U.S. GOVERNMENT PUBLISHING OFFICE

30–241 PDF WASHINGTON : 2018

EXAMINING THE SEC’S AGENDA, 

OPERATIONS, AND BUDGET 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

OCTOBER 4, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–45 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

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C O N T E N T S 

Page 

Hearing held on: 

October 4, 2017 ................................................................................................. 1 

Appendix: 

October 4, 2017 ................................................................................................. 64 

WITNESSES 

WEDNESDAY, OCTOBER 4, 2017 

Clayton, Hon. Jay, Chairman, U.S. Securities and Exchange Commission ....... 5 

APPENDIX 

Prepared statements: 

Clayton, Hon. Jay ............................................................................................. 64 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Delaney, Hon. John: 

Letter to Hon. Jay Clayton re: EDGAR .......................................................... 86 

Clayton, Hon. Jay: 

Written responses to questions for the record submitted by Representative Beatty ..................................................................................................... 89 

Written responses to questions for the record submitted by Representative Hultgren ................................................................................................. 90 

Written responses to questions for the record submitted by Representative MacArthur .............................................................................................. 97 

Written responses to questions for the record submitted by Representative Pittenger ................................................................................................. 98 

Written responses to questions for the record submitted by Representative Sherman ................................................................................................. 101 

Written responses to questions for the record submitted by Representative Velazquez ............................................................................................... 106 

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EXAMINING THE SEC’S AGENDA, 

OPERATIONS, AND BUDGET 

Wednesday, October 4, 2017 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Jeb Hensarling [chairman of 

the committee] presiding. 

Present: Representatives Hensarling, McHenry, Royce, Posey, 

Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross, Pittenger, 

Wagner, Barr, Rothfus, Messer, Tipton, Williams, Poliquin, Love, 

Hill, Emmer, Trott, MacArthur, Davidson, Budd, Kustoff, Tenney, 

Hollingsworth, Waters, Maloney, Velazquez, Sherman, Meeks, 

Lynch, Scott, Cleaver, Moore, Ellison, Perlmutter, Himes, Foster, 

Kildee, Delaney, Sinema, Beatty, Vargas, Gottheimer, Gonzalez, 

and Crist. 

Chairman HENSARLING. The committee will come to order. 

Without objection, the chair is authorized to declare a recess of 

the committee at any time. And all members will have 5 legislative 

days within which to submit extraneous materials to the chair for 

inclusion in the record. 

The hearing is entitled Examining the SEC’s Agenda, Operations, and Budget. 

I now recognize myself for 3–1/2 minutes to give an opening 

statement. 

This morning, we—the committee will come to order, please. 

This morning, we welcome the Securities and Exchange Commission Chairman, Jay Clayton, for his first appearance before our 

committee. It has been almost a year since an SEC chair appeared 

before the committee. And I want to take this time to applaud you, 

Chairman Clayton, for a number of changes that you have made 

during your brief tenure. 

Under the previous administration, the SEC failed to develop a 

capital formation agenda and did very little to promote it beyond 

what Congress required in the JOBS Act. This committee is extremely encouraged by the SEC’s renewed commitment under your 

leadership to facilitate capital formation to help small businesses 

access the capital they need to innovate, grow, and provide economic opportunities for all Americans. 

We also appreciate the public comments you have made on the 

need to reverse the trend of declining initial public offerings, and 

the SEC’s announcement that confidential IPO filings would be 

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open to all companies, a provision that the House passed as part 

the Financial CHOICE Act. 

The SEC should also continue to explore ways to simplify its disclosure regime and return to the concept of materiality. The securities laws are not the appropriate avenue to pursue ideological and 

political agendas that have nothing to do with the SEC’s mission, 

and can only harm economic opportunity and growth. 

Under the previous administration, the SEC dropped the ball on 

the fiduciary rule and allowed the Department of Labor to insert 

itself into the SEC’s jurisdiction. Surely, this must be reversed. 

And as I continue to watch our national debt clock spinning out of 

control, it is with deep gratitude, and at least I think for the first 

time since I have served on this committee and after the SEC’s 

budget has seen an increase of more than 325 percent since the 

year 2000, the SEC did not seek a budget increase for Fiscal Year 

2018. 

Congratulations. It is a welcome change for hardworking taxpayers. I do understand the SEC will request more funding in 

cybersecurity for Fiscal Year 2019 for obvious reasons, and this 

brings me to my next point. 

The committee has serious questions regarding cybersecurity 

controls at the SEC. The recent announcement that the SEC’s Electronic Data Gathering, Analysis, and Retrieval system, known as 

EDGAR, had not only been hacked in 2016, but that nonpublic information may also have been used to facilitate illicit trading. This 

is very, very troubling. Even more troubling is that Congress and 

the public were not informed until September 2017. 

Chairman Clayton, we know that this breach did not happen on 

your watch, but you are the one who has to fix it. Given the recent 

Equifax breach and this breach, the committee has serious concerns with the rapidly approaching November 15 implementation 

for the Consolidated Audit Trail. 

While the Consolidated Audit Trail serving as a central repository for order and trading activity data, I urge the SEC again to 

delay its implementation date until the Commission can ensure 

that the appropriate safeguards and internal controls are in place 

to protect this data. To echo what your colleague, Commissioner 

Piwowar, said, the SEC has only one chance to get this right. 

Please make sure you do, sir. 

I now yield 3 minutes to the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman. And welcome, Chairman Clayton, who is from the great city of New York. 

One of our country’s greatest assets is our economic strength, including our strong capital markets. Investors from all around the 

world pour their money into the U.S. markets because they trust 

that our companies are accurately reporting and are accurately auditing their financial statements and that their rights as investors 

will be protected. And it is this confidence in our markets that we 

need to focus on maintaining. It is the SEC’s job to oversee our 

markets, which makes the SEC one of the most important regulators in the world. 

Because of the breadth of activities that it regulates, the SEC 

must constantly evolve and adapt its regulations in order to remcarroll on FSR431 with DISTILLER

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spond to new innovations and trends in the market. Sometimes 

this means modernizing a regulatory regime to take account of new 

risks that are in the market. Other times it means modernizing the 

SEC’s own operations to account for new risks that the regulator 

itself faces. The SEC’s ability to adapt on both fronts has been 

highlighted by the recent cyber attacks, both at private companies 

like Equifax and at the SEC itself with the EDGAR attack. 

While I am deeply concerned about the EDGAR attack, I have 

noticed that there has been transparency in response to the breach. 

This breach did not happen on Chairman Clayton’s watch, but he 

has been proactive, some say not as proactive as he should be, but 

he has been proactive in disclosing it to the public and ordering a 

full investigation into the breach. 

The EDGAR system plays a central role in our capital markets. 

It is the main system where companies keep their investors informed about what is going on in the company. So if there is a 

problem with EDGAR and its reliability is called into question, we 

need to know about it as soon as possible, and it needs to be fixed 

immediately. 

I look forward to hearing from Chairman Clayton as well as 

other priorities he may have in addition to EDGAR. 

Thank you. 

Chairman HENSARLING. The gentlelady yields back. 

The chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, the chairman of the Capital Markets Subcommittee for 

1–1/2 minutes. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

Chairman Clayton, I will try not to echo Chairman Hensarling 

too much here, but obviously we now know that to protect investors, maintain fair, orderly, and efficient markets, and to facilitate 

capital formation is the three-part mission of the Securities and 

Exchange Commission. And as he pointed out, the last administration was more focused on CEO pay ratios and conflict minerals and 

a number of other things that literally brought nothing to the 

table. This designated mission may be important, and as Mary Jo 

White had said, important, but not the focus of the SEC. 

Something we have discussed, one of my biggest concerns, is the 

decline in IPOs, those initial public offerings that really have given 

fewer investment opportunities for Main Street investors. We have 

the strongest, deepest most liquid markets here, but we are becoming less and less attractive to growing businesses due to one-sizefits-all kind of securities regulations. 

Hardworking families in west Michigan and throughout the 

country rely on capital markets to save for everything from college 

to retirement, and we must work to maintain these efficient capital 

markets so investors have the opportunity to receive the greatest 

return on their investment. We need to ensure that Mr. and Mrs. 

401(k), as you call our Main Street investors, are able to invest in 

a better future. 

Chairman Clayton, I was encouraged by your remarks in July at 

the Economic Club of New York where you stressed that a key part 

of your agenda is facilitating capital formation. I applaud you for 

that. Well, let’s work together, sir, to reverse the negative trend of 

declining IPOs and instead refocus the SEC on capital formation to 

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expand opportunities for investors, unleash the American spirit, 

grow our economy, and increase our job creation. 

With that, I yield back. Thank you. 

Chairman HENSARLING. The gentleman’s time has expired. 

The chair now recognizes the gentleman from Michigan, the vice 

ranking member, Mr. Kildee, for 2 minutes. 

Mr. KILDEE. Thank you, Mr. Chairman. And welcome, Chairman 

Clayton. 

First, I want to express my concern over potential insider trading 

by Equifax executives. It is critical that the SEC closely examine 

these trades to determine, both for itself and the public at large, 

whether the individuals were taking advantage of knowledge that 

would not be publicly disclosed for another 6 weeks. I also urge the 

SEC to clarify to companies when a cybersecurity breach is material that it must be disclosed. Six weeks between discovery and disclosure is simply too long, especially considering the scale of the 

Equifax breach. The SEC plays a critical role in ensuring the safety 

and soundness of our financial markets, and it is vital that it fully 

examine the Equifax breach in order to begin restoring confidence 

in our markets. 

Second, I am interested in your plans regarding disclosure of political contributions by publicly traded companies. I disagreed with 

your predecessor, Chair White, in her decision not to undertake 

rulemaking on this issue. The Supreme Court’s 2010 decision in 

Citizens United v. FEC opened the floodgates in terms of political 

spending. And while we now have seen money take an even more 

outsized role in our democracy, it is all more critical that SEC act. 

It can’t undo the damage that has been done, but it could bring 

transparency to the glut of money being spent in American politics, 

money that we can’t see. 

The SEC already requires corporations to disclose material information that the public would need to know before investing in a 

company. I believe it should require similar disclosures regarding 

political contributions, so that citizens can make informed decisions 

as they participate in the democratic process. It will take transparency to restore confidence in our election process, and I urge the 

SEC to do its part and undertake rulemaking. 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

Today, we welcome the testimony of the Honorable Jay Clayton. 

This is the first time that Chairman Clayton has appeared before 

our committee. Chairman Clayton was sworn in as chairman of the 

U.S. Securities and Exchange Commission on May 4 of this year. 

Chairman Clayton earned a B.S. in engineering from the University of Pennsylvania, a B.A. and M.A. in economics from the University of Cambridge, and a J.D. from the University of Pennsylvania Law School. Prior to joining the Commission, Mr. Clayton 

was a partner at Sullivan & Cromwell. 

Without objection, the witness’s written statement will be made 

part of the record. 

Chairman Clayton, you are now recognized to give an oral presentation of your testimony. Thank you. 

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

SECURITIES AND EXCHANGE COMMISSION 

Mr. CLAYTON. Chairman Hensarling, Congresswoman Maloney, 

Congressman Huizenga, Congressman Kildee, distinguished members of the committee, thank you for the opportunity to testify before you today about the work of the SEC. 

I will start with a second thank you, this one to my fellow commissioners and the 4,600 women and men of the SEC who have 

been incredibly welcoming to me. I have benefited from my interaction with these individuals. 

During my 5 months at the Commission, I have devoted a substantial portion of my efforts to agency operations. As discussed in 

more detail in my written testimony, I believe there are four areas 

where additional focus and resources are most needed: One, 

cybersecurity; two, retail investor protection; three, market integrity, including structure, risk, and resiliency; and, four, capital formation. 

My written testimony also discusses in detail the work of the 

Commission over the past 5 months and various policy initiatives 

moving forward. 

The remainder of my oral testimony will focus on cybersecurity, 

and I will end with one comment on our regulatory agenda. 

I have been concerned by and focused on cybersecurity, both internally and externally, since my first weeks at the Commission. As 

recent events demonstrate all too well, this is an area where we 

need to devote significant additional resources and attention. I will 

turn to the recently disclosed incident from 2016. 

In August 2017, I was notified of a possible intrusion into our 

EDGAR system. In response to this information, I immediately 

commenced an internal review, which led me to understand that 

the breach of our EDGAR system in 2016 provided access to nonpublic information and that the information obtained by the intruders may have been used for illicit trading. 

This matter involving our EDGAR system and its ramifications 

concerned me deeply. I am focused on getting to the bottom of the 

matter, and importantly, lifting our general cybersecurity efforts 

moving forward. 

I recognize that I am not the only one who is deeply concerned. 

Rightfully, the 2016 intrusion will cause this committee and others 

to increase their focus on whether the Commission’s approach to 

cybersecurity appropriately addresses our risk profile. This is all 

the more reason it was appropriate to disclose the 2016 intrusion 

to Congress and the American people 2 weeks ago and to update 

that disclosure this past Monday. These disclosures were appropriate and important, even though a review and investigation are 

ongoing and may take substantial time to complete. 

