Policy Advisor for Regulatory Reporting. In this capacity, she will coordinate the Commission’s oversight of the SROs’ creation and implementation of the CAT. 

51 

Q.2. In your testimony, you discussed the standards for investment 

advisers and brokers and the Regulation Best Interest proposal. 

Specifically, you stated that under current standards the ‘‘baseline adviser standard is the adviser cannot put their interests 

ahead of the client’s interests’’. You added that, ‘‘with informed consent they can cut back on that standard. That is not well understood.’’ 

Please explain what constitutes informed consent in such a relationship? 

How has the SEC evaluated situations where informed consent 

was given to allow reducing the adviser’s standard of care? 

Also, what has the SEC done, or what can it do, to make sure 

the potential of a lower standard is better understood? 

A.2. In the proposed Commission interpretation of the standard of 

conduct for investment advisers, the Commission stated that the 

client cannot waive the Federal fiduciary duty. Although the investment adviser fiduciary duty is not waivable, it is well established that the terms of the investment adviser relationship—and 

therefore the scope of the duty in that relationship—may be shaped 

by disclosure and informed consent. Our proposed interpretation 

provides further details on this widely accepted process—that disclosures regarding the scope and terms of the relationship should 

be sufficiently specific so that a client is able to decide whether to 

provide informed consent. 

This process of scoping the terms of the advisory relationship, 

which is regularly effectuated through account agreements and 

Form ADV, is widely accepted in the industry and provides for arrangements such as limited account services and certain thirdparty compensation to the investment adviser. Our proposed relationship summary, if adopted, will increase retail investor awareness of the material terms of common arrangements with investment professionals, and the fees and conflicts of interest that 

apply. I have been surprised that, with all of the public dialogue 

about the fiduciary duty, there is not more acknowledgment of the 

fact that the application of that duty can and does vary depending 

on the terms of the agreement between the client and adviser. The 

proposed requirements of the relationship summary would highlight the nature of an advisory relationship and the scope of services that the investment adviser provides. 

We have received a lot of thoughtful comments on the proposed 

interpretation of the standard of conduct for investment advisers 

and Commission staff is reviewing comments carefully, engaging 

further with commenters and thinking about what next steps it 

might recommend to the Commission. 

Q.3. The Conflict of Interest Obligations in the Regulation Best Interest proposal requires that: a broker or dealer establishes, maintains, and enforces written policies and procedures reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations. 

A broker or dealer establishes, maintains, and enforces written 

policies and procedures reasonably designed to identify and disclose 

52 

and mitigate, or eliminate, material conflicts of interest arising 

from financial incentives associated with such recommendations. 

Please provide examples of ‘‘material conflicts of interest’’ that 

are distinguishable from ‘‘material conflicts of interest arising from 

financial incentives’’. 

Also, please provide examples of how material conflicts of interest arising from financial incentives can be mitigated. 

A.3. Proposed Regulation Best Interest reflected our concern that 

disclosure alone may not be enough when a conflict involves a financial incentive. 

Our proposal would require broker-dealers to establish, maintain 

and enforce written policies and procedures reasonably designed to 

identify and disclose and mitigate, or eliminate, material conflicts 

of interest related to financial incentives, in addition to the proposed requirement to establish, maintain and enforce written policies and procedures reasonably designed to identify and at a minimum disclose or eliminate general material conflicts of interest. 

As a practical matter, the vast majority of broker-dealer conflicts 

would likely be ‘‘financial incentives,’’ and the proposed conflict and 

disclosure obligations would require broker-dealers to establish, 

maintain and enforce written policies and procedures reasonably 

designed to, at a minimum, mitigate and disclose those conflicts. 

The proposal defined financial incentives broadly to cover a wide 

variety of compensation practices established by the broker-dealer, 

including quotas, bonuses, sales contests, special awards, differential, or special compensation, as well as the sale of proprietary 

products and effecting transactions in a principal capacity. So, for 

example, if a broker-dealer provides incentives to its representatives to favor one type of large cap mutual fund over another, 

under the proposal, the broker-dealer would need to mitigate that 

conflict to minimize the potential for the conflict to taint the recommendation. 

The proposal aimed to provide broker-dealers flexibility to develop and tailor reasonably designed policies and procedures that 

include conflict mitigation measures, based on each firm’s circumstances. We gave examples of potential mitigation measures in 

the release, such as minimizing compensation incentives to favor 

certain products over others and enhanced supervision of recommendations involving higher compensating products. 

The proposal also acknowledged that some material conflicts may 

be too difficult to mitigate and may be more appropriately avoided 

entirely or for certain categories of retail customers. For example: 

payment or receipt of certain noncash compensation that presents 

conflicts of interest for broker-dealers, such as certain sales contests, trips, prizes, and other similar bonuses. 

The proposal requested comment on whether the Commission 

should prohibit receipt of certain noncash compensation. We have 

received a lot of thoughtful comments on this issue and Commission staff is reviewing comments carefully, engaging further with 

commenters and developing a recommendation for the Commission. 

I believe the mitigation requirement is a very significant step forward in aligning the broker-dealer standard of conduct with retail 

customers’ reasonable expectations. Investors can generally understand a commission-based model and, if the commission structure 

53 

is reasonable and understandable, existing supervisory requirements supplemented with disclosure would be sufficient. However, 

I do not believe a reasonable investor would expect that disclosure 

alone would be enough to effectively reduce the impact of certain 

sales incentives on a broker-dealer’s recommendations and, therefore, I believe those incentives would need to be mitigated or eliminated, which is consistent with what a reasonable retail investor 

would expect. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM JAY CLAYTON 

Q.1. I would like to elaborate on your recent efforts to increase cybersecurity at the SEC, which you mentioned briefly in your opening statement. On September 20th you announced the establishment of a senior-level cybersecurity working group and the creation 

of a Chief Risk Officer position. 

Can you provide a detailed update on these efforts? 

Who participates in the working group and when are recommendations expected? 

A.1. The SEC has appointed a Chief Risk Officer (CRO), Mr. Gabriel Benincasa, whose background includes significant senior leadership experience in enterprise risk and compliance in the financial 

sector. The SEC’s Cybersecurity Working Group’s membership includes senior leadership in the agency’s divisions and major offices, 

the Chief Operating Officer, Chief Information Officer, Chief Information Security Officer, and the Cybersecurity Adviser to the 

Chairman. The purpose of the group is to coordinate information 

sharing, risk and threat monitoring, incident response and other 

cross-divisional and inter-agency efforts. During the past year, the 

group coordinated, among other things, an update to the agency’s 

procedures for handling cybersecurity incidents and participated in 

tabletop exercises to train staff on the new procedures. 

Q.2. In your submitted testimony you also indicate that you are 

contracting with outside entities to perform penetration testing. 

How were vendors selected for penetration testing and how often 

are comprehensive source code reviews being conducted? 

A.2. The SEC obtains penetration testing services from cybersecurity experts at the Department of Homeland Security (DHS) and 

the private sector, which allow us to periodically assess and continuously improve the security of our network and information systems. The agency’s agreement with DHS enables us to receive operational and technical assistance at no cost. The agency through our 

Office of Acquisitions has also leveraged government-wide acquisition contracts to obtain penetration testing services from multiple 

third-party entities, who are selected based on their ability to provide thorough testing services. These outside vendors are also required to meet certain prescriptive personnel security requirements. With respect to code reviews, the SEC is utilizing such reviews to assist in our efforts to uplift our EDGAR system as well 

as other critical agency systems. To facilitate additional code review, the SEC’s Office of Information Technology has acquired and 

is currently integrating the use of newly acquired code review tools 

54 

into the agency’s application development process. We expect these 

tools to be implemented during 2019. 

Q.3. Within the SEC’s Division of Enforcement, can you characterize how much enforcement activity takes place within the newly 

created Cyber Unit? 

Of the 754 enforcement actions and $3.8 billion in penalties in 

2017, how much of this activity was cyber-related? 

How much was related to fraud against retail investors of ICOs? 

How much was related to failures by issuers to make material 

disclosures? 

How many employees are staffing this unit and how aggressively 

are they targeting fraud? 

A.3. The Division of Enforcement’s Cyber Unit centralizes, 

leverages and builds upon the significant expertise that the SEC’s 

Enforcement Division has developed on cyber-related issues over 

the past several years. Because cyber is a growing threat to the 

markets, this area benefits from specialization, formalization and 

enhanced coordination. The Cyber Unit is staffed by 30 personnel 

nationwide, and each of the SEC’s regional offices has a liaison to 

the Unit who serves as a resource to non-Unit personnel conducting cyber-related investigations and litigation. The Cyber Unit 

focuses its efforts on the following key areas: 

• Market manipulation schemes involving false information 

spread through electronic and social media; 

• Hacking to obtain material nonpublic information and trading 

on that information; 

• Violations involving distributed ledger technology and initial 

coin offerings; 

• Misconduct perpetrated using the dark web; 

• Intrusions into retail brokerage accounts; and 

• Cyber-related threats to trading platforms and other critical 

market infrastructure. 

Since the formation of the Cyber Unit at the end of FY2017, the 

Division’s focus on cyber-related misconduct has steadily increased. 

In FY2017 and FY2018, the Commission brought a combined 26 

standalone cases, including cases involving ICOs and digital assets. 

So far, more than $120 million has been ordered in 10 of the 26 

cases. The other 16 cases are still in litigation. At the end of 

FY2018, the Division had more than 225 cyber-related investigations ongoing. These cases and ongoing investigations are being 

handled by both Unit and non-Unit personnel. Thanks to the work 

of the Cyber Unit and other staff focusing on these issues, in 

FY2018 the SEC’s enforcement efforts impacted a number of areas 

where the Federal securities laws intersect with cyberissues. 

Cyber Unit personnel, as well as other staff of the Division of Enforcement who are conducting cyber-related investigations and litigation, are aggressively targeting fraud and other types of misconduct in this space. For instance, last year, the SEC brought 

charges against a second defendant in connection with a scheme to 

allegedly manipulate the price of Fitbit securities through false regVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
55 

1Press Release 2018-130, ‘‘SEC Files Additional Charges in Fitbit Stock Manipulation 

Scheme’’ (July 11, 2018), available at https://www.sec.gov/news/press-release/2018-130. The 

first defendant was charged in 2017. Press Release 2017-107, ‘‘SEC Charges Fake Filer With 

Manipulating Fitbit Stock’’ (May 19, 2017), available at https://www.sec.gov/news/press-release/2017-107. 2Press Release 2017-202, ‘‘Day Trader Charged in Brokerage Account Takeover Scheme’’ (Oct. 