On Monday, I disclosed that, pursuant to our ongoing investigation, the staff had determined that the EDGAR test filings accessed 

by third parties contained personal information of two individuals. 

Staff are reaching out to the two individuals to notify them and to 

offer identity theft protection and monitoring services. I also noted 

in the release that should the agency’s review uncover additional 

individuals whose sensitive information may have been accessed, 

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the staff will contact them and offer identity protection and monitoring as well. 

With respect to, one, getting to the bottom of what happened in 

2016, two, assessing where we are today, and three, improving our 

approach to cybersecurity moving forward, I have organized the 

agency’s efforts into five work streams: The independent review of 

the 2016 intrusion by our Office of Inspector General. Second, the 

investigation led by the Division of Enforcement into the potential 

illicit trading, getting to who the hackers were. A focused review 

and, as necessary or appropriate, uplift of our EDGAR system. 

Four, a more general assessment and uplift of the agency’s 

cybersecurity risk profile efforts that were initiated shortly after 

my arrival, including the identification and review of systems, current and planned, that hold market sensitive data or personally 

identifiable information, including the Consolidated Audit Trail, or 

CAT. And finally, the agency’s own internal review of the EDGAR 

intrusion. 

While there are limits on what I know and can discuss about the 

2016 incident due to the status and nature of these reviews and investigations, I believe this is an appropriate framework to approach 

the key questions of what happened in the past, where we stand, 

and how we can improve moving forward. 

As a result of this incident, some have questioned whether we 

can appropriately protect sensitive information we receive and 

whether we should receive additional data to further our mission. 

I want to say that we are serious about this, but it is not the time 

for us to pull back from important market oversight initiatives. 

Our mission is too important to millions of Main Street investors, 

issuers, and market participants to do so. In short, we must be 

vigilant and we must do better. 

Turning to policy matters, my written testimony discusses our 

recent regulatory efforts and objectives in detail, including my philosophy on our upcoming Regulatory Flexibility Act agenda. I am 

pleased that this morning, the Commission announced it will hold 

an open meeting next Wednesday to consider a rule proposal by the 

FAST Act to modernize and simplify the disclosure requirements in 

Regulation S-K in a manner that reduces costs and burdens on 

companies with no reduction in the disclosure of all required material information. I know that a bipartisan group of members of this 

committee worked to include this provision in the FAST Act. I 

thank you for your efforts. 

In closing, I would like to thank the committee for its continued 

support of the SEC, its mission, and its people, and I look forward 

to answering any questions you may have. 

[The prepared statement of Mr. Clayton can be found on page 64 

of the appendix.] 

Chairman HENSARLING. The chair now recognizes himself for 5 

minutes. 

Chairman Clayton, I am happy to hear the FAST Act announcement. I will have a couple of cybersecurity questions, time permitting. But I really want to lead off with your concern about the declining IPO markets. 

In your opinion, what are some of the chilling effects of regulation on the IPO market? What would you focus this committee’s atmcarroll on FSR431 with DISTILLER

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tention on? And why is it so important that we reinvigorate the 

IPO market? 

Mr. CLAYTON. Let me start with your last question, why I think 

this is so important. The choices available to our retail investors, 

the people who are saving for their retirement, I believe, are, in 

fact, diminishing because the number of public companies is diminishing. 

The most efficient way for retail investors to invest is in our public capital markets. It is costly for them to invest in private investments. So I want to increase, to the extent possible, the opportunity set for our Main Street investors to invest in the growth of 

America. That is important. 

In terms of why do we have fewer public companies today than 

we did at different periods in the past, and why is the trend going 

in a downward direction? There are a couple of things. One thing 

is that we do have a bit of a one-size-fits-all model, and that means 

that the regulatory regime that applies to a very, very large company is essentially the same that applies to a medium size or 

smaller public company. I question whether that continues to be 

appropriate. I think that the JOBS Act and the scaled disclosure 

provisions for emerging growth companies demonstrate that a 

scaled system that is rooted in investor protection, audited financial statements, and disclosure of material information is something we should be looking at. 

I also recognize that there are alternative forms of capital available today that were not available 20, 25 years ago, including a 

fairly robust private equity and venture capital market. But I am 

looking at that landscape, and I would like to see a greater proportion of companies end up in the public market so that all investors 

have an opportunity to participate in America’s growth. 

Chairman HENSARLING. So switching gears, the Consolidated 

Audit Trail is due to go live in just a little bit more than a month. 

So given the EDGAR breach, how can you assure this committee 

that CAT is ready for prime time? Have all cybersecurity concerns 

been ameliorated? 

Mr. CLAYTON. Mr. Chairman, the CAT is being developed by the 

SROs, the self-regulatory organizations, FINRA and the exchanges, 

with a contractor. I look at us as having two roles, at the SEC: We 

have an oversight role in that we oversee those entities, and we are 

also a beneficiary of the CAT once it is up and running in that we 

get the data. 

With respect to your question about cybersecurity and the SEC, 

from the time I got to the Commission and got briefed on the CAT, 

the questions I have been asking are, what information are we taking in? It is sensitive. Do we need it to fulfill our mission, and can 

we protect it? And I have made it clear that I don’t want information unless we need it for our mission. 

Chairman HENSARLING. But, Mr. Chairman, have those questions been answered to your satisfaction? 

Mr. CLAYTON. To my satisfaction, from the Commission’s perspective, the answer has not yet been answered to my satisfaction. 

Chairman HENSARLING. And will this go live until those questions are answered to your satisfaction? 

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Mr. CLAYTON. I want to be clear, but it is a little bit complicated. 

As far as us taking the information, it is not—we are not going to 

take it until those questions with respect to the SEC are answered 

to my satisfaction. 

I also have questions about the SROs and the CAT generally and 

our oversight role. There is a contractual relationship among those 

parties. I am in dialog with them, but I want to be satisfied that 

they are doing what they are supposed to do well. 

Chairman HENSARLING. Switching gears again, the Financial 

CHOICE Act, which the House has passed, contains a number of 

capital formation provisions, including creating venture exchanges, 

modernizing the definition of accredited investor. What are some of 

the actions that the SEC is pursuing to make it, again, going public 

easier and make it more attractive to small businesses and entrepreneurs? 

Mr. CLAYTON. So to answer both questions: There is the private 

investing market, which retail investors and sophisticated investors 

do participate in. I have asked the Division of Corporation Finance 

to look across the way we approach crowdfunding, Reg A, Reg D, 

and ask, is there a consistency that we can bring to this? Removing 

complexity while maintaining the same investor protection has to 

benefit those small-and medium-size businesses. That is the bottom 

line. 

Chairman HENSARLING. My time has expired. 

The chair now recognizes the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets Subcommittee. 

Mrs. MALONEY. Chairman Clayton, I think the EDGAR hack has 

demonstrated that government agencies, and the SEC in particular, are constantly under attack from hackers and criminals, so 

the SEC really needs to step up its cyber defenses in the wake of 

this attack. So what are you doing to ensure that the SEC has the 

most robust cyber defenses possible? Are you creating any new positions, any new policies, any new procedures, any new resources? 

What are you doing to help protect the agency from the risk of 

cyber attack? 

Mr. CLAYTON. Let me say what we are not doing. We are not 

waiting until the end of the five workstreams that I outlined to 

take action. We are focusing immediate attention on the EDGAR 

uplift. 

But with regard more generally to your question, I want to say 

that I have the support of both Commissioner Piwowar and Commissioner Stein. We are looking at our incident response plan to 

see if we can improve it. 

With respect to new positions, this is something that I am 

pleased to say I have the support and I am ready to move forward 

and say it today, I think the agency could use a chief risk officer, 

not just for cybersecurity, but for general risk. I have begun the 

search for a chief risk officer for the agency. 

Mrs. MALONEY. Thank you. I want to talk to you about the gap 

between the—when companies determine that there has been a 

material change that they need to disclose to the public and when 

they actually disclose it to the public. And as you know, the current 

SEC rules give companies 4 days to disclose material changes, and 

there has been research from Professor Robert Jackson in New 

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York, Columbia Law School, that shows that executives do actually 

trade profitably in this 4-day gap. So Senator Van Hollen and I 

have been working on a bill, which we sent a draft to your office, 

that would prohibit executives from trading in this 4-day gap. 

And do you think this makes sense? What is your response? 

Should executives be allowed to trade after they have learned 

about a material change, but before they actually disclose it to the 

public? 

Mr. CLAYTON. Thank you. As I mentioned to Senator Van Hollen 

and as I mentioned to you, I believe it is good corporate hygiene 

that, once a determination has been made that there is a material 

event to disclose, that the company’s insider trading policy, which 

is essentially when are you and are you not allowed to trade, would 

have a control in there where the senior executives would not be 

allowed to trade. So as I said before and I agreed, I like this concept. 

Mrs. MALONEY. Thank you. I understand that you are examining 

a pilot program on the access fees charged by exchanges. Many 

market participants have told me that this pilot program really 

needs a bucket with zero rebates in order to accurately test the effectiveness of different access fee levels. So my question is, are you 

going to include a zero rebate bucket in the access speed pilot program? 

Mr. CLAYTON. So we have an access speed pilot under consideration. And this question as to what tiers would you have in a pilot 

program has been on my mind, and I know it has been on the other 

commissioners’ minds, essentially to get the right data so that 

when we do the pilot, we have the data we need to assess whether 

the make-or-take model is working appropriately, et cetera. That is 

a prelude to the answer to your question, which is there has been 

nothing definitive decided, but a zero rebate or zero fee bucket is 

something that is under consideration and that I have discussed 

with the staff. 

Mrs. MALONEY. And last, you mentioned in your testimony that 

you are limited in what you can say about the EDGAR hack due 

to the IG investigation, but you disclosed it as soon as you found 

out about it. Now, if only you or the other SEC commissioners had 

been informed of the EDGAR attack earlier, we might have learned 

about this much sooner. 

So my question is, what is the SEC’s policy on notifying the commissioners about cyber incidents when the Office of Information 

Technology detects any sort of unauthorized intrusion into the SEC 

systems? Are they supposed to notify their superiors, in this case 

the SEC’s chief operating officer, or is notification only required for 

really serious hacks? What is the SEC’s policy in this disclosure 

practice? 

Mr. CLAYTON. Looking at our past incident response plan, it is 

something that we will do as part of the review. But your question 

is a good one. Let me put it in a little bit of context. 

As I have said before, we are constantly under attack. Many government agencies are constantly under attack. I can’t be notified of 

every attempt, but there does have to be a mechanism for assessing 

the significance, not materiality, but the significance of the attack 

and elevating it to me and the other commissioners. 

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Chairman HENSARLING. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Capital Markets Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. I am going to be moving fast. I only have 5 minutes. 

The chairman had touched on Consolidated Audit Trail, the CAT. 

I have very serious concerns as well. That was part of a letter that 

we had sent to you last week, and I do—I am a little curious, based 

on the answers that we have, it seems like it might be a chicken 

or the egg situation here, whether you are waiting for the SROs to 

declare that the system isn’t ready and the SROs are waiting for 

SEC to say, hey, wait a minute, we are not ready to take this because of whether it is a breach in EDGAR or other things. So I 

don’t know if—I will give you very briefly, if you want to clarify 

that at all, or we can just leave it— 

Mr. CLAYTON. No. I think they have an obligation to get the CAT 

system up and running, including an obligation for cybersecurity. 

With respect to me taking the data once they have it, I am not 

going to take it until I am comfortable. 

Mr. HUIZENGA. So you are waiting to hear whether they can or 

can’t provide you the data in a safe, secure manner? OK. They will 

be thrilled to hear that, I am sure. 

Mr. CLAYTON. This is not the best place to negotiate with them. 

Mr. HUIZENGA. Yes, OK. I won’t try to get in the middle of that, 

but we do need to—we do need to address this. 

You are going to hear a number of others, my concern of Equifax, 

the breach of EDGAR. I do want to offer my philosophical support 

with my Ranking Member Maloney on this 4-day executive trading 

gap question being addressed, and I look forward to seeing some 

language on that and working with her. 

I do want to quickly move on to MiFID, the markets and financial instruments directive to MiFID II, which is a European Union 

directive. It is going to require banks to unbundle research payments and charge for research separately from brokerage services. 

The MiFID rules will require investment research to be paid from 

either a fund manager’s own account or from the client research 

payment account, which would limit these long recognized use of 

commissions from trading being used to help pay for research, 

quote/unquote, soft dollars. 

Well, MiFID II regime directly contradicts the U.S. regime, and 

under the 1934 Securities Act, brokers are prevented from receiving direct payment for research unless they are registered as an investment adviser, which would subject them to a completely entirely new regulatory regime. Clearly, I think we would agree that 

that would disrupt current models. 