30, 2017), available at https://www.sec.gov/news/press-release/2017-202. 3Press Release 2018-213, ‘‘SEC Charges Firm With Deficient Cybersecurity Procedures’’ 

(Sept. 26, 2018), available at https://www.sec.gov/news/press-release/2018-213. 4Press Release 2017-131, ‘‘SEC Issues Investigative Report Concluding DAO Tokens, a Digital 

Asset, Were Securities; U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations’’ (July 25, 2017), available at https://www.sec.gov/news/press-release/2017-131. 5 A full list of the ICO- and cyber-related actions that the Commission has brought is 

catalogued on Sec.gov. U.S. Sec. and Exch. Comm’n, Cyber Enforcement Actions, https:// 

www.sec.gov/spotlight/cybersecurity-enforcement-actions. 6Press Release 2018-71, ‘‘Altaba, Formerly Known as Yahoo!, Charged With Failing To Disclose Massive Cybersecurity Breach; Agrees To Pay $35 Million’’ (Apt. 24, 2018), available at 

https://www.sec.gov/news/press-release/2018-71. 

ulatory filings. 1 The SEC also charged a day trader with allegedly 

participating in a scheme to access the brokerage accounts of more 

than 100 unwitting victims and make unauthorized trades to artificially inflate the stock prices of various companies. 2 And, at the 

end of FY2018, the SEC brought settled proceedings against an 

Iowa-based broker-dealer and investment adviser related to its failures in cybersecurity policies and procedures surrounding a 

cyberintrusion that compromised personal information of thousands 

of its customers, in violation of Regulations S-P and S-ID. This was 

the SEC’s first action charging violations of Regulation S-ID, 

known as the Identity Theft Red Flags Rule, which is designed to 

protect customers from the risk of identity theft. 3

The Division, including its Cyber Unit, is focused on issues related to ICOs and digital assets. Many of the cases that have resulted from this focus have involved allegations of fraud. Since the 

Commission’s publication of The DAO 21(a) Report in FY2017, 4 the 

Commission has brought 19 actions involving ICOs, 10 of which involved allegations of fraud, and has utilized its trading suspension 

authority to suspend trading in the stock of over a dozen publicly 

traded issuers because of questions concerning, among other 

things, the accuracy of assertions regarding their investments in 

ICOs and operation of cryptocurrency platforms. 5

Aside from ICOs, fulsome disclosure of cyber-related issues is a 

priority. In FY2018, the Commission brought its first enforcement 

action involving charges against a public company for failing to 

properly inform investors about what was then the largest known 

cyberintrusion in history. The SEC’s order found that Yahoo! failed 

to properly assess the scope, business impact, or legal implications 

of the breach, including whether, when, and how the breach should 

have been disclosed. To settle the action, the entity formerly known 

as Yahoo! agreed to pay a $35 million penalty. 6

Q.4. There is no existing requirement in securities law that explicitly refers to cyber risks, and SEC policy regarding the necessary 

disclosure of breaches on the part of public companies is murky at 

best. Last month, for example, Marriott International disclosed a 

data breach to the SEC that may have exposed the personal information of up to 500 million guests and that has been going on undetected since 2014. 

56 

How can this process be improved, rather than considering 

whether companies are properly disclosing ‘‘material information’’ 

on a one-off basis? 

A.4. In February 2018, the Commission issued interpretative guidance to assist public companies in preparing disclosures concerning 

material cybersecurity risks and incidents. The guidance highlights 

the disclosure requirements under the Federal securities laws that 

public companies must evaluate when considering their disclosure 

obligations with respect to cybersecurity risks and incidents. 

The existing disclosure framework seeks to elicit disclosure of cybersecurity incidents and risks that are material to investors in a 

timely fashion. Generally, information is material if the information would be viewed by the reasonable investor as important in 

making an investment decision or as having significantly altered 

the total mix of information available. As the cybersecurity landscape and the risks associated with it continue to evolve, the Commission and staff will continue to evaluate the guidance in light of 

such disclosures, the cybersecurity environment, and its impacts on 

issuers and the capital markets generally and consider feedback 

about whether any further guidance or rules are needed. 

Q.5. What oversight authority does the SEC have when a digital 

asset is not considered a security, or when there is dispute about 

whether an asset meets the definition of a security or commodity? 

A.5. The SEC has jurisdiction over securities, securities market 

participants and securities-related conduct. Even if a digital asset 

is not a security, the SEC could have jurisdiction over a particular 

activity if a digital asset is used in connection with some securitiesrelated conduct or product. For example, even when a digital asset 

is not itself a security, the SEC has jurisdiction over a security that 

references that digital asset, such as a structured note referencing 

a digital asset. Whether a token or a digital asset called a 

cryptocurrency is a security is determined by applying long established law, including the Howey test, to the facts and circumstances of the particular instrument being sold. 

As part of the legal framework regulating financial instruments, 

the Commodity Exchange Act and the Federal securities laws contain provisions that determine which regulatory scheme applies to 

different financial instruments. As a general matter, the SEC has 

jurisdiction over derivatives (such as options) based on securities. 

The Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps, but the SEC has jurisdiction over swaps based on 

a single security or narrow-based security index and has antifraud 

authority over swaps based on a broad-based security index. The 

CFTC and the SEC have joint jurisdiction over security-futures and 

share jurisdiction over mixed swaps. For example, the SEC and the 

CFTC would share jurisdiction over a future on a digital asset that 

is a security and the SEC would have jurisdiction over an option 

or a swap on a digital asset that is a security. 

Staff of the CFTC and SEC coordinate and have frequent discussions about novel products, including in the digital asset space. 

Q.6. When we communicated last February regarding 

cryptocurrencies, you indicated that the SEC has generally developed their regulatory approach on a case-by-case basis, primarily 

57 

focusing on fraudulent initial coin offerings (ICOs). While I believe 

blockchain technology and virtual currencies have the potential for 

positive disruption of our institutions and processes, one recent 

study indicated that roughly 80 percent of all ICOs were found to 

be scams. 

You may have seen that this Committee held a hearing in October considering opposing perspectives on the benefits of virtual currencies. 

Based on your perspective as a regulator, what are the potential 

benefits and drawbacks of ICOs? 

A.6. Blockchain technology and the creative use of digital tokens 

that are recorded on distributed ledgers offer opportunities for new 

forms of capital raising and finance, can facilitate allocations of 

capital and can reduce the costs of funding by making that process 

more efficient. We meet with industry participants to learn about 

innovative blockchain mediated business. We also recognize that 

much of this promise is yet to be realized. Although the ICOs we 

have seen to date involve the offer and sale of securities, many of 

those offerings are not following our securities laws. These unlawful offerings seek all the benefits of a registered public offering— 

such as broad investor solicitation, no investor sophistication requirement and immediate secondary market liquidity—and also all 

the benefits of an exempt private offering, such as reduced regulatory costs and disclosure requirements. However, these offerings 

often are not following the private placement rules that limit the 

purchases to high net-worth or high income investors and are not 

registered offerings that must provide investors with full disclosures and the protections that follow from registration. 

This is something we are very focused on, as some of our recent 

enforcement actions reflect. The Federal securities laws provide important market and investor protections in connection with the 

offer and sale of securities—regardless of whether they are called 

shares of stock or digital assets or tokens. If you are offering digital 

asset or tokens that are securities to U.S. investors, you have two 

options: (1) comply with an exemption from registration; or (2) register the offering with the SEC. 

Secondary market activities in the digital asset markets also 

raise concerns. As currently operating, trading platforms in this 

space often permit the trading of securities but offer substantially 

less investor protection than in our traditional securities markets, 

with correspondingly greater opportunities for fraud and manipulation. 

Finally, ICO markets span national borders and significant trading may occur on systems and platforms outside the U.S. As a result, risks can be amplified, including the risk that market regulators, like the SEC, may not be able to effectively pursue bad actors or recover funds. 

We are cognizant of both the benefits and risks presented by this 

rapidly evolving area. We recognize its potential to facilitate capital 

formation—one of our three core missions. At the same time we 

continuously balance that goal with our other two core missions— 

to protect investors and maintain fair, orderly and efficient markets. 

58 

Q.7. For example, is it fair to say that ICOs have the potential to 

expand access to capital for small businesses? 

If so, do you have any data that indicates this? 

A.7. I have said before that technological innovations have improved our markets, including through increased competition, lower 

barriers to entry and decreased costs for market participants. Distributed ledger and other emerging technologies have the potential 

to further influence and improve the capital markets and the financial services industry. Businesses, especially smaller businesses 

without efficient access to traditional capital markets, can be aided 

by financial technology in raising capital to establish and finance 

their operations, thereby allowing them to be more competitive 

both domestically and globally. And these technological innovations 

can provide investors with new opportunities to offer support and 

capital to novel concepts and ideas. 

But technological advancement—including the introduction of 

technological developments into our securities offering and trading 

infrastructure and the raising of capital to fund technological advancement—must be pursued in harmony with our Federal securities laws. These laws reflect our tripartite mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. We should embrace beneficial innovations, including 

new techniques for capital raising, but not at the expense of the 

principles undermining our well-founded and proven approach to 

protecting investors and markets. 

We have not performed a quantitative study of this nature; however, we have implemented a number of initiatives designed to aid 

innovators, including those in the distributed ledger technology 

space. In October 2018, the SEC announced the formation of the 

Strategic Hub for Innovation and Financial Technology (FinHub), 

which serves as a public resource for FinTech-related issues at the 

SEC, including matters dealing with distributed ledger technology. 

The FinHub provides a portal for industry and the public to engage 

directly with SEC staff on innovative ideas and technological developments. Additionally, the FinHub is a warehouse of information 

regarding the SEC’s activities and initiatives involving FinTech 

and will serve as a platform and clearinghouse for SEC staff to acquire and disseminate information and FinTech-related knowledge 

within the agency. 

Q.8. In your testimony, you mention regular meetings with other 

agencies to consider areas where additional regulatory oversight of 

ICOs and digital assets may be necessary. 

Can you provide specific updates on the changes that you are 

considering to your policy and oversight of virtual currencies? 

A.8. The SEC will continue to closely coordinate with our regulatory and law enforcement partners across the globe on these 

issues. Through collaborations such as cross-agency working groups 

like the Financial Stability Oversight Council’s Digital Assets and 

DLT Working Group, and in other contexts, we will continue to explore whether there are regulatory gaps and consider the appropriate regulatory approach going forward. To the extent that new 

issues arise in our markets that the SEC is unable to address, we 

59 

will alert Congress to gaps in authority and request additional authority where necessary. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON 

FROM JAY CLAYTON 

Q.1. I want to draw your attention to a concerning trend: U.S.-listed, Cayman-incorporated, Chinese companies continue to exploit 

American capital markets at the expense of American investors. 

After enjoying the benefits of a U.S. listing, a controlling Chinese 

shareholder takes the company private at a low valuation, then 

relists in Shanghai or Hong Kong at a dramatically higher price. 

Through this scheme, Chinese shareholders are making billions at 

the expense of American minority investors. 

What tools does the SEC currently have—or need—to protect 

U.S. investors, maintain fair markets, and prevent Chinese exploitation of take-private transactions? 

A.1. Going-private transactions are subject to both Federal and 

State (or foreign) law. The Federal securities laws are focused on 

the disclosure of material information in a going-private transaction and the imposition of liability for such disclosures. State or 

foreign law (such as Cayman law) governs the other important 

issues in a going-private transaction that your question raises, 

such as the board of directors’ fiduciary duties (including with respect to the consideration offered in the transaction), procedural 

safeguards to address self-dealing concerns and the requisite security holder votes needed for approval of the transaction. 

Exchange Act Rule 13e-3 is the key SEC rule that governs goingprivate transactions. Under the rule, a disclosure document (Schedule 13E-3) must be publicly filed and delivered to all security holders of the target company prior to the closing of the transaction. 

Schedule 13E-3 requires disclosure specifically targeted at the fairness of the consideration offered in a going-private transaction and 

possible conflicts of interest, including: (1) the negotiations leading 

up to the execution of a transaction agreement, including any alternative transactions proposed; (2) the purposes of the transaction; 

(3) any plans or proposals for the company following the transaction; (4) historical and pro forma financial statements, in certain 

circumstances; and (5) the substantive and procedural fairness of 

the transaction to unaffiliated security holders, including: whether 

a report or opinion about the transaction’s fairness was received; 

whether the controlling security holder reasonably believes the 

transaction is fair to unaffiliated security holders; and the factors 

considered by the controlling security holder in making this fairness determination. 

This disclosure is subject to staff review and the liability provisions of Rule 13e-3, which prohibits any materially false 

misstatement or omission, and to the general anti-fraud provisions 

of the Federal securities laws. 

The SEC has pursued securities law violations by foreign-based 

issuers involving market manipulation, accounting and disclosure 

violations and auditor misconduct, among others. The SEC has various tools at its disposal for doing so. For instance, it can conduct 

investigations to determine whether any Federal securities laws 

60 

have been violated, and, if there is evidence of any violation, it can 

bring charges in Federal district court against the entity. To conduct these investigations, the SEC can utilize tools such as the 

IOSCO Multilateral Memorandum of Understanding to obtain documents and testimony from foreign jurisdictions, as well as leverage Mutual Legal Assistance Treaties with the assistance of the 

U.S. Department of Justice. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM JAY CLAYTON 

Q.1. I understand that the SEC has delegated the authority for creating accounting standards to the Financial Accounting Standards 

Board or FASB. FASB has led the way globally when it comes to 

accounting regulation. In light of pressure for the International Accounting Standards Board to assume a greater importance compared to FASB or perhaps even replace FASB, this may be an appropriate time to reevaluate FASB’s standard-setting practices. 

To that end it would be helpful to hear your perspective as to 

how the SEC estimates the impact of new accounting rules before 

they’re implemented. The Current Expected Credit Loss (CECL) 

and Long Duration Contract rules in particular seem like they are 

having adverse consequences that could have been fixed before the 

respective rules had been finalized if there had been a more thorough vetting process. 

Is the SEC still accountable for understanding the full impact of 

new accounting rules? If so, do you think it’s appropriate to require 

field testing, stakeholder input, and cost-benefit analyses before 

moving forward with new accounting standards? 

A.1. Consistent with Federal law, in 2003 the SEC determined that 

the FASB and its parent organization, the Financial Accounting 

Foundation (FAF), satisfy the criteria Congress set forth in Section 

108 of the Sarbanes–Oxley Act and, accordingly, the FASB’s financial accounting and reporting standards are recognized as ‘‘generally accepted’’ for purposes of the Federal securities laws. 

As a result, the Commission necessarily oversees the FASB’s activities in order to carry out our responsibilities under the Federal 

securities laws in an effective manner and works with the FAF and 

the FASB to ensure that the FASB continues to meet the required 

characteristics of a designated accounting-standard setter under 

the Sarbanes–Oxley Act. At the same time, we also recognize the 

importance of the FASB’s independence. 

I believe the FASB must use independent judgment in setting accounting standards and not be constrained in its discussion of 

issues. This is necessary to ensure that the standards developed 

have the highest degree of credibility in the business and investing 

communities. The alternative, whereby FASB sets accounting 

standards that privilege certain economic activities or are designed 

to achieve certain economic results, could result in many harms, including causing investors to lose confidence in the accuracy or quality of the reported information. Such an outcome could hinder our 

markets and raise the cost of capital for everyone. 

That being said, I believe it is useful for the FASB to perform 

field testing, gather stakeholder input and conduct cost-benefit 

61 

1 You note that some have criticized this approach and called for greater specificity. On occasions where these concerns have been raised to me, I have requested that those commentators 

provide specific language that would address their objectives in a manner consistent with the 

Continued 

analyses as it already does as part of its deliberative process. The 

process benefits from a two-way dialogue between the FASB and 

its constituents, as the FASB develops standards that meet a specific need with justification that balances the related costs and benefits. Specifically, when setting standards, the FASB states that it 

weighs whether the expected improvement in the quality of the information provided to users justifies the cost of preparing and providing that information. 

For example, the CECL outreach included significant outreach, 

including meeting with over 200 users of financial statements, and 

holding more than 85 meetings and workshops with preparers (including field work at 25 company locations) to get direct input on 

the proposed standard. Overall, I also remain supportive of all parties engaging in productive dialogue regarding the new accounting 

standard to further our shared goal of maintaining high-quality financial reporting for the benefit of investors in the U.S. capital 

markets and addressing unintended negative consequences. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED 

FROM JAY CLAYTON 

Q.1. Some have criticized the SEC’s February 21, 2018, Cybersecurity Guidance for not being clear enough about when companies 

should disclose cybersecurity incidents. In your testimony, you footnote to an April 24, 2018, SEC press release announcing that the 

‘‘entity formerly known as Yahoo! Inc. has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to 

disclose one of the world’s largest data breaches in which hackers 

stole personal data relating to hundreds of millions of user accounts.’’ The release notes that the cyberintrusion occurred in December 2014, but states that ‘‘when Yahoo filed several quarterly 

and annual reports during the 2-year period following the breach, 

the company failed to disclose the breach or its potential business 

impact and legal implications.’’ 

Based on the SEC’s 2018 Cybersecurity Guidance, when should 

Yahoo have disclosed this breach? 

A.1. The Commission’s February 2018 Guidance on Public Company Cybersecurity Disclosures expresses our belief that it is critical that public companies take all required actions to inform investors about material cybersecurity risks and incidents in a timely 

fashion. The guidance also stresses the importance for public companies to have disclosure controls and procedures in place to, 

among other things, help ensure that the company makes timely 

disclosures of material events, including those related to cybersecurity. 

Although our disclosure rules do not specifically refer to cybersecurity risks and incidents, a number of the requirements impose an 

obligation to disclose such risks and incidents depending on a company’s particular circumstances. 1 In addition, a company generally 

62 

Commission’s long-standing and proven approach to disclosure mandates, including materiality. 

We have not received any such submissions for consideration. 

must disclose such material information as may be necessary to 

make the company’s required disclosures not misleading. Generally, the Commission considers information to be material if it 

would be viewed by the reasonable investor as important in making 

an investment decision or as having significantly altered the total 

mix of information available. Where a company has become aware 

of a material cybersecurity incident or risk, it must make timely 

disclosures pursuant to its obligations in periodic or current reports 

under the Exchange Act, and in registration statements under the 

Securities Act. 

As outlined in its April 24, 2018, order, the Commission found 

that when Yahoo filed several quarterly and annual reports during 

the 2-year period following the breach, the company failed to disclose the breach or its potential business impact and legal implications. Instead, the company’s SEC filings stated that it faced only 

the risk of, and negative effects that might flow from, data 

breaches. The Commission found that Yahoo! knew, or should have 

known, that its disclosures in its annual reports on Form 10-K for 

the fiscal years ending December 31, 2014, and December 31, 2015, 

and in its quarterly reports on form 10-Q for the first three quarters of 2015 and the first two quarters of 2016, among other filings, 

were materially misleading. 

Q.2. You have called for more robust disclosures in certain instances, such as Brexit related risks. However, according to a February 2018 GAO report, the ‘‘SEC faces constraints in reviewing 

climate-related and other disclosures because it primarily relies on 

information that companies provide. SEC senior staff explained 

that SEC’s Division of Corporation Finance staff . . . do not have 

the authority to subpoena additional information from companies.’’ 

In the same report, GAO notes that ‘‘in an investigation of Peabody 

Energy under a New York State law, the Attorney General of New 

York State subpoenaed the company’s internal documents and 

found that although the company’s disclosures denied it had the 

ability to reasonably predict the impact of future climate change 

laws and regulations on its business, Peabody had made internal 

market projections showing severe negative impacts from certain 

potential laws and regulations and failed to disclose those projections to the public.’’ 

How is the SEC addressing the constraints identified in the GAO 

report regarding the SEC’s ability to review disclosures effectively? 

A.2. In its February 2018 report, the GAO noted that the scope of 

a compliance review conducted by our Division of Corporation Finance differs from the scope of an investigation by our Division of 

Enforcement, State attorneys general or other law enforcement authorities who have authority to require the production of nonpublic 

information for law enforcement purposes. As a result, as GAO 

noted, the detailed information companies rely on in making materiality decisions when providing disclosures in compliance with the 

Federal securities laws is generally not available in the course of 

a compliance review by SEC Division of Corporate Finance staff. 

63 

Regardless of the availability of such information during a compliance review, the company is subject to provisions in the Federal 

securities laws and well established case law precedent that specify 

what information it must disclose in its filings. Our staff approaches each filing review with professional skepticism and does 

not, in the normal course, question disclosures that appear to be 

in compliance with our rules and the Federal securities laws. Many 

of these disclosures are in response to principles-based requirements based upon materiality. 

The SEC’s regulatory, disclosure-based framework is working as 

designed. The Commission establishes rules and regulations; the 

Commission and staff communicate requirements and encourage 

full compliance; the Division of Corporation Finance, through its 

selective review of company filings, may question disclosure decisions, request support for those decisions as it assesses compliance 

and may refer instances of material noncompliance to our Division 

of Enforcement; and our Division of Enforcement investigates potential violations, including exercising the Commission’s subpoena 

authority, after which the Commission may file an action in Federal district court or institute an administrative proceeding. Although the GAO stated that our compliance review staff faces constraints because it does not have access to all of the information 

companies use to determine materiality, the Federal securities laws 

and well established case law precedent provide ample incentive for 

companies to take these disclosure decisions seriously. Furthermore, after a thorough evaluation of our filing review process to assess compliance with the identified disclosure requirements, the 

GAO did not have any recommendations for improving the process 

or changing the way in which the Commission delegates or exercises its subpoena power. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR MENENDEZ FROM JAY CLAYTON 

Q.1. Please provide a timeline for the SEC’s work on the five remaining executive compensation rules mandated by the Dodd– 

Frank Street Reform and Consumer Protection Act. 

A.1. On December 18, 2018, the SEC approved final hedging disclosure rules. Those rules, which were mandated by the Dodd–Frank 

Act, require companies to disclose in proxy and information statements their practices or policies regarding the ability of employees 

or directors to engage in certain hedging transactions with respect 

to company equity securities. 

The remaining Dodd–Frank Act executive compensation 

rulemakings are on the Commission’s rulemaking agenda, and we 

are continuing our work to finalize them. As I noted in my written 

testimony, as a result of the complexity and scope of the existing 

executive compensation disclosure regime, as well as the nature of 

the mandates, I believe a serial approach is likely to be the most 

efficient and best serve the SEC’s mission. 

Q.2. According to the SEC’s joint statement with the PCAOB, there 

are 224 companies listed on U.S. exchanges with a combined market capitalization of $1.8 trillion that are located in countries, primarily China, that make it difficult for U.S. regulators to review 

64 

their financial reporting. This presents a major risk to U.S. investors who may assume that the financial reporting of these companies is in line with U.S. requirements. Moreover, it’s fundamentally 

unfair for Chinese companies to take advantage of the strength and 

liquidity of U.S. capital markets, but not have to play by the rules. 

The U.S.–China Economic and Security Review Commission recommended that Congress consider legislation providing authority 

to ban and delist companies that have refused to sign reciprocity 

agreements with the Public Company Accounting Oversight Board. 

Despite the SEC and PCAOB’s best efforts to reach an agreement, it appears unlikely that Beijing will cooperate. 

Would such authority strengthen your hand in negotiations with 

your Chinese counterparts? 

A.2. The joint statement by SEC Chief Accountant Wes Bricker, 

PCAOB Chairman William D. Duhnke III and me outlines current 

challenges facing U.S. regulators to obtain information related to 

U.S. listed companies with significant operations in China, and 

how they may adversely affect investors in the U.S. markets and 

the interests they own in these companies. For example, these challenges impact the PCAOB’s ability to inspect the audits of these 

companies in question. 