September 14 of 2017, the world’s largest fund manager, 

BlackRock, announced that it will pay for external research out of 

its own pocket, following similar announcements from Vanguard, 

the world’s second largest fund manager, and JPMorgan Asset 

Management. Many of the asset management industry fear these 

moves in response to MiFID II are really changing the way the industry does business. And a number of folks up in New York, my 

friend Kenny, he knows who he is, have expressed grave concern 

about this, but I am not sure anybody knows really what to do with 

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this. There have been numerous calls on the SEC to provide some 

exemptive relief or negotiate with EU to find a workable solution. 

Does the SEC intend to provide any formal relief or guidance for 

U.S. firms to comply with the conflicts between MiFID II and the 

U.S. regime? 

Mr. CLAYTON. The answer is yes, we are trying to do this. The 

European Union has decided they want to proceed in a fairly specific way, separating payments, research, and commissions, which 

is, as you correctly outlined, different from the way our markets 

are structured and we approached it for a while. 

In a nutshell, our aim is to allow them to do that in their market, but not either directly or indirectly force the importation of 

that system. If our broker-dealers and other market participants 

want to take a different approach from the past, they are free to 

do so. But we want to provide a structure that allows the current 

model to continue. We can then assess, as things go on, what the 

best way forward is. 

Mr. HUIZENGA. OK. As we all know, that time is flying by. In our 

remaining few seconds here, market structure, equity market 

structure, we started a series of hearings on Capital Markets Subcommittee, and really trying to look at the 1975 amendments of the 

Securities and Exchange Act. A number of things, Reg NMS and 

others. 

Do you believe that it is important that both we and you at the 

SEC perform a holistic review of equity market structure? And 

should the focus be on regulation NMS or should it be a much 

broader review? 

Mr. CLAYTON. Yes, I believe it is important. I think a focus on 

Reg NMS principally makes sense. But you have to ask yourself 

the broader question: Are we driving efficiency in our markets? 

And do we have sufficient liquidity? And are the people who are 

providing that liquidity being appropriately compensated, undercompensated, overcompensated? Is it real liquidity? Those are the 

kind of broad questions we ought to be asking. 

Mr. HUIZENGA. All right. I appreciate that. 

My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentlelady from New York, Ms. 

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. And welcome, Mr. 

Clayton. 

Chairman Clayton, in the JOBS Act, we increased investor 

threshold for registering as a public reporting company from 500 

to 2,000 investors, with no more than 500 non-accredited investors. 

In implementing the rules relating to these increased thresholds, 

the SEC changed the definition of accredited investors as it is applied to those thresholds requiring firms to have a reasonable belief 

as to each investor’s accredited investor status annually, rather 

than only at the time of the initial investment. Some firms have 

interpreted this as a requirement by the Commission that firms annually ask their investors to recertify that they remain accredited 

investors. 

Among other things, this change leaves any firm taking advantage of the JOBS Act threshold with great uncertainty as to whethmcarroll on FSR431 with DISTILLER

12 

er that firm will remain private in the future, undermining the intent of the JOBS Act. 

Can you please explain how this additional requirement benefits 

the investor, if it at all benefits them? 

Mr. CLAYTON. Well, I think your question is a good one. Again, 

not every rule that we make is a perfect rule. This is a rule that 

we have to look at—it had a good intent, which was, ‘‘Hey, let’s just 

make sure that our status is where it should be.’’ It has had an 

effect of, ‘‘You know what, we are not even going to go there because it is too much trouble.’’ So this is a rule that we should look 

at. 

Ms. VELAZQUEZ. So my next question is can this requirement be 

change a of the Commission or do you believe this change requires 

a legislative fix? 

Mr. CLAYTON. Let me answer it this way: I think we should look 

at it. If we think it should be changed and we can’t change it, we 

will come back to you and ask for help. 

Ms. VELAZQUEZ. All right. Thank you. 

Chairman Clayton, more of America’s small businesses are accessing capital from financial technology or fintech companies. 

Some commentators have suggested that a current online marketplace for small business loans falls between the cracks for Federal 

regulators, including the SEC. What do you see as the SEC’s role 

in regulating this space? 

Mr. CLAYTON. So I am going to give you a general answer about 

fintech and developments, and then I will try and specifically answer your question about loans and my interaction with the banking regulators. 

And I like innovation in the marketplace. I like what we are seeing with distributed ledger technology, I like these things. But as 

we have seen, including with an enforcement action we brought 

yesterday, sometimes new things are a new avenue for old frauds. 

And we are very mindful of that in the initial coin offering space. 

Now, with respect to the online platforms I am not a—I’m not 

a person who likes to jump on other people’s jurisdictions, but I do 

think that we should be in dialog with the banking regulators on 

this and share with them our thoughts from the security space. 

Ms. VELAZQUEZ. OK. Thank you. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentlelady yields back. 

The chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. And welcome, Mr. 

Clayton. You are a breath of fresh air, trust me. 

We were discussing this morning the breach, and I would like for 

you to give me a timeline, if you wouldn’t mind, just take a few 

moments here, so we all know exactly what happened, when it happened, what you knew, when you knew it, if you don’t mind, just 

briefly. 

Mr. CLAYTON. I will do what I can. I will give you my timeline, 

which is, in August of this year, I was notified that there may be 

a problem with EDGAR. I asked, ‘‘OK, what is the problem? What 

is the extent of it?’’ Immediately got to the bottom of it. It is not 

mcarroll on FSR431 with DISTILLER

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easy to get to the bottom of these things. We are talking about 

something that was in 2016. You have to pull the servers, try 

and—it has been a long time since I have been a computer guy, but 

it takes a lot of work to compare what they looked like at one period to what they looked like another period. 

When it became apparent that we had a significant problem, I 

decided it needed to be disclosed. So we disclosed that. And I will 

say, our work is very much still ongoing as to the extent to which 

this intrusion took place, the information that was accessed, and 

then the next step of how was that information possibly used in the 

marketplace. 

With respect to 2016—what happened in 2016? I am going to— 

I am going to wait for more information from our internal investigation about when the intrusion was noticed, how it was patched, 

and as Congressman Maloney and others have said what was the 

escalation process and was it followed? Those questions I think I 

have to wait on. 

Mr. LUETKEMEYER. OK. In your testimony a while ago, you said 

that the breach basically had some nonpublic information that was 

used for illicit trading or could have been. 

Mr. CLAYTON. Uh-huh. 

Mr. LUETKEMEYER. To me, that begs the question are our markets safe? Are they being manipulated? Investors must be able to 

trust the system before they can or should be willing to participate 

in it. This falls right in your bailiwick of the trust of the public 

with regards to the systems that we have in place. 

Number 1, I guess, what kind of information was there, and did 

it affect trading? And what are you doing to look down the road 

as a result of this breach here to suggest to the different trading 

platforms how they can protect the data and make sure that those 

are not implicated or impacted or breached themselves? 

Mr. CLAYTON. First, you are absolutely right, this is serious because it does impact the integrity of our markets. This kind of information, nonpublic information that is stored either at the SEC 

or other places is a target of nefarious actors, because it is valuable 

to them because they can trade ahead of the rest of the market. 

So question one is do we need it? In this case, we are talking about 

test filings, and I expect, but don’t know the details, the filings that 

were probably the—let me say this. Filings that were of value were 

in advance of earnings releases, in all likelihood, or another market 

event, and that they happened to include information the night before the release or something like that. But that is the type of question in the overall review that we should be asking ourselves, do 

we need that information where there is a latency between the 

time we get it and the time it becomes public? And if we do need 

it, then we have to pay particular attention to it. 

Mr. LUETKEMEYER. During the course of the process here—I 

chair the Financial Institutions Subcommittee here and work data 

is right square in the middle of what we are doing. Tomorrow, we 

are going to have Equifax in here. In a couple of weeks, we are 

going to have another hearing in our committee with regards to 

data breaches and data security. And some of the things we are 

looking at are the protocols for notification and new forms of perhaps IDs that people use to be able to access. I saw in your testimcarroll on FSR431 with DISTILLER

14 

mony here, you had 50 million times a day the EDGAR system is 

accessed for individuals who do it in a positive way to look at data 

that is there. We need to let that disclosure information still be 

available, but how do you protect it? 

I saw that there is biometric stuff. I saw this morning where the 

administration is talking about doing away with Social Security 

number IDs. Do you have some thoughts on what you would like 

to suggest to us with regards to identification monikers as well as 

notification protocols? 

Mr. CLAYTON. Well, let me try and stay in my space. And I have 

asked the folks at the Commission, if we are taking things like personally identifiable information, Social Security numbers, date of 

birth, do we really need to be taking that? And if we do need to 

be taking it, should we be taking it in a different or disaggregated 

form from the other market information we are taking? Those kind 

of threshold questions are ones we should be asking. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the ranking member, the gentlelady 

from California, Ms. Waters. 

Ms. WATERS. Thank you very much, Chairman Jay Clayton. 

Chairman Hensarling, thank you for holding this hearing. And 

I would like to thank Vice Ranking Member Kildee for managing 

today. 

Mr. Chairman, 2 weeks ago, you announced that, in 

August 2017, you learned that a 2016 breach of the SEC’s electronic system for public company filings, quote, ‘‘May have provided 

the basis for illicit gains through trading,’’ end quote. This announcement came right on the heels of Equifax’s announcement of 

a data breach that exposed sensitive personal information of 145 

million American consumers. These incidents are deeply disturbing 

as they indicate critical vulnerabilities in our financial system. The 

dangers presented by these vulnerabilities are even more potent, 

given the recent efforts by foreign actors to destabilize the United 

States through cyber attacks on Wall Street, U.S.-based information technology companies, and even our national election processes. 

Could you tell us whether the SEC’s investigation, as far as you 

know, has uncovered the involvement of any foreign actors in the 

2016 hack? To what extent are you coordinating with the Department of Homeland Security to identify and guard against significant cyber threats from state and nonstate actors? 

Mr. CLAYTON. Thank you. I agree with you about the seriousness 

of this issue that we had, the Equifax issue, and issues generally. 

With respect to the investigation of, I will call it, our incident, and 

the hackers, perpetrators, I don’t want to—I don’t want to comment 

with any specificity because there is an ongoing investigation, and 

I have been advised, and I agree with this advice, that getting into 

details may hamper that investigation. We are looking at who the 

actors are, trying to identify how long they were there, and with 

the ultimate goal of bringing them to justice. 

Ms. WATERS. So given all of this, the GAO identified 26 deficiencies in the SEC’s control over its key financial systems and information, including failure to properly prevent unauthorized access to sensitive financial data. 

mcarroll on FSR431 with DISTILLER

15 

What steps has the SEC taken to address the deficiencies identified in the GAO’s report and better protect nonpublic market information from exploitation by cyber criminals? 

Mr. CLAYTON. We have had two recent GAO audits, which I 

think you reference there. My understanding of where we stand on 

those is that there were 15 recommendations, and we have implemented 12 in one report, and I can get you more details. But I 

think adding it up, of the 26, I think we have implemented over 

20 at this stage. So it needs to go through the process with the 

GAO for the GAO to be satisfied that our implementation is what 

they would expect. 

Ms. WATERS. Do you feel you have the resources available to you 

to make these corrections? The SEC has been underfunded, seriously underfunded. And many of us have fought very hard to try 

and give you, our cop on the block, the resources that you need to 

do the work that you have to do to protect our investors, et cetera. 

Do you feel you have the resources necessary to correct these financial systems that the GAO has identified need so much work? 

Mr. CLAYTON. So I have made an assessment now in the first 5 

months that I have been there. And for Fiscal Year 2019, we were 

flat this year. I think that was appropriate, given that I am new. 

But going forward, I am asking for a 7 percent increase, a substantial portion of that going to cybersecurity. I would say the next 

thing behind cybersecurity is market integrity, making sure—and 

those two are related, cybersecurity and market integrity. And then 

I would like to put more money into retail fraud. But the short answer to your question is we need more money for cybersecurity. 

Ms. WATERS. All right. So you are talking about flat funding for 

2018? 

Mr. CLAYTON. Yes, that was what we had for 2018. 

Ms. WATERS. Well, with flat funding, how are you going to be 

able to move forward to do what needs to be done to ensure that 

you can protect all of this vital information that is exposed? 

Mr. CLAYTON. That is a really good question, a question I ask 

myself. I had what I will say is a pool of reserve, 20 positions, new 

positions, and a bit of money for our contingencies. Well, I now 

know what those contingencies are. I authorized the hiring of six 

additional people for cybersecurity and putting some additional 

money into it. 

Ms. WATERS. So you have a reserve that you will be using probably for 2018, given the flat funding? 

Mr. CLAYTON. I am using what—I will use a nontechnical term: 

I am using what wiggle room I had for cybersecurity. 

Ms. WATERS. I am trying to get you to say what you need so the 

chairman will hear you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Housing and Insurance Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Chairman Clayton, welcome to the committee. I just want to get 

some clarification on the EDGAR hack. This took place some point 

in 2016. Is that fair to say? 