I understand that the PCAOB has been in negotiations with foreign audit regulators in certain countries, including China, that 

currently prevent the PCAOB from carrying out its inspection process with respect to the audits of companies based in those countries. I note that even while these negotiations are continuing, a refusal to cooperate by an audit firm, either in an inspection or an 

investigation, could subject the firm to SEC or PCAOB sanctions 

and remedial measures. Having the ability to impose sanctions and 

remedial measures certainly may enhance the ability to make further progress with respect to such negotiations, although the imposition of such sanctions and remedial measures would require an 

assessment of their potential impact on U.S. investors and the 

broader capital markets. 

As we continue our efforts to obtain appropriate access to information, I would welcome an opportunity to further discuss these 

issues with you and to have SEC staff provide technical assistance 

or other information about draft legislation. 

Q.3. The statement mentions ‘‘remedial actions involving U.S.-listed companies’’ as a possible consequence for in certain companyspecific issues. 

Under existing authorities, what are the specific remedial actions 

the SEC and PCAOB could employ to address such issues? 

A.3. The joint statement noted that if information barriers continue 

to exist, we may consider remedial actions, which could include, 

among other things: (1) requiring affected companies to make additional disclosures to investors; (2) placing additional restrictions on 

new securities issuances from companies with activities in China; 

and (3) bringing actions against auditors who do not meet our requirements. 

All of these actions have collateral consequences that must be 

carefully evaluated as we and the PCAOB seek to meet our objectives. 

65 

Q.4. I noted your recent comments on the implications of Brexit for 

our own financial sector. 

In light of the recent collapse of the plan to vote on a Brexit deal 

last week, will you provide the Commission’s current view of the 

options facing the U.K. in its dealings with the EU, with a focus 

on the implications for the U.K. financial sector and the risks to 

the many U.S. banks that base their European options in the U.K.? 

A.4. I continue to be concerned that the effects of Brexit will be 

international, including on our U.S. markets and our investors. I 

am encouraged by memoranda of understandings entered into by 

the European Securities Markets Authority and the Bank of England and the U.K. Financial Conduct Authority in February 2019. 

These agreements are important steps towards preventing significant disruption of securities and derivatives transactions in the 

event that the U.K. exits from the European Union without a deal 

in place. 

The Commission’s responsibility with respect to Brexit is focused 

on its potential effects on U.S. investors and securities markets. 

The Brexit-related concerns you have highlighted with the U.K. financial sector will have international effects given the interconnectedness of our global financial markets. We are monitoring 

company disclosure concerning the potential impact that Brexit 

may have. This effort includes monitoring disclosures made by 

banks and financial institutions with significant U.K. exposure. Additionally, we continue to engage and communicate with other U.S. 

financial authorities, with our U.K. and EU counterparts, and with 

market participants to consider the effects of Brexit to our market 

utilities and infrastructure. We will remain focused on identifying 

and planning for potential Brexit-related impacts on U.S. investors 

and markets. 

Q.5. I worked to include the honest broker provision in the Wall 

Street Reform law, and our clear intent was for the SEC to establish a uniform standard of conduct, if warranted by a study. Despite the 2011 SEC study recommending a uniform standard of 

conduct for brokers and investment advisers, the SEC’s recent proposal fails to establish a uniform standard of conduct for brokerdealers and investment advisers, and it puts the burden on the customer to understand the difference between brokers and investment advisers—ignoring the SEC’s own findings. 

Moreover, the SEC’s own Investor Advisory Committee recommended in November that everyone—investment advisers and 

brokers—be held to a uniform standard. 

Will you commit to personally taking another look at the SEC’s 

2011 study on the issue as well as the recommendations from the 

SEC’s Investor Advisory Committee before you move forward with 

a formal rule? 

A.5. The recommendations of the staff’s 2011 study were useful to 

us in evaluating how to specifically enhance investor protection and 

improve the obligations that apply to broker-dealers when making 

recommendations to retail customers. After considering the staff’s 

recommendations from the 2011 study, the information that the 

public has submitted over the years and our extensive experience 

regulating broker-dealers and investment advisers, the Commission 

66 

proposed an approach focusing on enhancements to broker-dealer 

regulation, taking into consideration the characteristics of the 

broker-customer relationship. The broker-dealer relationship generally is different from the investment adviser-client relationship. 

I believe our proposal requires financial professionals, whether 

broker-dealers, investment advisers, or both (aka ‘‘dual-hatted persons’’), to follow standards of conduct that reflect key fiduciary 

principles tailored to the client relationship. This framework draws 

from the recommendations of the 2011 study. 

The staff is considering all comments, including recommendations from the SEC’s Investor Advisory Committee and the SEC 

2011 study, as it develops a recommendation for the Commission. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM JAY CLAYTON 

Q.1. SEC Disgorgement—In your written testimony you mentioned 

the effects that the Supreme Court case Kokesh v. SEC has had 

on the SEC’s ability to recover ill-gotten gains from bad actors and 

return them to wronged investors. The most recent SEC enforcement report said that to date the SEC may have to forgo $900 million in disgorgement from cases filed in the last year and a half. 

That’s a significant number, particularly in light of the fact that 

the SEC recently reported that in its last fiscal year it collected 

$3.9 billion in total enforcement actions returned $794 million to 

harmed investors in 2018. 

Can you describe in more detail how Kokesh is affecting the 

SEC’s ability to return illegally obtained funds to investors? 

Can you explain what this means for the average investor who 

is the victim of fraud? 

A.1. In Kokesh v. SEC, the Supreme Court held that our claims for 

disgorgement are subject to a 5-year statute of limitations. From a 

remediation standpoint, I am concerned that we may be unable to 

recover a fraudster’s illegal profits to remedy the losses of investors, particularly retail investors, if they were defrauded in wellconcealed and long-running frauds. Said simply, if the fraud is 

well-concealed and stretches beyond the 5-year limitations period 

applicable to penalties, it is likely that we will not have the ability 

to recover funds invested by our retail investors more than 5 years 

ago. And our experience under Kokesh is showing that this already 

is happening. With respect to matters that have already been filed, 

the Division of Enforcement estimates that the Court’s ruling in 

Kokesh may cause the Commission to forgo up to approximately 

$900 million in disgorgement, of which a substantial amount potentially could have been returned to retail investors. As we continue 

to bring new Enforcement actions, this number is likely to increase. 

Q.2. Human Capital Management Disclosure—Earlier this summer 

I sent you a letter describing my belief that time is past due for 

the SEC to provide more requirements and guidance regarding 

human capital management disclosure. Currently, the only data required to be disclosed under SEC rules are the number of employees a company has, the median pay of those employees and the 

compensation of the CEO. But other information is clearly important to investors, including the amount spent by the company on 

67 

worker training, and average turnover, among others. Increasing 

disclosure requirements doesn’t mean we have to impose significant 

costs on businesses. A Harvard Law School study finds that a majority of companies in their dataset already collect a variety of 

human capital metrics of increasing interest to investors through 

their internal management processes. I appreciate your response to 

my letter on this topic and the discussions we’ve had on it. 

Do you agree that human capital management issues are very 

important to businesses? 

Will you work with me to expand human capital management 

disclosure requirements and improve disclosures in this area? 

A.2. I appreciate your focus on the importance of human capital 

management. As I stated in my response to your letter, I believe 

the strength of many of our public companies is due, in important 

part, to their human capital. 

In February 2019, I shared some thoughts on human capital disclosure on a call with members of the SEC’s Investor Advisory 

Committee. Specifically, I expressed that human capital, like intellectual property, often represents an essential resource and driver 

of performance for many of today’s companies. While I am wary of 

rules or guidance that would mandate rigid human capital standards or metrics for all public companies given that each industry, 

and even each company within a specific industry, has its own 

human capital circumstances, I believe investors would be better 

served by understanding the lens through which each company 

looks at their human capital. For example, does management focus 

on the rate of turnover, the percentage of their workforce with advanced degrees or relevant experience, the ease or difficulty of filling open positions, or some other factors? The principles of materiality, comparability, and efficiency should be guideposts for human 

capital disclosure. I have asked the Investor Advisory Committee 

for their input and feedback on what they look for as investors and, 

when making an investment decision, what questions they ask 

issuers relating to human capital. 

Additionally, the Division of Corporation Finance has been working to evaluate and recommend improvements to our public company disclosure requirements. I expect human capital disclosures 

will be among the issues under consideration. I have asked the Division of Corporation Finance to consider feedback from investors, 

registrants, and other parties, and make recommendations to the 

Commission regarding additional action, as appropriate. 

I welcome further engagement with you as we continue as to consider the best way forward. 

Q.3. Volcker Rule—I have a question about the covered funds section of the Volcker Rule and the recent proposed rulemaking. Despite very clear legislative intent, banks are prohibited under the 

current rule from investing in certain fund structures that would 

otherwise be permitted investments if a bank made a direct investment from its own balance sheet, even if the fund simply wants to 

extend credit or make long-term investments to potential investors 

(such as startup companies). Investing through a fund structure 

supports safety and soundness due to the ability to diversify risk 

as well as ensuring that companies looking to grow and innovate 

68 

1https://www.gpo.gov/fdsys/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf 

have the capital that they need. It is clear to me that the agencies 

have the legal authority they need since they’ve already allowed for 

certain specific exclusions for permissible investments in fund 

structures. 

Wouldn’t you agree that if a bank can make an investment on 

its balance sheet that it should be allowed to make that same investment through a fund structure? 

A.3. Since the adoption of the Volcker Rule in 2013, banking entities and the agencies charged with implementing the rule have 

gained experience through its implementation, including through 

examinations. Based on that experience, and in response to feedback received in the course of administering the Volcker Rule, we 

and the other agencies have identified opportunities, consistent 

with the statute, for improving the implementation of the Volcker 

Rule. In short, we recognize that to effectively implement the 

Volcker Rule its terms should reflect our collective experience with 

prudential regulation and market activities. 

The amendments we proposed June 2018 included a request for 

comment regarding issues relating to the ‘‘covered fund’’ definition. 

Among the requests for comment are requests generally about 

whether the definition of ‘‘covered fund’’ effectively implements the 

statute and is appropriately tailored. We have received many comments responding to these requests, as well as the multiple other 

requests about the ‘‘covered fund’’ definition. SEC staff is carefully 

reviewing these comments and remains engaged in regular and ongoing dialogue with the staffs at our fellow Federal financial regulators. I look forward to considering the issues raised, including 

concerns about the scope of the ‘‘covered fund’’ definition. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM JAY CLAYTON 

Q.1. In response to my suggestion that you reduce investor confusion by using the same language for investment advice standards 

that apply to registered investment advisers and for those that 

apply to broker-dealers, you indicated that the SEC is considering 

doing so, saying that ‘‘we may do that.’’ 

To clarify that statement, will you commit that, in its finalized 

form, Regulation Best Interest will comply with section 913(g) of 

the Dodd–Frank Wall Street Reform and Consumer Protection Act, 

in that ‘‘the standard of conduct for such broker or dealer with respect to such customer shall be the same as the standard of conduct applicable to an investment adviser under section 211 of the 

Investment Advisers Act of 1940,’’ and that broker-dealers and registered investment advisers will all be required to give advice 

‘‘without regard to [their] financial or other interest?’’ 1

A.1. We believe our proposal is consistent with the underlying intent of Section 913, including that a broker-dealer should not put 

its interests ahead of the retail customer’s interests when making 

a recommendation to a retail customer. 