Mr. CLAYTON. Yes, that is. 

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Mr. DUFFY. And Homeland Security was notified of this in 2016. 

Is that right? 

Mr. CLAYTON. I believe that to be correct, yes. 

Mr. DUFFY. And do you know if any of the commissioners or 

Chair White were notified at the same time that Homeland Security was notified? 

Mr. CLAYTON. I have no indication that they were notified. 

Mr. DUFFY. So we have a hack, someone at the SEC knows that 

it has taken place, they notify Homeland Security, but don’t notify 

the chair or the commissioners? Does that give you some pause? 

Mr. CLAYTON. That is a question that should be answered as part 

of our investigation. 

Mr. DUFFY. Better yet, when did you become the chair of the 

SEC? 

Mr. CLAYTON. May of this year. 

Mr. DUFFY. May of this year. And when did you find out about 

this hack? 

Mr. CLAYTON. In August. 

Mr. DUFFY. Does that give you some pause? 

Mr. CLAYTON. Yes. 

Mr. DUFFY. There is some conversation about a deep state. That 

the chair, the head of the organization on day one wouldn’t have 

been apprised of this is concerning to me, and hopefully—I know 

you just got there—hopefully, you will take a look at this in the 

chain of command and ask the questions who should be making decisions at the SEC? Frankly, I would say it would be you and the 

commissioners, not the deep state. Fair enough? 

Mr. CLAYTON. Fair enough. 

Mr. DUFFY. I want to quickly move to economic growth. So there 

has been a lot of conversation about the lackluster economic growth 

that we have had since the crisis or over the Obama years of 1.8 

percent. We just hit 3.1 percent growth this last quarter. I hear 

President Trump, our former colleague and committee member, 

Mick Mulvaney, has talked about this frequently: What we can do 

to put people back to work, what we can do to address our deficit 

clock, if we can actually just grow our economy. And that is 

wrapped around a conversation of tax reform. We hear a lot of conversation about regulatory reform in government. 

What space does the SEC have in helping grow the American 

economy, address our debt, put people back to work? Do you have 

any space to play in economic growth? 

Mr. CLAYTON. I think we—well, let me say this: I share the view, 

your view, I think it is the view of most people in this room, that 

the difference between 3–1/2 percent growth and 2–1/2 percent 

growth is huge, over any meaningful period of time. As a citizen, 

growth in jobs is what I want to see. So I definitely bring that perspective to the SEC in terms of growth and jobs. Capital formation 

is essential to it. As is confidence in our markets. 

So I am looking, and the men and women of the SEC are looking, 

how can we facilitate, how can we break down barriers to capital 

formation without in any way affecting the integrity of our markets? And that is, I know it is front of mind for our division of corporation finance, it is in front of my mind, and we are going to continue to look for opportunities. 

mcarroll on FSR431 with DISTILLER

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Mr. DUFFY. And for my constituents in central and northern Wisconsin, your work on improving capital formation, that has an impact on jobs, doesn’t it? That has an impact on economic growth? 

Is that fair to say? 

Mr. CLAYTON. It is fair to say. 

Mr. DUFFY. OK. I want to quickly pivot to corporate governance. 

We have been spending some time looking at proxy advisory firms. 

We basically have two that own the market. There is a lack of 

transparency. There is a lack of competition. I am wondering if this 

is a space that you have had an opportunity to look at and whether 

you see whether there is a need for at least some reform in this 

space? 

Mr. CLAYTON. It is a space that I have had an opportunity to 

look at. It is a space that the Commission is looking at. These firms 

provide a service that has value. They amalgamate data so that 

1,000 investment managers don’t have to do it and provide that 

data. 

Mr. DUFFY. Is that a service to the company that hires them or 

is this a service to the ideology of the firm that owns them? 

Mr. CLAYTON. Good question. Good question. Because they are 

the aggregator of data and the entities that people look to for that 

data, they have significant influence in the way they present that 

data. That is just the way life works. I am aware of that. I am looking at it, and I think it is something that we should all look at, 

because—particularly with the increase in indexing and passive 

money that— 

Mr. DUFFY. If I could just— 

Mr. CLAYTON. —Further increases their influence. 

Mr. DUFFY. My time is almost up. When we hear stories about 

a firm getting a negative recommendation, and right on the heels 

of that coming out, lo and behold, an offer comes to buy the consulting services of the firm that just gave you a negative recommendation, and they claim there is a firewall between the two. 

But I watch enough Mafia movies where people come in and go, 

yes, we were going to protect you. Pay up. This is a space that is 

ripe for the SEC to look at and this committee as well. 

Mr. Chairman, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Georgia, Mr. Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Good morning, Chairman Clayton. Last week, I sent you a letter 

regarding legislation that I am helping to lead, which is H.R. 3555. 

I hope you got the letter. It is entitled the Exchange Regulation— 

Regulatory Improvement Act, and it is by my colleague, Republican 

colleague from Georgia, Mr. Loudermilk, and myself. 

Now, our bill simply clarifies the definition of the word facility 

of an exchange so that companies like the New York Stock Exchange are not hamstrung when trying to diversify the lines of 

business that they provide to their members and to investors. 

I want to make it clear also that our bill in no way limits the 

Securities and Exchange Commission’s regulatory powers, nor does 

it impede their ability to do their job. But our bill does not carve 

anything out from the Securities and Exchange’s regulatory jurisdiction. The SEC has full authority today and tomorrow, should our 

mcarroll on FSR431 with DISTILLER

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bill become law, to continue to go after the bad actors and to oversee the filings of market data, collocation, lifting standards, and 

other business changes filed with the SEC today. All we are trying 

to do is to allow the necessary breathing room for the New York 

Stock Exchange and companies like that to be able to operate in 

a more fluid situation. 

Your thoughts on that. And were you able to get my letter and 

read it? 

Mr. CLAYTON. I am aware of—I am aware of your letter and I 

am aware of the issue, which is, in our regulatory approach to the 

New York Stock Exchange or similar facilities, are we, the SEC, 

going beyond our bread and butter and getting into regulating 

businesses that are away from, or tangential to, the operations of 

those facilities? And it is a good question. It is a good question. We 

shouldn’t be stretching in a way that impedes innovation, so we 

should be asking ourselves that question. 

Mr. SCOTT. Right. Well, we look forward to working with you and 

sharing your input as we move this legislation forward. By Mr. 

Loudermilk and myself. 

Now, I want to go to another bill. Ms. Gwen Moore and myself 

are working on a bipartisan bill with Republican Keith Rothfus entitled or numbered House Resolution 2319, and it addresses a concern that we have about your rule that went into effect a year ago. 

It was the amendment to the rule governing money market funds. 

Now, as you know, Chairman, rule 2a–7 of the Investment Company Act requires certain funds available to institutional investors 

to switch from a usable, very usable net asset value, which we call 

NAV, to allow it to fluctuate or float, but others don’t get that benefit. And I know the SEC went through a very rigorous rulemaking 

process on this rule. But sometimes, sometimes, very few times but 

sometimes, our regulators get it wrong, and I think this is an example of that. 

Now, your predecessor, chairman of the SEC, argued that the 

benefits of a floating NAV would exceed the costs and issuers of 

commercial paper and municipal debt. But evidence is showing 

that this isn’t the case, because since the SEC has finalized the 

rule in 2015, we have seen a massive flight from prime and tax exempt money funds, because the costs of a floating NAV are so high. 

So we have this bipartisan effort, and what are your thoughts on 

that? 

Mr. CLAYTON. I am aware of the shift in assets from municipal 

and commercial assets to government assets in the institutional 

money market space as a result of our rule. It was anticipated. 

There are other considerations here, but I am looking at it. 

Mr. SCOTT. Good. 

Mr. CLAYTON. Our Division of Economic and Risk Analysis is 

looking at it. And so I think it is too early to say we were wrong, 

too early to say we were 100 percent right. 

Mr. SCOTT. I welcome your thoughts. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner, chairman of our Oversight and Investigations Subcommittee. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

mcarroll on FSR431 with DISTILLER

19 

And thank you, Chairman Clayton. Before I get into my line of 

questioning, I did want to mention the latest news concerning the 

hack on the EDGAR corporate filing system. As chairman of the 

Oversight and Investigations Committee, I would ask that you continue to communicate with our staff concerning this issue, as it is 

of obviously great interest to all of us. And I thank you for the time 

you have spent with them at this point. 

Now, as you know, I have spent the better part of the last 4 

years fighting for low- and middle-income investors who are losing 

their access to investment advice under the Department of Labor’s 

misguided fiduciary rule. A recent U.S. Chamber of Commerce survey noted 13.4 million consumer accounts will lose access to products under the Department of Labor rule. America is in the midst 

of a savings crisis, and we want to make things easier, not harder 

for them. 

Just last week, I introduced the Protecting Advice for Small Savers Act, the PASS Act of 2017, which will create a standard for 

broker-dealers that will eliminate I hope any confusion. My bill, 

among other things, will repeal the Department of Labor rule, create a best interest standard for broker-dealers and all the services 

they provide, and require them to disclose compensation and any 

conflict of interest that exists. Most importantly, it will allow these 

broker-dealers to do what they must do, which is act in the best 

interest of their clients. 

Mr. Chairman, I believe the PASS Act of 2017 would certainly 

provide clarity for the investor. If you are sitting across from a 

broker-dealer and maybe you have two different accounts with 

them, it is important that you have the same standard. Unfortunately, that isn’t the current practice, and that is causing both confusion and harm. 

Can you comment, sir, on how important it is to fix this, to move 

from this bifurcated regulatory regime created under the Department of Labor rule, sir? 

Mr. CLAYTON. Yes. So we have talked about one of the things 

that I initially focused on in getting into the job, cybersecurity. 

Mrs. WAGNER. Right. 

Mr. CLAYTON. One of the other initial focuses was this: I want 

to thank Secretary Acosta for reaching out to us and saying, hey, 

this is something that we should try and work on together. And we 

have been. And a lot of the themes that you outlined are the 

themes that I have, one of which is choice. Investors should have 

a choice, what type of account they want, what type of relationship. 

Mrs. WAGNER. And you stated that the choice is diminishing, in 

fact, in your earlier testimony. 

Mr. CLAYTON. And asset choice, what assets they want to invest 

in. There should be clarity. I recognize that there is not the kind 

of clarity that there should be in the marketplace today. We should 

bring clarity. 

There ought to be consistency with us and the Department of 

Labor. We can’t have asymmetric standards. You can’t put one hat 

on when you are talking about 50 percent of your assets and another hat on when you are talking about another 50 percent. It 

makes no sense. 

mcarroll on FSR431 with DISTILLER

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And then we have to cooperate. They have a mandate; we have 

a mandate. They are not the same, but we can cooperate and get 

there, I believe. I am for all of those things. Now, the devil’s in the 

details and we are working on it. 

Mrs. WAGNER. Do you agree this is something we need to make 

sure is completely transparent for that investor? 

Mr. CLAYTON. Yes. 

Mrs. WAGNER. Wonderful. In July of this year the State of Nevada implemented its own fiduciary standard. Are you concerned 

about the potential impact a patchwork of State laws will have on 

the provision of retirement advice? 

Mr. CLAYTON. I am. 

Mrs. WAGNER. My staff and I have been reviewing the comments 

submitted to the SEC as part of the review. There are a lot of very 

personal stories that concern me, mostly how the rule will result 

in decreased services. As you know, the Dodd-Frank Act gave the 

SEC the authority to establish regulations in this space. 

Can you tell me, Chairman Clayton, what your next step is and 

when will the SEC be acting? 

Mr. CLAYTON. The next step in anything like this would be a rule 

proposal. We are working on such a proposal. We want to work 

with the Department of Labor. If this were easy, it would already 

be fixed. We have a lot to do, but I am confident that we are going 

to put forward something that addresses those four issues and that 

has a standard that protects investors and that they understand. 

Mrs. WAGNER. We are all interested in the best interest standard. We want to make sure that there is access, that there is 

choice, and that it is affordable for those low-and middle-income investors. I have maintained all along the past 5 years, this is about 

Main Street, not about Wall Street. This is about taking care of 

those that should be saving for the future in the middle of this savings crisis. 

So I thank you, Chairman Clayton, I look forward to working 

with you, and my time has expired. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from New York, Mr. 

Meeks. 

Mr. MEEKS. Thank you. Hello, Mr. Chairman. 

Mr. CLAYTON. Hi. 

Mr. MEEKS. Good to see you. Good to have you here. And I first 

want to start off by thanking you for replying to a letter that I sent 

to you earlier on. And I am sure if you recall my letter dealing with 

diversity is very important to me. 

So let me just—and I assume that we are in the same spot that 

you do consider that board diversity, with regards to gender and 

ethnicity, et cetera, on our public companies is tremendously important to disclose, and so that the public knows who is on these 

boards. And it also helps I think the culture within some of these 

companies. Are we together on that? 