Our proposal sets a clear, enhanced standard of conduct for 

broker-dealers that is drawn from the principles applicable to an 

69 

investment adviser’s fiduciary duty. The commonality of these conduct standards is clear when the requirements of proposed Regulation Best Interest are compared to the standards of conduct required of investment advisers under the Advisers Act. 

While the two standards draw from common principles, under 

the proposal, their application would differ in practice because the 

relationship models of broker-dealers and investment advisers differ. But—importantly—the overall principles are the same, and the 

proposal is designed to make sure that, at the point in time at 

which the recommendation or advice is provided, the analytical 

process followed by the financial professional should be the same 

regardless of whether the retail investor chooses an investment adviser or broker-dealer: advice provided with diligence and care by 

a financial professional that is prohibited from placing its own interests ahead of the retail investor’s interests. 

Q.2. In response to my suggestion that broker-dealers should be 

held to the same fiduciary standard that investment advisers are 

held to, you stated that, ‘‘Investment Advisers are allowed to contract around this standard. It’s not well known. This is something 

that we want people to understand. The baseline Advisers standard 

is the Adviser cannot put their interests ahead of the client’s interests. Now, they are able to say ‘But I’m going to do these things’ 

and with informed consent, they can cut back on that standard.’’ 

While investors may consent to limitations on a broker-dealer’s 

or investment adviser’s services, and to the existence of certain 

conflicts of interest, do you believe that a reasonable investor 

would ever consent to be harmed? 

Will you commit that, for both broker-dealers and investment advisers alike, disclosure and consent to conflicts of interest will 

never be deemed to satisfy either a broker-dealer’s or investment 

adviser’s obligations to act in the best interests of the customer if 

the advice results in harm to the investor? 

A.2. Under proposed Regulation Best Interest, a broker-dealer 

would be required to act in the best interest of the retail customer 

when making a recommendation, and would be prohibited from 

placing its financial or other interest ahead of the interest of the 

retail customer. In order to discharge the duty, a broker-dealer 

would need to: first, disclose material facts relating to its relationship with the customer; second, enhance its current compliance 

framework to meet the demands of a more rigorous best interest 

standard; and third, eliminate, or mitigate and disclose, material 

conflicts of interest related to financial incentives. In other words, 

even if a broker-dealer has mitigated and disclosed its conflicts, it 

must still have a reasonable basis to believe that a recommendation is in the best interest of the retail customer and the brokerdealer must have written policies and procedures reasonably designed to prevent it from placing its interests ahead of the interest 

of the retail customer. 

In the proposed Commission interpretation of the standard of 

conduct for investment advisers, the Commission stated that the 

client cannot waive the Federal fiduciary duty. Although the investment adviser fiduciary duty is not waivable, it is well established that the terms of the investment adviser relationship—and 

70 

2https://www.sec.gov/news/public-statement/clayton-overview-standards-conduct-investmentprofessionals-rulemaking 

therefore the scope of the duty in that relationship—may be shaped 

by disclosure and informed consent. Our proposed interpretation 

provides further details on this widely accepted process—that disclosures regarding the scope and terms of the relationship should 

be sufficiently specific so that a client is able to decide whether to 

provide informed consent. 

This process of scoping the terms of the advisory relationship, 

which is regularly effectuated through account agreements and 

Form ADV, is widely accepted in the industry and provides for arrangements such as limited account services and certain thirdparty compensation to the investment adviser. Our proposed relationship summary, if adopted, is designed to increase retail investor awareness of the material terms of common arrangements with 

investment professionals, and the fees and conflicts of interest that 

apply. I have been surprised that, with all of the public dialogue 

about the fiduciary duty, there is not more acknowledgment of the 

fact that the application of that duty can and does vary depending 

on the terms of the agreement between the client and adviser. The 

proposed requirements of the relationship summary would highlight the nature of an advisory relationship and the scope of services that the investment adviser provides. 

We have received a lot of thoughtful comments on the proposed 

interpretation of the standard of conduct for investment advisers 

and Commission staff is reviewing comments carefully, engaging 

further with commenters and thinking about what next steps it 

might recommend to the Commission. 

Q.3. When the SEC proposed the Standards of Conduct for Investment Professionals Rulemaking Package in April, you stated that 

you intend for it to ‘‘rais[e] the standard of conduct for broker-dealers when they provide recommendations to retail investors.’’ 2

Please list any broker-dealer practices that are permitted under 

current FINRA suitability rules but that would be prohibited under 

the SEC’s proposal. 

A.3. Under current standards, it has been argued that broker-dealers are permitted to recommend to their retail customer a product 

that is suitable but more costly for the customer than another 

product that the broker-dealer offers—because the first product 

makes the broker-dealer more money. 

Proposed Regulation Best Interest would address this concern. 

Under proposed Regulation Best Interest, a broker-dealer, when 

making a recommendation of a securities transaction or investment 

strategy to a retail customer, will be required to act in the best interest of that customer at the time the recommendation is made, 

including the broker-dealer being prohibited from placing its financial or other interest ahead of the interest of the retail customer. 

The proposal acknowledged that the cost (including fees, compensation, and other financial incentives) associated with a recommendation would generally be an important factor in evaluating 

whether a recommendation is in the best interest of a retail customer. Specifically, the proposal noted that in order to meet its 

Care Obligation, when a broker-dealer recommends a more expenVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
71 

3https://www.sec.gov/news/public-statement/statement-clayton-082218 

sive product over another reasonably available alternative offered 

by the broker-dealer, the broker-dealer would need to have a reasonable basis to believe that the higher cost is justified based on 

other factors (e.g., the product’s objectives, characteristics, liquidity, risks and potential benefits, volatility, and likely performance 

in a variety of market and economic conditions), in light of the retail customer’s investment profile. 

Q.4. In August, you stated that, based on what you heard at a series of investor roundtables, ‘‘Main Street investors have no tolerance for certain questionable sales practices such as high-pressure, 

product-based sales contests,’’ that you believe ‘‘these practices 

should be eliminated,’’ and that their elimination ‘‘would enhance 

investor protection but would not adversely affect investor choice 

and opportunity.’’ 3

Do you believe that firms should be permitted to use other sales 

practices that create harmful conflicts of interest, including sales 

contests based on total production, bonuses for recommending certain products, and quotas for sales of certain products (such as proprietary funds)? 

Why or why not? 

A.4. I do not believe that broker-dealers or investment advisers 

should be permitted to use sales practices that harm retail investors. As I have stated publicly, I believe that certain questionable 

sales practices such as high-pressure, product-based sales contests 

should be eliminated. In my view, eliminating these practices 

would enhance investor protection but would not adversely affect 

investor choice and opportunity. However, there is an important 

distinction between compensating individuals based on broad performance metrics—an important component of the compensation 

structure of many professional services firms that have served clients well—and incentivizing individuals to recommend a particular 

product through time-based quotas, bonuses, or sales contests. 

As proposed, Regulation Best Interest would not specify particular compensation practices as impermissible. Broker-dealers, 

however, would be required to act in the best interest of the retail 

customer when making recommendations, without placing the financial or other interest of the broker-dealer making the recommendation ahead of the interest of the customer. The proposed 

rule includes specified requirements to meet this obligation. Importantly, even if a broker-dealer has eliminated or appropriately mitigated and disclosed its conflicts, it still must have a reasonable 

basis to believe that its recommendations are in the best interest 

of the retail customer. 

For example, it would be inconsistent with the Care Obligation 

of proposed Regulation Best Interest if the broker-dealer made the 

recommendation to a retail customer in order to: maximize the 

broker-dealer’s compensation (e.g., commissions or other fees); further the broker-dealer’s business relationships; satisfy firm sales 

quotas or other targets; or win a firm-sponsored sales contest. 

To be clear, the proposal acknowledges that broker-dealers may 

not be able to appropriately address certain conflicts through disclosure and mitigation and that such conflicts may be more approVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00075 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
72 

priately avoided entirely. For example: payment or receipt of certain noncash compensation that presents conflicts of interest for 

broker-dealers, such as certain sales contests, trips, prizes, and 

other similar bonuses. The Commission requested comment on 

whether the Commission should prohibit receipt of certain noncash 

compensation. We have received a lot of thoughtful comments on 

this issue, and Commission staff is reviewing comments carefully, 

engaging further with commenters and developing a recommendation to the Commission. In developing our final rule, I believe we 

should address the issues of elimination and mitigation with the 

goal of better aligning the legal obligations with retail investors’ 

reasonable expectations. 

Q.5. Will you commit that any final Standards of Conduct for Investment Professionals rule will prohibit firms from creating incentives that would result in recommendations based on the financial 

interests of the firm or financial professional rather than the best 

interests of the investor? 

For example, will you commit than any final Standards of Conduct will prohibit: sales quotas, bonuses for recommending certain 

products, and other forms of sales contests; the use of trips and 

other awards for meeting production thresholds that may encourage inappropriate rollover recommendations; and ratcheted compensation grids, which retroactively and precipitously increase professionals’ compensation? 

A.5. I do not believe that broker-dealers should be permitted to use 

sales practices that harm retail investors. As I have stated publicly, 

I believe that certain questionable sales practices such as highpressure, product-based sales contests should be eliminated. In my 

view, eliminating these practices would enhance investor protection 

but would not adversely affect investor choice and opportunity. 

To be clear, the proposal acknowledges that broker-dealers may 

not be able to appropriately address certain conflicts through disclosure and mitigation and may be more appropriately avoided entirely. For example: payment or receipt of certain noncash compensation that presents conflicts of interest for broker-dealers, such 

as certain sales contests, trips, prizes, and other similar bonuses. 

The Commission requested comment on whether the Commission 

should prohibit receipt of certain noncash compensation. We have 

received a lot of thoughtful comments on this issue and Commission staff is reviewing comments carefully, engaging further with 

commenters and developing a recommend to the Commission. In 

developing our final rule, I believe we should address the issues of 

elimination and mitigation with the goal of better aligning the legal 

obligations with investors’ reasonable expectations. 

Q.6. Will you commit that any final rule will include strong enforcement mechanisms to enforce such a prohibition, including a 

private right-of-action to allow investors to sue advisers and 

broker-dealers who cheat them through the use of these practices? 

If not, why not? 

A.6. Regulation Best Interest is designed to enhance the Commission’s enforcement mechanisms. We do not believe it would create 

any new private right of action or rescission, nor did we intend for 

it to do so. 

73 

The Commission has experience examining and enforcing compliance with a variety of obligations under the Federal securities 

laws, including existing obligations that are more principles-based 

or that are based on facts-and-circumstances, such as suitability, 

which is enforced under our anti-fraud authority. 

If Regulation Best Interest is adopted, I would expect our exam 

and enforcement staff to assess compliance and potential violations, 

as is the case with any rule. Commission staff is engaging with experienced professionals from our Division of Enforcement and our 

Office of Compliance Inspections and Examinations to help ensure 

that if Regulation Best Interest is adopted, compliance with the 

rule can be efficiently examined and breaches of the rule can be effectively addressed. We have encouraged public comment on any 

potential issues or concerns and have received a lot of thoughtful 

comments on this issue, which Commission staff is considering. 

Q.7. Section 913(g) of the Dodd–Frank Act states that, ‘‘The Commission shall . . . examine and, where appropriate, promulgate 

rules prohibiting or restricting certain sales practices, conflicts of 

interest, and compensation schemes for brokers, dealers, and investment advisers that the Commission deems contrary to the public interest and the protection of investors.’’ 

The Regulation Best Interest proposal does not include an indepth discussion of broker-dealer compensation structures or a 

meaningful examination of how certain sales practices, conflicts of 

interest, and compensation schemes can be and often are contrary 

to the public interest and harmful to investors. Similarly, the Investment Adviser guidance provided no discussion of these topics. 