Mr. CLAYTON. We are together on diversity adding value in decisionmaking bodies and organizations. I believe in it, and I think it 

is important in our public companies. It is important to me at the 

SEC. 

mcarroll on FSR431 with DISTILLER

21 

Mr. MEEKS. So the companies should disclose. To the degree I 

know that the board diversity rule, your predecessor was talking 

about how we needed to improve it and that was on the agenda. 

And that is why I wrote the letter to you, because I was concerned 

when I heard that you were removing that improvement from the 

agenda dealing with board diversity. 

So I am very concerned about that, because if something is not 

working I think that we should fix it, correct? 

Mr. CLAYTON. So we have a rule in place that says that to the 

extent companies have a policy regarding diversity, they are to discuss it and how they approach it. 

I have asked our Division of Corporation Finance to look at that, 

to look at the work they have done in the past and to see if we 

are getting the type of disclosure that we would expect companies 

to provide in this area. How do you think about putting together 

a mix of directors that is going to best serve the shareholders, 

keeping in mind various characteristics of diversity. And that is— 

Mr. MEEKS. So disclosing if those boards on these public corporations, then shouldn’t they be disclosing the diversity that they have 

on their boards, whether or not and what criteria, if any, that they 

are setting forth for women, for ethnic minorities, for disabled, 

for—that is information. 

I know, for example, it is important to a State like mine where 

my comptroller is saying that if you are going to get the pension 

funds of all of New York, which are diverse, we want to make sure 

that those companies have diverse boards. Therefore, they should 

be—and I thought the diversity rule that it has to be disclosed or 

should be disclosed, the diversity on these boards. 

And I will just add I just saw a report that said that basically 

big companies say they favor diversity, but they refuse to prove it. 

In other words, only 40 percent of the companies are talking about 

where the diversity is, which tells me that there is a lot of room 

for improvement. And so I would have to turn to the SEC to see 

how do we improve the rule on diversity disclosure, since it does 

not appear to be working currently? 

Mr. CLAYTON. And some people say that for improvement, we 

should have a grid that has different categories with respect to diversity, and that that should be disclosed in the company’s proxy 

statement as opposed to the current narrative disclosure of how 

companies approach it. Is that Mr. Stringer who you are referring 

to? 

Mr. MEEKS. Yes. 

Mr. CLAYTON. Yes. And I am aware of his shareholder engagement in this area, and I believe in shareholder engagement in 

areas of this type. I am not at the point where I think a grid is 

appropriate. I get concerned about that kind of prescribed disclosure. But I am monitoring this issue. 

Mr. MEEKS. So what do you think should be done, based upon 

what we have seen from some reports thus far that does not seem 

to be working other than just monitoring or after you monitor and 

you confirm what we see in these reports, then what actively do 

you think you can do, as chair of the SEC, to make this rule a 

stronger rule or to make sure that it is complied with? 

mcarroll on FSR431 with DISTILLER

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Mr. CLAYTON. I think exactly what I said. I have the Division of 

Corporation Finance looking at this, looking at whether companies—when a company gets together, when the nominating committee of a company gets together and says, hey, what should we 

have on our board, what type of skills, what type of perspectives 

should we have on our board, I would like to see a discussion of 

that that includes— 

Mr. MEEKS. I don’t mean to cut you off, but I have 12 seconds. 

I just want to say this: I think that when you look at levels of 

skills, everybody, whether you are a woman, you are going to have 

a level of skills; ethnic minority, you are going to have a level of 

skills. 

The question is, you can have two people that have the same, 

and if you don’t consider diversity at all you can just have one 

group, period, and just say that they have the level of skills, and 

you have not considered diversity. 

Mr. CLAYTON. I agree with you. I agree with you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Kentucky, Mr. 

Barr, the chairman of our Monetary Policy and Trade Subcommittee. 

Mr. BARR. Chairman Clayton, welcome to the committee and 

thank you for your service. 

As you know, the SEC has adopted a rule that will require all 

mutual funds that invest in stocks and bonds to file monthly reports detailing all the securities in their portfolio. The compliance 

date for this rule is fast approaching. The fund industry expressed 

deep concerns during the rulemaking that the SEC was not in a 

position to assure that the data would be kept secure, and it emphasized that the data in the hands of a hacker could be used to 

trade in a way that could hurt millions of fund investors. For example, criminals might trade ahead of funds, based on what they 

observe in the data, or replicate proprietary portfolio strategies. 

When the SEC adopted the rule, I am told it issued a 500-pluspage release and only two paragraphs of which mentioned the industry’s information security concerns. In short, the SEC said that 

it is none of your business, we have it covered. Obviously, that is 

not, in fact, the case, given recent revelations. Of course, I will note 

that the EDGAR hack did not occur on your watch. 

But my question, Chairman Clayton, is this: Shouldn’t the SEC 

delay this monthly reporting of fund portfolio data until it is far 

more certain that the SEC will be able to keep it secure? 

Mr. CLAYTON. So that provides an example of the type of question that we are asking, which is, are we taking in data that does, 

indeed, have significant market sensitivity. And I will take what 

the fund industry is saying at face value there, which is that this 

data, although it may be a month old, is something that would provide someone who had access to it an advantage if somebody had 

a large position that they know they needed to get rid of. We can 

go into details. That is exactly the type of question we are asking. 

Mr. BARR. Thank you. 

Mr. CLAYTON. Can we protect it? We need to know. And if we 

can’t, do we delay our receipt? Do we have people hold it so if we 

mcarroll on FSR431 with DISTILLER

23 

really need it we can get access to it? Those are all the kind of 

questions we should be asking. 

Mr. BARR. Thank you. I thank you for taking that under consideration. 

I also would applaud you in your written testimony and your 

verbal testimony talking about disclosure effectiveness and the 

need to reduce costs and burdens on companies. And I noted your 

concern about IPO activity, diminished IPO activity, and why companies are not going public. 

Let me share with you one example of why that may be the case 

and a good example of the need to modernize and simplify disclosure requirements. And the perfect example is section 1503 of the 

Dodd-Frank Act. That is the mine safety disclosure requirement. 

Under 1503 of Dodd-Frank, a publicly traded mine operator is required to report on a quarterly or annual basis various violations 

alleged—alleged—by MSHA in citations and orders. When MSHA 

issues any of these citations or orders, it is important to recognize 

that the mine operator is required to disclose, regardless of whether or not it agrees with MSHA’s allegations. In the meantime, the 

mine operator has the ability to dispute MSHA’s findings with informal conferencing with MSHA and formally before the Federal 

Mine Safety and Health Review Commission. 

In fact, one co-operator in Kentucky told me that over 30 percent 

or over a third of all of these MSHA violations are challenged, and 

many of them are successfully challenged. And that process takes 

time. It takes about 4 to 6 months from the date of the citation 

being issued before it can be assigned to an administrative law 

judge, and during that process many citations and orders are modified. But by the time this occurs, a publicly traded mine operator 

may have already been required to include the citation or order in 

the quarterly or annual filing. 

Now, here is the problem: The problem is that not only many 

times these disclosures are not material to the investor; they are 

affirmatively misleading to the investor, because of the timing of 

when they have to file. Talking to attorneys who practice in this 

MSHA area and have looked at the statute, they believe that the 

SEC has regulatory discretion to stay the filing requirements. 

And I would urge the SEC to take a look at this, because, of 

course, this can significantly undermine the public’s confidence and 

investment in the mining industry. And I would just urge you as 

you talk about why companies are not going public, this is exhibit 

A. This should be the example of exhibit A. 

And I would ask for your response and whether or not the SEC 

would be willing to review that? 

Mr. CLAYTON. So it is not an area where I practiced, so I don’t 

have the type of familiarity with it that you referenced. But as a 

more general matter, I have talked about the aggregate effects of 

incremental requirements, that each one on its own has a purpose, 

and you can see why people would ask for it. But overall, it creates 

quite a burden. 

And one of the metrics I like to ask people who run public companies is, how many days a quarter do you spend on compliance 

and reporting as a result of our rules and the market’s reaction to 

our rules? And I will tell you what bothers me is that it is a signifimcarroll on FSR431 with DISTILLER

24 

cant multiple of the amount of time private company managers 

who are good spent. 

Mr. BARR. Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Illinois, Mr. Foster. 

Mr. FOSTER. Thank you, Mr. Chairman, and Chair Clayton. 

And I would like to start out by saying that I too represent one 

of the tragically underrepresented minorities in Congress, that is 

to say scientists, and how pleased I am to see an engineer in public 

service. So thank you for that. 

Now, Chair Clayton, the SEC has been looking into initial coin 

offerings, including taking recent action against two of them. I 

have been speaking with various people in the ICO space and I am 

interested in your thoughts on where this is all going and whether 

the ICOs are more likely to evolve into some sort of innovative tool 

for capital formation or simply an attempt to circumvent security 

laws while providing inadequate disclosures. 

Specifically, some of these ICOs involve purchasing something 

tangible, like say cloud storage, that would not traditionally be 

treated as a security, but however the purchaser can then sell it 

and there is a secondary market. And so there is undoubtedly room 

for speculators to hope to profit as the value of this token appreciates. 

And adding to this complexity, very often sometimes the token 

holder offers, as part of the exchange, his or her available computing power as part of the bargain, which would seem to me to 

mean that the token holder is not relying solely on the efforts of 

others, which is one of the traditional definitions of securities. 

Does the Howey test actually work in this case, and where do 

you see this going? 

Mr. CLAYTON. We have tests that look backward, because that is 

what we know, what happened in the past. I will be very—the way 

I look at these types of arrangements, where you take someone’s 

money and instead of handing them a stock certificate you hand 

them a piece of computer code and then you take the money and 

you invest it in a venture, I don’t see that much of a distinction 

between those two, whether you get a stock certificate or whether 

you get a piece of computer code. 

But what I am optimistic about is we have a settlement and 

transfer system, and I think one of the things that is very appealing but also can be an engine for fraud about these initial coin offerings is the ability to transfer, to trade is greatly enhanced, because you are just exchanging computer code across the spectrum 

rather than getting a stock certificate, signing it over, things like 

that. 

So that is an answer. The answer to your question is, it depends. 

I want to give people who are investing just like a stock certificate 

the same protection from those kind of things, but I do want to facilitate a more rapid ability to exchange. 

Mr. FOSTER. OK. 

Mr. CLAYTON. That is my point. 

Mr. FOSTER. At the point you see legislative clarity needed on 

this stuff, don’t hesitate to contact us, because Congress does not 

mcarroll on FSR431 with DISTILLER

25 

always do well in staying abreast to technological developments as 

we should. 

Mr. CLAYTON. Thank you very much. 

Mr. FOSTER. Now, you have also expressed concern about the declining fraction of companies that are publicly held, and which is 

something that concerns me greatly. I was wondering what fraction 

of that might simply be due to the fact that we are having wealth 

pile up at the top in our country and that wealthy people tend to 

invest in private equity, direct investments in companies, whereas 

retail investors sort of come from the middle class. 

And so have you made an attempt to separate that? Because the 

narrative that we have that there is something wrong with the 

public markets might be a symptom of the larger problem that the 

wealthier just having more. 

Mr. CLAYTON. It is a dynamic system, and I think that there are 

elements of all of this. One thing that we have in this country, 

which I don’t want to lose, is a broad participation in our capital 

markets. We are actually having—we are putting more responsibility on individuals to save for their retirement. The amount of 

funds in self-directed retirement accounts or quasi-self-directed has 

tripled in the last three and a half decades. I want to keep that. 

So there are lots of drivers. Ones you mentioned too probably are 

having an effect. But we need to have an efficient way—given what 

we have decided to do in terms of retirement savings, we need to 

have an efficient way for the average American to participate in 

the marketplace. 

Mr. FOSTER. All right. Thank you. Just the last question, I have 

been really concerned about these reports of sexual harassment in 

Silicon Valley. You have seen really egregious things being done 

that for sure involve misallocation of the investors’ capital for reasons that are not economic. 

And I was wondering, aside from just the fundamental immorality of this, at what point is the problem of investors being not 

treated properly something the SEC might get involved in? 

Mr. CLAYTON. I actually had not thought about us getting involved in that. I will think about that. 

Mr. FOSTER. Another thing to think about. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, vice chairman of the committee. 

Mr. MCHENRY. Thank you so much, Mr. Chairman. 

Mr. Clayton, thank you for being here. And I actually want to 

follow up on Mr. Foster’s question about initial coin offerings. Your 

investigative finding from July 25th I found encouraging. The SEC 

had a finding in order to establish a rationale for initial coin offerings, or ICOs. 

Can you walk me through your thinking on that finding? Because I know it was a major decision for you to enter into a new 

space and try to regulate and point to good actors that are in the 

ICO space. 