Has the Commission completed this Dodd–Frank regulatory requirement elsewhere? If so, please provide a written copy of your 

analysis on these matters. 

To the extent that the Commission has not satisfied this regulatory requirement, will you commit to doing so before you issue a 

final rule? 

A.7. In proposing Regulation Best Interest, the Commission examined the impact that financial professionals’ conflicts of interest— 

specifically those caused by financial incentives—can have on the 

provision of recommendations to retail investors. The rule proposing release also discussed certain existing sales practices and 

compensation structures, drawing on a range of sources, including 

our own experience overseeing and examining broker-dealers. The 

Commission recognized the harm that conflicted recommendations 

can cause investors and also discussed that conflicts of interests 

can be particularly significant when involving certain types of sales 

practices and compensation structures. The staff continues to consider these issues through the ongoing review of comment letters 

and economic studies, as well as discussions with market participants and investors. 

Q.8. The one-on-one interviews conducted as part of the RAND report on investor testing are an importance source of data for understanding the ability of the SEC’s proposed disclosures to enable investors to make informed decisions. 

Will you commit to publishing full transcripts of these interviews? 

74 

If not, why not? 

A.8. The Commission and staff have made significant efforts to connect directly with investors, including through investor testing and 

outreach. The SEC’s Office of the Investor Advocate and the RAND 

Corporation prepared a research report that sought to determine 

how well investors understood the retail market for investment advice. The report was added to the public comment file for the Commission’s package of rulemakings regarding standards of conduct 

for financial professionals on October 12, 2018. 

The SEC’s Office of the Investor Advocate also engaged the 

RAND Corporation to conduct investor testing of a sample of the 

Commission’s proposed Form CRS Relationship Summary. On November 7, 2018, the results of this investor testing were added to 

the public comment file. The testing consisted of a nationwide survey and qualitative one-on-one interviews. In the report, the RAND 

Corporation synthesizes its findings from the one-on-one interview 

component of the investor testing, noting that although the one-onone interviews have certain limitations, they serve as a valuable 

complement to the nationally representative quantitative survey 

that the RAND Corporation conducted. At that time, we issued a 

press release encouraging the public to submit comments on 

RAND’s investor testing report by December 7, 2018. 

The Commission staff also organized seven roundtables across 

the country to provide Main Street investors the opportunity to 

speak directly to me, my fellow Commissioners and senior SEC 

staff to tell us about what they expect from financial professionals. 

These candid, experience-based conversations were incredibly valuable and are informing the staff’s work moving forward. The transcripts from these roundtables have been added to the comment 

files. The Commission has also invited investors to share their insights and feedback on the proposed Relationship Summary by 

going to a new ‘‘Tell Us’’ website. Through these efforts, the Commission has received nearly 100 individual feedback submissions. 

The rules’ comment files continue to receive and publish public 

comments, and the staff will continue to consider the rulemaking 

record as it develops a recommendation. 

Q.9. If the SEC’s own research, such as the data included in the 

RAND report, does not indicate that the SEC’s proposed disclosures 

serve their intended purpose of enabling investors to make an informed decision between brokerage and advisory accounts, will you 

consider applying a strong, uniform fiduciary standard across all 

accounts, so that investors will be protected regardless of whether 

they fully understand the disclosures? 

A.9. All of the feedback we have received, including the data included in the RAND report regarding the proposed disclosure form, 

has been very helpful. The staff is considering all comments and 

will take them under consideration in developing a recommendation for the Commission. 

75 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM JAY CLAYTON 

Q.1. Protecting Investors With ‘‘Best Interest’’ Standard—Can you 

name one or more broker-dealer practice that is permitted under 

current FINRA suitability rules that would be prohibited under the 

proposal? 

A.1. Under current standards, it has been argued that broker-dealers are permitted to recommend to their retail customers a product 

that is suitable but more costly for the customer than another similar product that the broker-dealer offers—because the first product 

makes the broker-dealer more money. 

Proposed Regulation Best Interest would address this concern. 

Under proposed Regulation Best Interest, a broker-dealer, when 

making a recommendation of a securities transaction or investment 

strategy to a retail customer, would be required to act in the best 

interest of that customer at the time the recommendation is made. 

This would prohibit the broker-dealer from placing its financial or 

other interest ahead of the interest of the retail customer. 

The proposal acknowledged that the cost (including fees, compensation, and other financial incentives) associated with a recommendation would generally be an important factor in evaluating 

whether a recommendation is in the best interest of a retail customer. Specifically, the proposal noted that when a broker-dealer 

recommends a more expensive product over another reasonably 

available alternative offered by the broker-dealer, in order to meet 

its Care Obligation, the broker-dealer would need to have a reasonable basis to believe that the higher cost is justified based on other 

factors (e.g., the product’s objectives, characteristics, past preference, liquidity, risks and potential benefits, volatility, and likely 

performance in a variety of market and economic conditions), in 

light of the retail customer’s investment profile. 

Q.2. Does this proposal require all financial professionals who 

make investment recommendations related to retail customers to 

do so as fiduciaries? 

A.2. Proposed Regulation Best Interest and its ‘‘best interest’’ 

standard draws upon principles that apply to investment advice in 

other contexts. Simply put, under proposed Regulation Best Interest, a broker-dealer cannot put her or his interests ahead of the retail customer’s interests. The similar levels of protection are clear 

when proposed Regulation Best Interest is compared to the standards of conduct applicable to investment advisers. 

Specifically, our proposal is designed to enhance broker-dealer 

regulation by building upon, and being tailored to, the unique 

structure and characteristics of the broker-dealer relationship with 

retail customers and existing regulatory obligations, while taking 

into consideration and drawing on (to the extent appropriate) the 

duties of loyalty and care as interpreted under the Advisers Act. 

Our proposal is designed to make sure that, at the point in time 

at which the recommendation or advice is provided, the analytical 

process followed by the financial professional should be the same 

regardless of whether the retail investor chooses an investment adviser or broker-dealer: advice provided with diligence and care by 

a financial professional that is prohibited from placing its own inVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
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terests ahead of the retail investor’s interests. I believe our proposals are designed to make investors get just that whether they 

choose a broker-dealer or an investment adviser. And I believe that 

they should have that choice. 

Q.3. Does this proposal require financial professionals to provide 

retail customers with the best available options? 

A.3. Under the proposed Regulation Best Interest’s Care Obligation, a broker-dealer would be required to have a reasonable basis 

to believe, based on its diligence and understanding of the risks 

and rewards of the recommendation, and in light of the retail customer’s investment profile, that a recommendation is in the best interest of the retail customer. 

As described in the proposal, the broker-dealer’s diligence and 

understanding of the risks and rewards of the recommendation 

would generally involve consideration of factors, such as the costs, 

the investment objectives and characteristics associated with a 

product or strategy (including any special or unusual features, liquidity, risks and potential benefits, volatility, and likely performance in a variety of market and economic conditions), as well as the 

financial and other benefits to the broker-dealer. The broker-dealer 

would be required to match this understanding of the security or 

strategy to the particular retail customer to form a reasonable belief that the security or strategy is in the retail customer’s best interest. 

This ‘‘facts and circumstances’’ approach is similar to ‘‘best interest’’ approaches under other advice standards, including the fiduciary standard applicable to investment advisers. These approaches 

do not specifically define ‘‘best interest’’ but provide principlesbased guidelines. Another similarity with those approaches is the 

recognition that a requirement for financial professionals to provide 

retail customers with the ‘‘best available option’’ or ‘‘perfect advice’’ 

would create a standard that would be virtually impossible to meet, 

particularly with 20-20 hindsight. Instead, the proposed standard 

of conduct for broker-dealers requires the recommendation to be in 

the best interest of the retail customer at the time and in the circumstances in which it is made, which is similar to how I view the 

duty of care of an investment adviser. 

Q.4. Cryptocurrencies—Will the SEC continue to reject creating a 

cryptocurrency-linked ETF? 

A.4. Certain national securities exchanges registered with the SEC 

have filed proposed rule changes seeking to list and trade shares 

of exchange-traded products based on digital assets, such as bitcoin 

and ether. The proposed exchange-traded products have been structured as commodity trusts directly holding the digital assets, as 

trusts holding exchange-traded futures on digital assets, managed 

funds issuing shares whose value relates to digital assets, or instruments based on digital assets held by the fund. Several of these 

proposals have been disapproved by the Commission, or by the Division of Trading and Markets acting pursuant to its delegated authority, and several have been withdrawn. 

To approve an exchange’s proposed rule change—such as a proposal to list a new exchange-traded product—the Commission must 

find that the proposed rule change is consistent with the applicable 

77 

requirements of the Securities Exchange Act of 1934 (Exchange 

Act) and the rules and regulations thereunder. The Commission’s 

Rules of Practice provide that the submitting exchange bears the 

burden to demonstrate that its proposed rule change is consistent 

with the requirements of the Exchange Act. 

The Commission has emphasized in its disapproval orders that 

its actions to date regarding digital-asset exchange-traded products 

have not rested on an evaluation of whether bitcoin, or blockchain 

technology more generally, has utility or value as an innovation or 

as an investment. 

Instead, the Commission’s actions have reflected a finding, in 

each case, that the submitting exchange had not met its burden to 

demonstrate that the proposal was consistent with the requirements of the Exchange Act, including Section 6(b)(5), which requires that the rules of a national securities exchange be designed 

to ‘‘prevent fraudulent and manipulative acts and practices’’ and 

‘‘protect investors and the public interest.’’ 

The Commission has also specifically noted that bitcoin markets 

are in the early stages of their development and that, over time, 

regulated bitcoin-related markets may continue to grow and develop. Should circumstances change in this manner or in a way 

that otherwise affects the Commission’s analysis under the Exchange Act, the Commission would then have the opportunity to 

consider, among other things, whether a digital-asset exchangetraded product would be consistent with the requirements of the 

Exchange Act. 

Q.5. How is the SEC coordinating with State Attorneys General on 

oversight of cryptocurrencies? 

A.5. Federal and State regulators share an interest in making sure 

investors in digital asset securities and related investment products are appropriately protected. SEC staff have ongoing interactions with State regulators about securities law issues involving 

digital assets that may affect the citizens of their States. We also 

communicate about digital asset related conduct that may be occurring in their States—such as initial coin offerings (ICOs). Last 

year, together with former Commissioners Kara Stein and Michael 

Piwowar, I commended the North American Securities Administrators Association on their release highlighting important issues and 

concerns relating to ICOs, among other digital asset products. 

Q.6. Have you collaborated on any enforcement actions related to 

fraud in cryptocurrencies? Please describe. 

A.6. Yes. As a general matter, we closely coordinate with our domestic and international regulators and law enforcement partners 

in this space. The AriseBank ICO matter is one example of a case 

involving parallel SEC and criminal investigations. In that case, 

two former executives behind an allegedly fraudulent ICO settled 

the SEC’s charges brought in the Northern District of Texas. The 

U.S. Attorney’s Office in that district also brought parallel criminal 

charges against one of the executives. 

Q.7. Nearly two dozen Nevadans have complained to the Consumer 

Financial Protection Bureau about virtual currencies using the 

Consumer Complaint Database. The Bureau has nearly 2,000 comVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
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plaints about virtual currencies in its Consumer Complaint Database. 

Is the SEC collaborating with the Consumer Bureau to respond 

to frauds in cryptocurrencies? 

A.7. Yes. SEC staff continues to closely coordinate with our regulatory partners in this space, including with staff of the CFPB. 

Q.8. Has the SEC endorsed any cryptocurrencies? 

Does the SEC have any plans to endorse a cryptocurrency as a 

valid investment? 

A.8. The SEC does not endorse any investments, including digital 

assets, and has no plans to do so. 

Q.9. Disclosure Rules (Pay Gap)—Wells Fargo announced on February 1, 2018, that they would voluntarily disclose disparities in 

pay broken down by gender and minority status. They are among 

a few big banks that already disclose this data, although not required to by law. The SEC has purview over similar compensation 

disclosure regulations (e.g., the CEO-median worker pay ratio rule 

or the pay for performance incentive structures for management). 

Since companies are already headed this direction, would you 

favor disclosure requirements for publicly traded companies regarding compensation gaps regarding gender, ethnicity, and race? 

A.9. The Commission’s disclosure requirements are rooted in the 

concept of materiality, and what a reasonable investor would consider material today may be different than when those requirements were first adopted. As such, the SEC regularly evaluates our 

existing rules and attempts to ensure that they have not become 

outdated. In the context of our disclosure requirements under Regulation S-K, this means ensuring that public company disclosures 

allow investors to make informed investment decisions. 

Materiality will continue to be the touchstone through which we 

approach our efforts in this area. I do note that compensation is 

an area where the marketplace is continually active in shaping 

policies and practices, and the staff and I regularly engage with investors on compensation disclosure and related matters. A requirement of the type you cite is not under consideration. When we consider changes to our approach to disclosure, I believe it is important to remain mindful that, while there are many factors that 

drive the decision of whether to be a public company, increased disclosure and other burdens may render alternatives for raising capital, such as the private markets, increasingly attractive to companies that only a decade ago would have been all but certain candidates for the public markets. I would be happy to discuss this 

issue with you. 

Q.10. Proxy Advisors—Shareholder proposals as early warning 

signs about potential problems at a company. For example, shareholders sought proposals seeking votes to get more information 

from Wells Fargo about its employee compensation system in 2014 

and information on predatory lending activities from Washington 

Mutual, Merrill Lynch, and Lehman Brothers. Yet, at the request 

of those companies, the SEC denied the proposal under the ‘‘ordinary business exclusion.’’ The SEC agreed to prevent the shareholder proposal from coming to a vote. 

79 

Do you agree that history has shown it can be far more detrimental to make errors of omission than inclusion when considering 

shareholder proposals? 

A.10. The SEC’s shareholder proposal rule, Rule 14a-8, enables a 

shareholder to have a proposal included in a company’s proxy materials for a vote by shareholders if certain requirements are met. 

The rule provides a number of procedural and substantive bases on 

which a proposal can be excluded from a company’s proxy statement. A company that believes it has a basis to exclude a proposal 

may seek the staff’s views regarding whether the staff would recommend enforcement action to the Commission if the proposal 

were excluded. In such cases, the staff carefully evaluates the proposal and the arguments made by the company and shareholder 

proponent, if any, to determine whether it would recommend enforcement action to the Commission if the company were to exclude 

the proposal. The staff applies the requirements of Rule 14a-8 and 

is not charged with weighing the merits of a proposal or the underlying policy issues it may raise when deciding whether the proposal 

falls within one or more bases for exclusion under the rule. It is 

important to note that the staff’s shareholder proposal process reflects only informal views of the staff regarding whether it is appropriate for the Commission to take enforcement action based on 

a violation of the Commission’s proxy rules. The views expressed 

by the staff are not binding on the Commission or other parties and 

do not and cannot definitively adjudicate the merits of a company’s 

position with respect to the legality of a shareholder proposal. 

Shareholder proponents and issuers have the ability to seek a more 

definitive determination from a court of competent jurisdiction. 

Q.11. How will ensure that your legacy at the SEC is not marred 

by SEC staff decisions to kill shareholder proposals that warned us 

of pending problems? 

Like not acting on Wells Fargo incentive pay problems or 

WAMU’s predatory loans? 

A.11. Above all, it is important that the shareholder proposal process is administered fairly, consistently and without bias, and the 

staff is committed to administering the process in this manner. In 

evaluating a company’s arguments for excluding a shareholder proposal from its proxy materials, the staff does not consider the merits of a shareholder proposal or the underlying policy issues. Instead, the staff’s evaluation is limited to whether there is a basis 

for excluding the proposal under Rule 14a-8. Stakeholders are best 

served when the rule is administered in such a fair and consistent 

manner. 

As noted above, the staff’s shareholder proposal process reflects 

only informal views of the staff regarding whether it is appropriate 

for the Commission to take enforcement action based on a violation 

of the Commission’s proxy rules. The views expressed by the staff 

are not binding on the Commission or other parties and do not and 

cannot definitively adjudicate the merits of a company’s position 

with respect to the legality of a shareholder proposal. Shareholder 

proponents and issuers have the ability to seek a more definitive 

determination from a court of competent jurisdiction. 

80 

Q.12. The consensus problem at the SEC’s proxy advisors roundtable was vote accuracy. Proxy votes seem to have a high incidence 

of over and under voting as well as absence of retail investors. 

If you engage in any changes to the proxy system, would you 

prioritize election accuracy first? 

A.12. Improving the proxy process will be a significant SEC initiative for 2019. The fundamental right of shareholders to participate 

in the governance of their companies can be fully exercised only to 

the extent shareholders are assured that their votes are accurately 

counted. While the current proxy process has worked well for the 

vast majority of public company meetings, legitimate concerns have 

been raised about the accuracy and efficiency of the proxy voting 

process. Complications and delays in tabulating the final votes at 

several recent shareholder meetings highlighted the need for the 

SEC to renew its focus on this important area. 

The SEC staff’s recent proxy roundtable led to a productive dialogue among issuers, investors, proxy service providers and others 

about the current proxy voting process and important developments since the Commission’s 2010 proxy plumbing concept release. Perhaps most encouraging was the common desire expressed 

by all the roundtable participants to work collaboratively to explore 

possible improvements to the proxy process, including through the 

use of distributed ledger technology and other promising new innovations. As I noted in my written testimony, we should focus on 

what the Commission can do in the interim to improve the current 

system, and I encourage all those interested in improving the proxy 

plumbing to share their thoughts, particularly regarding actionable, interim improvements. As a part of this effort, I have therefore asked the staff to facilitate discussions among market participants for possible private-sector solutions and to formulate recommendations for interim improvements that the Commission 

could consider as well. 

Q.13. IPOs—Mr. Chairman, you have made boosting Initial Public 

Offerings (IPOs) one of your top priorities. The decline in IPOs is 

mostly due to mergers and acquisitions, not regulations. Entrepreneurs can more easily—and profitably—sell their firms to another corporation or wealthy individual than going public. 

Do you agree that the regressive tax bill that has led to much 

higher corporate profits and greater wealth for CEOs and executives is exacerbating the decline in publicly traded firms? 

Will you take steps to strengthen transparency and investor protections in the private markets, so investors better understand the 

private market? Then, there would be less of a gap with the public 

markets? 

Have you thought about deploying the tools that the SEC has to 

take on monopoly—such as enhanced disclosure of competition? 

Will you commit to use normal administration process for all 

your substantive actions regarding IPOs? We need transparency 

about what the impact of various rule changes might be. 

A.13. I have long viewed with concern the reduction in the number 

of public companies because it has resulted in fewer investment opportunities for Main Street investors. I believe we can attribute the 

reduction to a number of reasons, including economic and reguVerDate Nov 24 2008 14:13 Mar 20, 2019 Jkt 046629 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\12-11 ZZDISTILLER\121118.TXT JASON
81 

latory factors, such as the cost of compliance. I am not in a position 

to comment on whether the Tax Cuts and Jobs Act legislation has 

affected the decline, though I would note that this decline has been 

occurring over a longer period of time. Based on my review and discussions with Commission staff, issuers, long-term investors, entrepreneurs and others, it is clear that the reporting, compliance, and 

oversight dynamic between private and public markets, as well as 

the costs associated with being a public company, may incent certain companies to remain private or stay private longer. The SEC 

has taken meaningful steps during my tenure to encourage capital 

formation for companies seeking to enter our public capital markets while maintaining, and in many cases, enhancing investor protections. While we do not take credit for the numbers, I am encouraged by reports indicating that the number of IPOs in the United 

States increased year-over-year from 2016 to 2018 in both volume 

and dollar amount raised. 

One of our upcoming capital formation initiatives is to look at the 

private offering framework. The Division of Corporation Finance is 

working on a concept release to take a critical look at our ‘‘patchwork’’ private offering system to see how it can be improved, harmonized, and streamlined, while at the same maintaining or enhancing investor protection. I look forward to receiving comments 

from entrepreneurs, investors and other market participants on 

this release. 

In furtherance of promoting capital formation, the Commission 

promulgates rules and regulations, which have the force and effect 

of law. Such rules and regulations generally take effect only after 

the Commission publishes a notice of proposed rulemaking in the 

Federal Register and adopts a final rule that considers public comments on the proposal in accordance with the Administrative Procedure Act. As I stated in my Statement Regarding SEC Staff 

Views in September 2018, any views of the staff of the SEC are 

nonbinding and create no enforceable legal rights or obligations of 

the Commission or other parties. 

With respect to your question on monopoly concerns, the Federal 

securities laws do not give the SEC jurisdiction over antitrust 

issues. The Commission’s disclosure requirements seek to provide 

investors with material information in order to make informed investment decisions. Item 101 of Regulation S-K requires disclosure 

on competitive business conditions. The Division of Corporation Finance selectively reviews filings both to monitor and to enhance 

compliance with disclosure requirements, including the requirements of Item 101 of Regulation S-K. 

Q.14. Enforcement—Individual accountability has a greater deterrent effect across the market. One such tool to hold individuals accountable is the so-called ‘‘Yates Memo’’ from the previous Administration. This memo outlined six key steps prosecutors should take 

to quote, ‘‘strengthen the pursuit of individual corporate wrongdoing.’’ Last week, the Department of Justice changed how the 

Yates Memo was implemented. No longer would companies seeking 

cooperation credit need to identify ‘‘all’’ individuals ‘‘all’’ individuals 

involved in the wrongdoing, so long as the companies identify those 

who were ‘‘substantially involved’’ in the misconduct. We are already seeing this at the Consumer Financial Protection Bureau. 

82 

1 U.S. Sec. and Exch. Comm’n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to 

Agency Enforcement Decisions, Exchange Act Release No. 44969 (Oct. 23, 2001), available at 

http://www.sec.gov/litigation/investreport/34-44969.htm. 2 Id. 

Enforcement actions are taken against firms without naming those 

who defrauded consumers. 

Does the SEC have any plans to avoid identifying all individuals 

involved in misconduct? 

A.14. As we have discussed, I strongly believe in the deterrent effect of enforcement proceedings pursuing individual accountability 

and believe that individual accountability drives behavior more 

than corporate accountability. I also recognize that bad actors undermine the hard-earned confidence that is essential to the efficient 

operation of our capital markets. 