Mr. CLAYTON. Sure. There is a process and a substance element 

to it. The process element was, instead of starting with enforcement actions, we decided to start by level-setting with this report 

and saying, hey, here is how to behave well and here are some 

mcarroll on FSR431 with DISTILLER

26 

things that trouble us. So the intent of that was to notify people 

in this space there is a way to do this right and there are some 

things that—then there are some things that trouble us. And if you 

do it right, we are all for it; and if you do it wrong you are going 

to have some explaining to do. That is it in a nutshell how we went 

about it. 

Mr. MCHENRY. I have been involved in crowdfunding, and it 

looks to me that ICOs are an avenue that are basically trying that 

level set, to enable the flow of capital and enable different opportunities via technology. So what are you doing to help entrepreneurs 

ensure that they are pursuing ICOs correctly? 

Mr. CLAYTON. Well, that was part of the report, to first ask yourself if it is a security. In most cases where you are funding something, it is. And then go through, whether it is crowdfunding procedures, Reg A procedures, whatever exemption works for you, go 

through that exemption; or if an exemption doesn’t work you are 

going to have to consider registration, which is probably not a practical avenue at this moment. 

I think it does highlight that this area of funding smaller businesses, through crowdfunding or other means, technology can really help it. It can help us do our job too. 

Mr. MCHENRY. So do you foresee the need for congressional action to ensure that secondary trading of coin, cryptocurrencies are 

enabled, or do you believe you have law on your side to properly 

do that? 

Mr. CLAYTON. The fair answer is, I don’t know enough about how 

they are going to trade yet to know if we can do it with what we 

have or whether we need your help. 

Mr. MCHENRY. OK. But it is a first step. We are only 3 months 

in for the SEC’s findings. 

Mr. CLAYTON. Yes. 

Mr. MCHENRY. With time, I hope we can get more data on that. 

So let me shift to a separate issue that I know you care about 

as much as I do, which is this discussion about the rise of the rest. 

How do you help—what we do know is 80 percent of startup capital 

goes to three States. There are 47 other States that have great 

ideas, but the flow of capital is not there. It is not commensurate 

with the set of ideas and opportunities around there. And I know 

this is something you care about, as we have discussed. 

What can we do for medium size and small businesses in the rest 

of the country? What can we do as policymakers and what can you 

do at the SEC to make sure that is possible? 

Mr. CLAYTON. I think first recognizing that this is the landscape. 

I have to say I was surprised that the three States get the lion’s 

share. We had some folks in the other day. We have been talking 

to people about this, small and medium size businesses, not intermediaries, but people who have these businesses. 

I learned something new, which is the Midwest is the world’s 

fourth or fifth largest economy, depending on how you measure it, 

but it has very little venture capital, has lots of great companies, 

lots of well-educated people, a big economy, but very little venture 

capital. And that should tell us something. 

mcarroll on FSR431 with DISTILLER

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Mr. MCHENRY. So that initial finding, now we have to work 

through steps in order to enable this, right? So the surprising thing 

to you was the lack of capital? 

Mr. CLAYTON. Yes. Well, and a lack of that type of capital and 

the type of expertise in the venture market to put that capital to 

work, because there must be people who have businesses that are 

worthy of funding. 

Mr. MCHENRY. My time has expired, but I would love to follow 

up with you more on those ways that we can enable policy so that 

the other 47 States benefit. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentlelady from Ohio, Mrs. Beatty. 

Mrs. BEATTY. Thank you, Mr. Chairman, and thank you, Ranking Member, and thank you to our witness today, Mr. Secretary. 

We have had a lot of questions posed to you about the Consolidated Audit Trail. So I have a question. Is it necessary for the CAT 

to collect social security information of the individuals and, if so, 

what value of that information is it to the SEC? 

Mr. CLAYTON. Your question is a question that I have as well. 

What value do we get from the PII? Now, I am sure there is some 

value. I will give you an example. If we have an insider trading investigation and we want to be able to say, oh, here is this person 

and they know that person, identifying who the people are and 

where they live and how they might work together is something of 

value to us. And we have actually made great strides in connecting 

insider trading rings that you would never know on the face of 

them through data. That said, it is when do we need to get it? Do 

we need it all the time? Those are very good questions around 

things like people’s social security numbers. 

Mrs. BEATTY. OK. We may circle back a little more on that. 

I ask the following question to every Secretary that comes here, 

your predecessor, because I think when you run an operation as 

large as your operation, it is important for some of us to focus on 

the people side of it as well as the process, the security side. 

So for me in section 342 of the Dodd-Frank with the OMWI Act, 

it is very important to me, as a female and as a black woman, 

small business owner, that we have diversity in our agencies, because I think it makes a difference. So I took the liberty of looking 

at some statistics that I want to share with you now that you are 

the chairman of the SEC and you head an agency that has that actual mandate under Dodd-Frank. 

So when you think about of the 500 companies that make up the 

Fortune 500, only four of them have African-American CEOs. That 

is less than 1 percent. So I am going to ask you on three questions, 

do you think that is problematic? 

The second one, of the 500 companies that make up the Fortune 

500, there are only 32 female CEOs. That is roughly 6 percent. Do 

you think that is problematic? 

Even at your old law firm, Sullivan & Cromwell, of the 174 partners, there were 32 women and only 3 were African American. 

I guess my point of this exercise is to make sure that I point out 

it is not just a problem for you; it is a problem for all of the directors. That is important to the constituents that I represent, because 

mcarroll on FSR431 with DISTILLER

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I think—and you mentioned it on page 18 of your testimony, that 

you had value in having a diverse work force. 

So I want to know how you are going to continue that, improve 

that, so maybe when you come back and your expert team might 

have some females sitting behind you or people of color. 

Mr. CLAYTON. I do have some behind me. 

Mrs. BEATTY. Let’s get them on the front row the next time. 

Mr. CLAYTON. We will. I want to thank you for this question. So 

we have that OMWI report that you know about. I read it in connection with my preparation. And then when I got to the Commission I met with Pam Gibbs right away, who is our chief OMWI officer. 

So here is the bottom line on our report: We are doing pretty well 

across the Commission except in one area, leadership. And so when 

I talk to Pam and when I look to fill leadership positions, this has 

been front of mind. And we have been in a regular dialog about improving that aspect of diversity at the Commission. 

Mrs. BEATTY. In my few seconds left, let me thank you for that, 

because I appreciate your honesty, I appreciate your effort. And 

you have also met with her more than one time. So I want to say 

thank you for that, because that is not always the case here. And 

I appreciate you saying that we don’t—recognizing that it is important that we have women and minorities on the team, but to put 

them in leadership is important. 

I even beat up on our chairman. We didn’t have a female as the 

chairwoman of any of our committees, and now we have one. So I 

am not asking you anything that I don’t ask here. 

So the next time you come, I will be looking forward to having 

females and minorities in leadership. 

And I yield back. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Mr. Chairman. 

And thank you very much, Chairman Clayton. At the outset in 

your remarks, Mr. Chairman, let me just say I appreciate your 

comments that we need to give Mr. and Mrs. 401(k) access to the 

capital formation of growing companies. I thought you put that 

well. The current downward trend, as you explained for companies, 

has fewer and fewer going public, and that has the potential to 

benefit the few over the many. I strongly share your sentiment that 

all investors should have the opportunity to participate in America’s growth, and I think we stand ready to help you achieve that 

goal. 

I think when we talk about the massive Equifax breach and the 

attack on the SEC itself, this is not the first nor will it be the last 

attack, but consumers, consumers as well as investors deserve to 

know when cyber attacks put their money at real risk. And in your 

recent speech that you gave before the Economic Club of New York, 

you emphasized that disclosure requirements extend to 

cybersecurity issues. Your words were: Public companies have a 

clear obligation to disclose material information about cyber risks 

and about cyber events, and that you expect them to take this requirement seriously. 

mcarroll on FSR431 with DISTILLER

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So I would ask are there plans for the SEC to look at current 

disclosure requirements for cybersecurity risks, or do you believe 

the materiality standard that we currently have is sufficient? What 

is your view on that? 

Mr. CLAYTON. Thank you for recognizing there are different constituencies that need to know, consumers and investors, and those 

two aren’t separate but that is a good way to look at it. 

In terms of what is my view on this, for me, materiality is the 

touchstone. I have seen overly prescriptive rules not have the effect 

that they should. And in this area, though, I think it is pretty clear 

that your cyber risk profile, hey, where do I have sensitive material? Where would a denial of service attack affect my company? 

Where would it affect consumers? That is a materiality judgment 

that I think is fairly easy to make, and I expect companies to be 

thinking about it in the same way they think about other key elements of their business. 

Mr. ROYCE. Let me get through a couple other questions here to 

you. So I am pleased also on your reference here on efforts to hire 

a chief risk officer to oversee cybersecurity efforts at the SEC. Now, 

over at the State Department, I have led the effort through the bipartisan cyber diplomacy act to establish a high-level Ambassador 

there for cyberspace to help counter foreign threats to the internet. 

My question is fairly straightforward here. Do you need our help 

to get this done, in terms of your ambition here of filling that slot, 

or can you do this on your own? Do we need any legislative language? And also, as a follow-on, how will you define the responsibilities of this new CRO that you will bring on board? 

Mr. CLAYTON. So to try to take them in order, I think a CRO, 

as we have seen in the private marketplace, we are not a corporation, but in terms of just it is good organizational hygiene to have 

somebody who looks across the organization at the risk profile of 

the organization. 

We have a lot of different divisions at the Commission, and I 

can’t expect somebody in one division to be constantly thinking 

about risks in another, but I should have somebody who is thinking 

about risks across those divisions. So that is the role. And the risk 

that kind of goes across the divisions, at least across several of 

them, that is most acute at the moment is cyber risk and our use 

of data. Do I need your help at this point? No, but if I need help 

I am not going to be afraid to ask for it. 

Mr. ROYCE. OK. And then I would like to follow up on Mr. Duffy’s comment on proxy advisory firms. I understand your comment 

that the firms do provide a service that has value, but I would like 

you to look at this another way. 

Wouldn’t you agree that the value of the information would benefit from competition in the market, because right now I just asked 

are investors being best served when only two firms dominate that 

entire market? Is there more we can do to increase competition? 

Mr. CLAYTON. It is a valid point. It is a valid point. It is an interesting organizational dynamic question, because somebody has to 

compile the data, but once one or two people do it, how do you foster competition across more of them? 

Mr. ROYCE. Maybe we can continue that dialog. 

Thank you, Mr. Chairman. 

mcarroll on FSR431 with DISTILLER

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Mr. CLAYTON. We can continue that dialog, yes. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. Welcome to the committee, Mr. Clayton. I am going 

to kind of pick up on where Chairman Royce left off. This issue of 

market concentration has been on my mind a lot. And I am glad 

that you are focused on this question of IPOs and startups and I 

think this is an important question, but I would like to get your 

take on how increasing market concentration has impacted a whole 

range of things in our economy. 

If you look up on the screen, if you look at Facebook, you can see 

they acquired 50 companies since 2005, Google 200, Amazon 65, 

Apple 80. That is just in the tech area. We could get charts up 

there in beer, in chicken, in you name it, we pretty much can do 

it, in pharmacies. And I wonder, like if I am a startup person, I 

have opened up a new business, I am trying to consider either taking my company public or why wouldn’t I just sell to a big company 

like that, because then I could avoid a lot of fees and stuff like that 

and maybe get more money. 

And I am curious to know, from your standpoint, is that part of 

the explanation for why we don’t have the IPOs? Then in addition 

does that explain why you see what I consider to be recklessness 

and a lack of care with companies like Wells Fargo, that they just 

don’t have to be as careful because they just don’t have the competition. Maybe even Equifax would be a little bit more careful. If 

they just didn’t have two other competitors in the market to worry 

about, they might put more energy/resources into protecting our 

data. What are some of your thoughts on how market concentration 

is impacting our economy? 

Mr. CLAYTON. So first question on—and with your data here. 

Mr. ELLISON. Yes. 

Mr. CLAYTON. I agree with you that—and as I said, the lack of 

companies going public troubles me, because I want broader participation. I agree with you that when—not me, but when someone 

is sitting there saying, hey, am I going to go public, am I going to 

continue to take private money, or am I going to sell, the path of 

least resistance and maximum return can be to sell. And that is 

more true in some industries than others, but it does lead to these 

companies not raising money in the capital markets and a concentration. And look, it is smart for these companies to acquire 

smaller companies. They acquire talent. 

There are a lot of market forces that affect there, but I think 

your point is a valid one as to one of the factors driving a reduction 

in the number of small-and medium-size startup opportunities for 

people to invest in. 

As far as your broader question on concentration of let’s just call 

it power in the marketplace and does it have effects, that is outside 

of our bailiwick as securities regulators, but it is certainly a valid 

question. 

Mr. ELLISON. And we often don’t get the chance to talk to the 

agency lead who would be exactly on point but I do think the SEC 

has a role to play in terms of fostering competition. In keeping with 

what Mr. Royce just asked you, what are your views on how the 

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SEC can help foster a greater amount of competition in the market 

when you look at like all these industries. They have three players 

in them, two players, four players. I can go on and on. 