The Commission considers individual liability in every case; it is 

a core principle of our enforcement program and holding individuals accountable for wrongdoing is a priority for me. To date, the 

Commission’s enforcement actions have borne out the premium I 

place on individual accountability; during fiscal years 2017 and 

2018, the SEC has charged individuals in more than 70 percent of 

our stand alone cases. As I continue to serve as Chairman, I will 

continue to support the Enforcement Division’s efforts to hold individuals accountable when it is appropriate to do so under the facts 

and the law. To evaluate whether, and how much, to credit entity 

self-policing, self-reporting, remediation, and cooperation, the Commission looks to the criteria described in the Seaboard 21(a) report. 1 Among the criteria described in the report are whether the 

company ‘‘promptly, completely and effectively disclosed the existence of the misconduct to the public, to regulators and to self-regulators.’’ 2

Q.15. Does the Department of Justice’s changes to the Yates Memo 

impact your work with your law enforcement partners? If so, how? 

A.15. Our work with our law enforcement partners has not been 

impacted. In each case, the Commission, acting upon recommendations from Enforcement staff, makes an independent decision as to 

whether the facts and the law support charging an individual with 

misconduct and, in cases involving entities, whether and to what 

extent to credit self-policing, self-reporting, remediation, and cooperation. 

Q.16. In his famous retirement speech, SEC attorney James Kidney cautioned against ‘‘bosses who mouthed serious regard for the 

mission of the SEC—to be a strong public protector in the securities market—but their actions were tentative and fearful in many 

instances. They see an agency that polices the broken windows on 

the street level and rarely goes to the penthouse floor.’’ 

Are the SEC’s investigation resources well-spent and properly 

distributed? If not, what challenges remain? What funding level is 

needed to properly staff the SEC regarding investigations, cybersecurity, investor protection, etc.? 

A.16. The SEC—agency wide—has approximately 4,400 people. Approximately 6.3 million people work in the financial services sector 

in the United States. We are less than one-one thousandth of that 

83 

amount. In order to adequately police this sector for wrongdoing, 

it is important that the agency have adequate resources to do so. 

Over the past year, the SEC generally, and the Enforcement Division specifically, have been focused on maximizing our impact 

with the resources we have. The sheer size of the financial industry 

and the volume of potential wrongdoing mean that we will always 

have to make decisions about where to allocate our resources and 

how best to coordinate with other authorities for the maximum impact. 

I believe that the Commission’s enforcement resources are well 

spent and properly allocated to address key priorities—retail investor protection (both directly and through institutional enforcement 

actions) and the investigation and prosecution of cyberbased 

threats—as well as other critical areas including, but not limited 

to, investment professional misconduct, insider trading, market 

manipulation, and accounting fraud. 

For FY2019, the Commission requested funds for critical investments in our ability to protect investors by restoring 17 positions 

for Enforcement to support key enforcement priorities, including 

expanding the work of the Cyber Unit and the Retail Strategy Task 

Force, and I am pleased that Congress recently provided those resources. Moving forward, I will continue working with the Division 

of Enforcement to evaluate their resource needs to ensure they can 

continue vigorously protecting investors and expect to request additional resources in FY2020. 

Q.17. The President required a hiring freeze at the SEC. 

How has this hiring freeze—two years now—made your work 

more difficult—from everything from investigating fraud to 

strengthening your defenses against cyberattacks? 

A.17. The Commission has operated under an agency-wide hiring 

freeze since late 2016. Consequently, the Division of Enforcement’s 

employee and contractor staffing levels have decreased since the 

freeze was imposed. The combined number of positions in the Division and the number of contractors supporting our investigation 

and litigation efforts fell by approximately 10 percent between 

FY2016 and FY2018. These reductions in human capital have created challenges for the Division of Enforcement in staffing, resource allocation, and prioritizing investigations and litigation. But 

despite these challenges, the Division has risen to the challenge 

and continued to exhibit significant enforcement-related activity. 

On a qualitative basis, which I believe is the most meaningful 

basis by which to judge the Division’s effectiveness, the SEC 

achieved many notable enforcement-related successes in FY2018— 

recommending that the Commission bring significant actions 

against important individuals and market participants, achieving 

successes for retail investors, fashioning meaningful and effective 

remedies and relief, and addressing emerging and developing risks. 

And, while I believe that often cited quantitative metrics such as 

number of cases filed or the total amounts of fines and penalties 

assessed, do not provide, without substantial additional information, a meaningful measure of the effectiveness of an enforcement 

program, FY2018 nonetheless reflected a high level of enforcementrelated activity by the Commission. The Commission brought 821 

84 

actions (490 of which were ‘‘stand alone’’ actions) and obtained 

judgments and orders totaling more than $3.9 billion in 

disgorgement and penalties. Significantly, it also returned $794 

million to harmed investors, suspended trading in the securities of 

280 companies, and obtained nearly 550 bars and suspensions. 

While these achievements are a testament to the hardworking 

women and men of the Division, with more resources the SEC 

could focus more on individual accountability, as individuals are 

more likely to litigate and the ensuing litigation is resource intensive. Moreover, additional resources that we requested for FY2019 

will support two key priorities of the Division: protecting retail investors and combating cyber-related threats. 

Q.18. How have two recent Supreme Court decisions—Kokesh v. 

SEC and Lucia v. United States—made SEC enforcement actions 

more difficult? 

A.18. The Supreme Court’s decisions in Kokesh v. SEC and Lucia 

v. SEC have significantly impacted the Commission’s enforcement 

program. In Kokesh v. SEC, the Supreme Court held that our 

claims for disgorgement are subject to a 5-year statute of limitations. The Supreme Court’s holding in Kokesh is obviously a very 

significant decision, and one that has limited our ability to return 

ill-gotten gains to Main Street investors in longer running frauds. 

I do not believe it is productive to debate the merits of the Kokesh 

decision. I agree that statutes of limitation serve many important 

functions in our legal system, and certain types of claims should 

have reasonable limitations periods. Civil and criminal authorities, 

including the SEC, should do everything in their power to bring appropriate actions swiftly, and, in our markets, particularly our public markets, the certainty brought by reasonable limitations periods 

has value for investors. 

However, as I look across the scope of our actions, including most 

notably Ponzi schemes and affinity frauds, which often target retail 

investors, I am troubled by the substantial amount of losses that 

we may not be able to recover for retail investors. Said simply, if 

the fraud is well-concealed and stretches beyond the 5-year limitations period applicable to penalties, it is likely that we will not 

have the ability to recover funds invested by our retail investors 

more than 5 years ago. Allowing clever fraudsters to keep their illgotten gains at the expense of our Main Street investors—particularly those with fewer savings and more to lose—is inconsistent 

with basic fairness and undermines the confidence that our capital 

markets are fair, efficient and provide Americans with opportunities for a better future. 

And, our experience post-Kokesh is showing that this may already be happening. With respect to matters that have already 

been filed, the Division of Enforcement has estimated that the 

Court’s ruling in Kokesh may cause the Commission to forgo up to 

approximately $900 million in disgorgement, of which a substantial 

amount potentially could have been returned to retail investors. I 

welcome the opportunity to work with Congress to address this 

issue to ensure defrauded retail investors can get their investment 

dollars back. I believe that any such authority should be narrowly 

85 

tailored to that end while being true to the principles embedded in 

statutes of limitations. 

In Lucia v. SEC, the Court held that the Commission’s Administrative Law Judges (ALJs) were inferior officers of the United 

States who must be appointed in the manner required by the Appointments Clause of the U.S. Constitution. The Court held that 

the SEC’s ALJs had not been appointed in a manner consistent 

with the Appointments Clause and that the appropriate remedy for 

an adjudication tainted with an appointments violation was a new 

hearing before a properly appointed official. Examining the facts of 

Lucia, the Court further held that, the adjudication at issue could 

not occur before the same ALJ who heard the case, even if she or 

he had now received a constitutional appointment. According to the 

Court, having already both heard Lucia’s case and issued an initial 

decision on the merits, she or he could not be expected to consider 

the matter as though she or he had not adjudicated it before. The 

court ruled that to cure the constitutional error, another ALJ (or 

the Commission itself) must hold the new hearing. 

After Lucia, the Commission stayed all pending administrative 

proceedings. The Commission lifted the stay on August 22, 2018, 

and approximately 200 administrative proceedings were reassigned 

at that time. Many of the 200 administrative proceedings have now 

been substantially resolved. The remaining reassigned APs will require substantial litigation resources going forward. 

Q.19. The Dodd–Frank Act included a provision (Sec. 954) that 

would require public companies to clawback compensation that 

were erroneously awarded to executives whenever their companies 

had accounting restatements. The SEC proposed a rule in 2015. 

What is the status of this rule? 

When will it be final? 

A.19. Because of the complexity and scope of the SEC’s existing executive compensation disclosure regime, as well as the nature of 

the Dodd–Frank Act’s executive compensation rule mandates, I believe a serial approach to these rules is likely to be most efficient 

and best serve the SEC’s mission. To that end, we issued final 

rules in December 2018 to implement Section 955 of the Dodd– 

Frank Act to require companies to disclose in proxy and information statements their practices or policies regarding the ability of 

employees or directors to engage in certain hedging transactions 

with respect to company equity securities. 

The clawbacks rule and the remaining Dodd–Frank Act executive 

compensation rulemakings are on the Commission’s rulemaking 

agenda, and we are continuing our work to finalize them. As I 

noted in my written testimony, several companies already have 

made public their policies regarding compensation clawbacks, and 

some of these policies go beyond what would be required under the 

Dodd–Frank Act. We have seen a few companies attempt to claw 

back compensation from their executives under these policies. Our 

rulemaking priorities, as well as the rules themselves, should reflect these observable developments. 

Q.20. The Dodd–Frank Wall Street Reform and Consumer Protection Act included other permissive rules. 

What are the status of those rules? 

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A.20. The Commission has had an active rulemaking calendar in 

recent years, focusing on, among other things, the 80 mandatory 

rulemaking requirements applicable to the SEC under the Dodd– 

Frank Act, congressional mandates in the Economic Growth, Regulatory Relief, and Consumer Protection Act, and responding to 

major events and changes in the broader regulatory landscape that 

have required our immediate attention. 

With respect to the Dodd–Frank Act, the Commission has undertaken both mandatory and permissive rulemakings. For example, 

the Commission has now completed many, but not all, of the security-based swap rules mandated by Title VII of the Act, and I anticipate that in the coming year the Commission will move forward 

with a package of rulemakings to complete our Title VII rulemaking obligations. The Commission also has taken action on some 

of the permissive rulemakings under the Act. For example, the 

Commission proposed Regulation Best Interest regarding the 

standard of conduct for broker-dealers when making a recommendation of any securities transaction or investment strategy 

involving securities to a retail customer. 

Q.21. Information in the Market—What is the status of InlineXBRL—eXtensible Business Reporting Language—that makes it 

easier to search data in an open and interactive way? 

A.21. In June 2018, the Commission adopted amendments requiring the use of Inline XBRL for the submission of operating company financial statement information and fund risk/return summary information. The amendments are intended to improve the 

data’s usefulness, timeliness, and quality, benefiting investors, 

other market participants, and other data users. The amendments 

are also intended to decrease, over time, the cost of preparing the 

data for submission to the Commission. 

The amendments will go into effect in phases. Operating companies that are currently required to submit financial statement information in XBRL will transition to Inline XBRL on the following 

phased basis: 

• Large accelerated filers that use U.S. GAAP will be required 

to comply beginning with fiscal periods ending on or after June 

15, 2019. 

• Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 

2020. 

• All other filers will be required to comply beginning with fiscal 

periods ending on or after June 15, 2021. 

Funds that are currently required to submit risk-return summary information in XBRL will transition to Inline XBRL on the 

following phased basis: 

• Large fund groups (net assets of $1 billion or more as of the 

end of their most recent fiscal year) will be required to comply 

2 years after the effective date of the amendments. 

• All other funds will be required to comply 3 years after the effective date of the amendments.