Mr. CLAYTON. I will give you the cliche that I use, but I think 

it is not just a cliche. I say when we have one-size-fits-all regulation, we end up with just one size. 

Mr. ELLISON. Well, good point. I don’t know if I agree with that 

point, but I will say this: We stopped doing aggressive antitrust enforcement in the eighties. And we used to be really into it, Republicans and Democrats. Now we have just said—one of the things I 

read in your bio is that you used to do mergers and acquisitions. 

Perhaps you might be the best qualified among a lot of other people 

to really say now that you are on the other side of the divide we 

might want to start taking this problem a lot more seriously about 

declining competition. 

Mr. CLAYTON. An area that I can step into and say that I am 

worried about declining competition is in the provision of financial 

services. I don’t want to see our regulations drive us toward a limited number of players in financial service provision. 

Mr. ELLISON. Well, I agree with that. And that is why I think 

that we have had a lot of debate in this committee over a SIFI designation. My thought, if you don’t want to be a SIFI, get smaller. 

Anyway, I hope that we can continue this conversation. I am 

worried about even you mentioned risk. When you are so big you 

don’t have to worry about risk then you do not do—anyway, I am 

out of time. Thank you. 

Mr. CLAYTON. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you, Chairman. 

Chair Clayton, thank you for being here. Good to have you here 

and appreciate your important work at the SEC. I am interested 

initially in discussing and getting your opinion on the implementation of the Consolidated Audit Trail in light of recent discovered 

breaches in the EDGAR database at the SEC. 

Two days ago, in an op-ed by Hal Scott and John Gulliver of Harvard Law School ran in the Wall Street Journal made a number 

of points for why the proposed data collection went far beyond its 

intention for unraveling market events, such as the flash crash. 

Specifically, they note, and I will quote from their op-ed: ‘‘An SEC 

cost-benefit analysis for the CAT did not meaningfully weigh the 

risk and potential cost of a cybersecurity breach against the benefit 

from the improved ability to discover the cause of a flash crash or 

identify a market manipulator,’’ end quote. 

I wonder first, do you believe the operators of the CAT, Thesys, 

is taking the appropriate steps to secure the information that will 

be stored within the CAT, and what role does SEC have in overseeing this? 

Mr. CLAYTON. OK. So Professor Scott’s editorial, I think it is fair 

to quote from it because no one likes criticism, but it was a fairly 

based set of questions that we should be asking ourselves. 

And to your specific question about oversight of security, the first 

line of oversight of security is with the SROs, who under our plan 

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are charged with overseeing Thesys, the vendor who is producing 

the CAT. And I do intend to press them on whether the current 

security procedures that are in place are appropriate, and to do it 

in the kind of detail that Professor Scott raised in his editorial, 

which was, what is the data you are taking in, and is the security 

apparatus appropriate for that data? 

Mr. HULTGREN. That is our hope that this is obviously vital information that is there and potentially susceptible, and so we are just 

concerned about that. I also am concerned about some of the timing. NMS’ plan for the CAT calls for specs to be produced by May 

2018 detailing how personal identifiable information should be 

shared and protected. However, the SROs, as we were talking 

about, are scheduled to report data beginning November 15th, 

which is just 5 weeks from now, hard to believe. 

How can we expect Thesys to construct a test to secure a database, a test that secures a database within such a short period of 

time? And then wouldn’t it be more appropriate for the SEC and 

the NMS plan to consider PII before this information is collected 

and shared by the SEC and SROs? 

Mr. CLAYTON. Yes and yes. And in that question of do we have 

the right security in light of the data and its usefulness to us, we 

should be particularly focused on PII and what is its value. Does 

it have enough value that we should be taking it; and if it does, 

to what extent and what security are we going to place on it? 

Those are all questions that the SROs should be asking Thesys 

and I should be looking at from an oversight perspective, and then 

if we eventually take that data in we should be looking at. 

Mr. HULTGREN. My sense is that your voice is very important in 

this of clarifying what really is necessary and what isn’t necessary 

for the SROs to collect. And especially, I think that gets back to 

this cost-benefit analysis of absolutely, we want to do everything 

we can to identify bad actors or problems in the market, but at the 

same time we realize this information really is personal and important and we want to protect it. Again, that is the point of my question. 

Let me move on, because I have just have a minute left. I sent 

you a letter earlier this year regarding amendments to FINRA Rule 

4210. I want to thank you for your quick response and for the attention your agency and FINRA have given to the issue for small 

and middle market dealers that my letter highlighted. I would also 

like to commend you on your initiative to assemble a fixed income 

advisory committee at the SEC. 

To my prior point, I believe it would be helpful to make sure that 

small and middle market dealers have a strong voice before the 

Commission. These dealers are often overlooked, unfortunately, 

with policymakers and as new rules come up and new regulations 

and things. And I think it is a great opportunity to help prevent 

that. 

So I wanted just to see can you give the committee a sense of 

when the advisory committee will officially begin its work, and 

what are the primary topics for which you hope they can lend expertise to the Commission, and, again, any thoughts you have on 

having smaller or middle market dealers have a voice in that. 

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Mr. CLAYTON. So on the committee itself, as soon as possible. I 

am working through this with Commissioner Piwowar and Commissioner Stein. We are doing it in a very collaborative way. 

With respect to representation on the committee, to your narrow 

question, yes, this is not going to be all the big boys. 

Mr. HULTGREN. Good. 

Mr. CLAYTON. It is going to have— 

Mr. HULTGREN. That is important. I have a lot more questions. 

We will follow up in writing if that is OK. 

Thank you, Mr. Chairman, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, ranking member of the Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman, for being here. Presently security laws will allow good-acting companies, companies 

that follow the law to receive less oversight and more relaxed disclosure requirements. And on the other hand, current security laws 

would say that if you are found guilty of felonies or even misdemeanors or if your company just stepped on antifraud provisions 

that based on those laws you are supposed to be automatically disqualified. 

I am assuming you do understand that that is not how it works, 

because we have repeat offenders who don’t suffer when they violate these security laws. I can call the names of some of the companies. I am not anxious to do that, but I will if you wanted me to 

do so. 

But do you have any—assuming that I am correct in my assessment, which I am, what would you do to deter that kind of behavior essentially forgiving the bad behavior and allowing companies 

that are repeatedly violating securities laws to function like they 

are a moral company? 

Mr. CLAYTON. So this is the area of bars, and whether it is bars 

from the industry altogether or bars from particular activities. And 

I will just tell you how I look at it. I break it down into two areas. 

One is individuals. Having given us, the Securities and Exchange 

Commission, the power to bar individuals I think is very important. And I actually—I expect our enforcement division to use that 

power aggressively, because if you have individuals—it is a privilege to work in this industry. You do well if you work in this industry. And if you are an individual bad actor, you should be out of 

the industry. And I think I have made that clear to our enforcement division. 

Mr. CLEAVER. Well, are you— 

Mr. CLAYTON. Then there are companies. 

Mr. CLEAVER. Yes. 

Mr. CLAYTON. Companies are more complicated, because you can 

have a relatively junior person, in terms of the hierarchy, who is 

a bad actor who you are getting rid of. And I do have a hard time 

making shareholders pay substantially for that type of activity. 

Now, to be clear, if you have activity at the top of the house that 

is bad activity or there is endemic activity, I do believe in bars. 

And so I am just giving you a flavor. That is how I look at it. And 

different people can look at it a different way, but that is how— 

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and I also like—I want to empower the enforcement division with 

the power to pursue those bars, because it makes them more effective. 

Mr. CLEAVER. I appreciate that. Sometimes these repeat offenders are not dealt with, in my estimation. In fact I think about this 

a lot. You rob a neighborhood convenience store, and you are going 

to be ostracized and criminalized. You rob America, and you are decriminalized and monetized. And it is just one of those things that 

in the middle of the night I get a headache. 

And the years that I have been on this committee, 13 years, we 

have had people come in here who have done some bad stuff, and 

they get punished with a $60 million separation amount of money. 

That is their punishment. And the world, the people out in the 

world see this and they don’t understand. It makes people angry. 

It is one of the things that I think angers—I wish we had more 

time, but my time is out. You do understand I think where I am 

going. 

Mr. CLAYTON. I do. And I want you to know we formed a new 

unit in our enforcement division, a retail fraud unit that is focused 

on this. And one of the things they are very focused on is recidivists. We need the people out, we need those people out of the industry. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair wishes to inform all members that after calling on one 

more member the chair will call a short 10-minute recess. 

The chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Chair. 

Chairman, thank you for being here as well. And thank you for 

not increasing your budget request this year. That is rather refreshing to see that more can be done with less and really challenge the efficiencies of the skills and resources that are under 

your tutelage there at the SEC. 

One of the things I have been concerned about for a long time, 

and you spoke about this a little bit, capital formation. And it is 

specifically the ability of smaller companies to access benefits from 

the capital markets. Compared to larger capitalization ranges, 

small cap equities face unique challenges in both capturing the attention of analysts and attracting institutional investors. 

As a result, many potentially high-growth companies often face 

a deficit in independent investment research and a lack of liquidity 

after going public. Again, you discussed the one size fits all. 

Some CEOs have branded this phenomenon as the valley of 

death. Unfortunately, it has become clear that this issue is causing 

many promising companies, our startups, the ones that you spoke 

about that aren’t happening, to stay private longer or elect to sell 

to larger companies rather than accessing the capital markets to 

foster job creation. 

Are there any steps the SEC can take to help reduce the barriers 

faced by small cap equities after they go public? 

Mr. CLAYTON. I hope the answer is yes. One of the motivators of 

the tick size pilot that we have been looking at is if we adjust the 

tick size, are we going to get—how do I say it—better trading, increased liquidity, and perhaps attract more research? If you do 

those things, it makes it more attractive to become a medium-size 

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public company to start with. That is one of the questions we are 

asking ourselves with the tick size pilot. 

There are other things that I am— 

Mr. ROSS. And I guess where I am going with this is that our 

European friends have a different approach to this, and specifically 

with MiFID, the Markets in Financial Instruments Directive II, 

that will, of course, require that they unbundle their research and 

have to—it is going to adversely impact the consensus values. It is 

going to adversely impact earnings. It is going to impact a lot in 

the markets, in fact, devaluing domestically. 

Are there measures that the SEC is taking to address this? 

Mr. CLAYTON. Yes. There are a lot of commentators who believe 

that the unbundling is going to have an adverse impact at the 

small and medium size— 

Mr. ROSS. They can’t afford it. They are going to eventually have 

to register as an investment adviser and— 

Mr. CLAYTON. Yes. 

Mr. ROSS. And it is going to trickle down to Mr. and Mrs. 401(k). 

Mr. CLAYTON. This is exactly why I don’t want that model to be 

imported. 

Mr. ROSS. But it is going into effect in January? 

Mr. CLAYTON. It is going into effect in Europe in January. And 

I want our approach to their efforts to ensure that the U.S. markets don’t have to import that model. 

Mr. ROSS. And what can we do to help you in that regard? 

Mr. CLAYTON. There is a patchwork that we are putting together 

of exemptive relief. But we can’t do this alone. We have to have our 

European colleagues recognize that we will recognize the way they 

are approaching the market, but recognize the way we are approaching the market should stay the same way, because capital 

flows back and forth. 

Mr. ROSS. Right. 

Mr. CLAYTON. So we can’t just draw a line down the middle of 

the Atlantic and say, you do it your way, we will do it ours. We 

have to— 

Mr. ROSS. Some transition, yes. 

Asset managers, they are totally different than the bank entities, 

yet they are being identified by FSOC as potentially being SIFIs 

and yet they are under the authority of the SEC. 

It would seem to me that there are obvious differences, there is 

a difference in risk, there is a difference in capital. Would you not 

agree that the SEC is more than competent to regulate the asset 

managers, as it has been doing without FSOC’s interference with 

SIFIs? 

Mr. CLAYTON. I agree that this is our space. 

Mr. ROSS. And even being your space, I would hope also that if 

any asset managers were of such a significantly important financial 

institution that you would allow them the opportunity to be recognized early on to have an opportunity to correct that and to stay 

in the market without having to adversely impact the markets, because they were taken by surprise, not knowing what their classification is? 

Mr. CLAYTON. I think that is a reasonable perspective on this 

issue. 

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Mr. ROSS. I appreciate that. 

Chairman, I will I yield back. 

Chairman HENSARLING. The gentleman yields back. The committee now stands in recess for 10 minutes. 

[Recess.] 

Chairman HENSARLING. The committee will come to order. 

The chair now recognizes the gentleman from Colorado, Mr. 

Perlmutter. 

Mr. PERLMUTTER. Thank you, Mr. Chair. 

Mr. Commissioner, thank you for being here. I just have a couple 

questions and sort of basic stuff. I first want to start with these 

ICOs, these initial coin offering things. It reminds me of the old 

days with penny stocks. It can be a different medium every time. 

And I just—you are in a position where you have to balance formation and ease of liquidity with the potential for fraud and theft and 

loss. 

So just kind of your basic philosophy on this stuff now that you 

are chair of the Commission. 

Mr. CLAYTON. So I agree with you. This is—here we have a new 

thing that has some good, but it is a new avenue for fraud. And 

that was getting the 21(a) report out saying, hey, here is the good 

way to do it, here is the bad way to do it. That is sort of the guidance for people in the marketplace, but then we have the bad actors. And I am very—well, I am cautiously optimistic about the Enforcement Division’s approach to this. They know that this is a ripe 

area for pump and dump. 

Mr. PERLMUTTER. Right. 

Mr. CLAYTON. Right? Pump and dump—it is actually even easier 

here than it is in the penny stock area, because it is all electronic, 

it is all anonymous. It is harder to catch the bad guys at the end 

of the day. And I recognize that, and from a philosophical and policy point of view, if we are not doing a decent job on educating people that that is what can happen, and then when the bad guys act, 

getting at them, it is going to be a lot harder for us to get the benefits of this kind of technological advancement. So that is how I look 

at it. 

Mr. PERLMUTTER. OK. And I agree with you. You are going to 

just always be balancing this sort of stuff. 

So I serve on the new subcommittee that we formed on terrorism 

and illicit finance where a lot of our concerns deal with 

cryptocurrencies and electronic kinds of transactions, but more financing of bad guys, but potentially the SEC’s going to have to 

keep their eyes on all of this. 

The second question I have is sort of going to an Equifax or a 

Sony or a Yahoo or EDGAR or whatever, a hack occurs, but let’s 

put it in the private sector. And you talked about materiality, a reportable event. Given—you potentially have insider trading and 

you potentially have bad guy trading. So how quickly do you expect 

somebody to report this kind of hack upon their discovery of it? 

Mr. CLAYTON. I have done this for a while in terms of disclosure. 

You can’t put a day, a specific day timeframe on this. But what we 

can ask people to do is to constantly assess: am I at the point 

where I know that this is something that investors making investment decisions should know, and what can I tell them? It is not 

mcarroll on FSR431 with DISTILLER

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an easy thing to do, but my experience is the sooner you can reach 

a conclusion on that and get it out, the better. 

And you can see with our own work here. You don’t always know 

all the facts that you would want to know at the time you have to 

make the disclosure, but erring on the side of earlier rather than 

later is the way to go. 

Mr. PERLMUTTER. Right. And I would suggest to you, you are 

moving from the attorney who has had to deal with this and advise 

clients to the regulator who says you should have done this earlier. 

Mr. CLAYTON. Uh-huh, uh-huh. 

Mr. PERLMUTTER. Or you didn’t have enough information, we are 

going to cut you some slack. But it is a different mindset that you 

have to have. 

Mr. CLAYTON. Absolutely. And I have been pretty clear, going 

back to July, before we disclosed the incident we have discussed, 

that I would like to see better and more prompt disclosure. I 

thought it was good to get that message out. 

Mr. PERLMUTTER. OK. Mr. Chair, I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman, for hosting this important briefing. And thank you, Chairman Clayton, for being with 

us today and for providing your perspective on so many important 

issues relative to the SEC. 

My interest today, Chairman Clayton, is to address the pending 

sale of the Chicago Stock Exchange to a Chinese government-affiliated firm. And I would thank you for your recent thoughtful decision to freeze this transaction. 

As you are aware, for the past year and a half, I have lead a congressional effort to block this transaction over our significant national security concerns. In addition to national security, we are 

also concerned that the SEC may have trouble monitoring the post 

transaction ownership of the exchange with a Chinese foothold in 

this market, that there might be significant Chinese government 

dominance over its business operations and decisionmaking, enabling a company to be listed that would not otherwise have previously been acceptable. 

With this in mind, would you please describe the actions and 

thought process that led to the Commission placing a hold on this 

transaction? 

Mr. CLAYTON. I am happy to discuss the procedural aspects of 

where we stand. And where we stand is Commissioner Stein, Commissioner Piwowar, and I will have to decide this issue, because it 

is now before the Commission. So I am not going to—I am not 

going to comment on the merits in light of that deliberative process. But from a process point of view, this was a matter that had 

originally been delegated to the staff. We delegate lots of matters 

to the staff. 

Mr. PITTENGER. Sure. 

Mr. CLAYTON. The staff went through its review process and produced a recommendation. That recommendation is now being reviewed by the Commission. We have provided a time period for additional submissions of information. Those submissions of informamcarroll on FSR431 with DISTILLER

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tion are coming in. And I—it is a group effort with my other commissioners. I feel like we are working collaboratively very well in 

all areas. I expect we will work well in this area. But speaking for 

myself, I want to bring this matter to a resolution sooner rather 

than later. 

Mr. PITTENGER. Yes, sir. Do you have a timeframe for adjudicatory decision? 

Mr. CLAYTON. I don’t have a specific timeframe, but I don’t expect this to be—I don’t expect to be talking about this particular 

aspect of it next time I see you. 

Mr. PITTENGER. Thank you, sir. 

As you know, the transaction did receive the CFIUS approval 

under the previous administration. In light of your decision to 

freeze the transaction, would you qualify this at this point as a national security oversight by CFIUS and the previous administration? 

Mr. CLAYTON. The question—there is a lot of ground that I have 

to cover. 

Mr. PITTENGER. Sure. 

Mr. CLAYTON. National security is not really one that they have 

given me responsibility for. 

Mr. PITTENGER. Well, there are basis for— 

Mr. CLAYTON. I need to take advice on national security. 

Mr. PITTENGER. Yes, sir, I understand that. 

Let’s move on then. Earlier this year, acting Chairman Piwowar 

stated: It is difficult to conceive of a circumstance with counsel in 

favor of enforcing the due diligence requirements to the conflict 

mineral rule. 

Do you agree with acting Chairman Piwowar’s reviews, and what 

is in the status of the SEC work on modifying the conflict minerals 

disclosure rule? 

Mr. CLAYTON. So just taking a step back on the conflict minerals 

rule. This was the subject of substantial court process involving the 

First Amendment, a finding that parts of the rule did, in fact, violate the First Amendment. The district court has now sent all of 

that effectively—I am using layman’s terms rather than lawyer’s 

terms—has sent that back to the Commission to assess whether 

where we stand today, which is the rule is partially in effect, is appropriate in light of that decision. And one of the questions is, is 

our current no-action stance on the due diligence appropriate, and 

we are looking at it. 

Mr. PITTENGER. Yes, sir. Thank you for that. 

Just going back briefly to the Chicago Stock Exchange issue, do 

you consider the Chinese foothold in our markets and being able 

to list a semiconductor company, perhaps some other business that 

would no longer—otherwise, we would not have accepted, do you 

believe that that is a concern? 

Mr. CLAYTON. Look, I am—let me—I don’t want to talk about 

specific instances because that is not appropriate. But what I can 

say is the United States has generally been in favor of fair and 

open global capital markets. 

Mr. PITTENGER. Yes, sir. 

mcarroll on FSR431 with DISTILLER

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Mr. CLAYTON. It is fair and open. And one of the things I have 

to do in my job is assess whether we have fairness across jurisdictions. 

Mr. PITTENGER. OK. I understand. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

And I want to thank the witness, so welcome, Mr. Clayton. I 

would like to revisit the issue of the Equifax hack and breach and 

possible insider trading. I think to talk about this, the timeline is 

important, and that is on or about July 29 of this year, 2017, 

Equifax discovered that their computer systems had been hacked, 

and that the Social Security numbers and personal identifiable information for about 143 Americans was stolen, including their Social Security numbers. Sometime later, but before the hack had become public information, the three top executives for Equifax sold 

about $2 million worth of stock. And because they were clever 

enough to conduct this trade before the information was made public, and while it was inside information, they avoided a 35 percent 

drop in the share price. 

Now, I understand that you were asked some questions about 

this over in the Senate, and you were asked if there was an investigation of these three individuals and the trades that they had 

made before the news of the hack and of the breach had been made 

public. And you were reluctant to answer that question. Could you 

answer that today? 

Mr. CLAYTON. I would provide the same answer to you that I did 

in the Senate and that I do with anything with respect to the matter. We at the Commission have a longstanding policy of not commenting on whether we have an investigation ongoing or any details of an investigation. 

Mr. LYNCH. Let me ask you this, when— 

Mr. CLAYTON. And it has served us well. I am sorry. 

Mr. LYNCH. When we had the EDGAR situation, you came right 

out. 

Mr. CLAYTON. That was us. 

Mr. LYNCH. Yes, it was you. 

Mr. CLAYTON. Yes. And I made an exception for that because I 

thought it was important, and it is ours. 

Mr. LYNCH. The only thing—look—so this is 143 Americans. This 

is everybody. 

Mr. CLAYTON. Uh-huh. 

Mr. LYNCH. This is everybody. 

Mr. CLAYTON. What I can say—what I can say, and I—we are 

mindful of the significance of cybersecurity issues, we are mindful 

of the significance of insider trading, and we are very mindful that 

the American people, they want to know that—they want to know 

that we are doing what they would want us— 

Mr. LYNCH. I want to know that too. I am on this committee. I 

have to tell you, and I will follow up on Mr. Cleaver’s questions, 

so we have bad actor restrictions, and your commission regularly 

and customarily is giving exemptions and waivers to people who repeatedly violate the law. So that is why it makes me ask the quesmcarroll on FSR431 with DISTILLER

40 

tion, are you investigating the three executives from Equifax? If I 

didn’t have doubt, I wouldn’t ask this question. 

Mr. CLAYTON. I am confident—let me answer your question in a 

general way that I hope gives you comfort, and that is that if we 

were to find that an executive of a U.S. public company committed 

insider trading, I am certain that we would ban them. 

Mr. LYNCH. Well, they are saying they did. Equifax is saying that 

they were hacked on the 29th, and that some time before they announced it to the public and the stock went down 35 percent, they 

are saying they sold $2 million. So the elements are there. 

Mr. CLAYTON. I want to go back to Congresswoman Maloney’s 

question— 

Mr. LYNCH. Yes. 

Mr. CLAYTON. —About having a control in place so that issues 

like this are avoided in the future, and that is if a company determines that it has a material event that it should disclose. I do believe it is good corporate hygiene for section 16 insiders—set of executives—to not be permitted to trade by their insider trading policy. I do believe that. 

Mr. LYNCH. Well, I will let that go for now. I will wait for further 

action. But in the meantime, I do want to just amplify what Mr. 

Cleaver was getting at. When these folks are repeatedly found to 

have violated the law, it doesn’t help our confidence in the SEC to 

have you regularly and routinely give them waivers from the bad 

actor legislation that we in Congress have passed. 

I yield back, Mr. Chairman. Thank you. 

Mr. HUIZENGA [presiding]. The gentleman’s time has expired. 

The chair recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Chairman, I want to talk a little bit about the issue with the capital markets we have and the liquidity of them and depth. In your 

testimony, you state U.S. capital markets have long been the deepest, most dynamic, and most liquid in the world. I am wondering 

about the connection between depth and liquidity, particularly 

when we consider the decreasing number of public companies and 

fewer IPOs that we have been seeing. It was interesting, Representative Ellison showed a chart looking at delistings of public 

companies going back into the 1970’s, and how the line went up 

and down with respect to mergers and acquisitions. 

The mergers and acquisitions have been around a long time, and 

delisting has happened as a result of that. But what is new here 

is lack of new companies coming in. We have seen a similar dynamic going on in the community bank space with all the consolidations going on and very few charters coming on. I think the SEC 

has said it cost $2.5 million to go public in ongoing costs of $1.5 

million for public companies. And you have talked about how fewer 

public companies are affecting Mr. and Mrs. 401(k). 

Do fewer public companies mean a shallower market? 

Mr. CLAYTON. Well, do they mean that the portfolio you can 

choose from is smaller? 

Mr. ROTHFUS. Yes. So if you have—say you used to have 5,000 

public companies, now it is 2,500. Fewer options for diversifying, 

concentration? 

mcarroll on FSR431 with DISTILLER

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Mr. CLAYTON. Yes. Yes. And now, people are starting to look at 

this, academics, market participants, they are starting to look at if 

you have a shrinking number of companies and you have continuing need for investing for your retirement—are we—is that 

somehow having an effect on the marketplace that we should be 

concerned about? Now, that is sort of— 

Mr. ROTHFUS. Well, it seems it might also have an effect on liquidity too. 

Mr. CLAYTON. It does. It does. 

Mr. ROTHFUS. Any time you shrink the number of purchasers or 

the number of sellers, I think it is going to impact liquidity. Would 

you agree with that? 

Mr. CLAYTON. Yes. I—one of—I outlined in my four priorities, 

one of them was market integrity, including structure and risk. 

This is one of the things that I think I need to better understand, 

we need to better understand, is how our market’s changing and 

is it having an effect on liquidity. 

Mr. ROTHFUS. The chairman started off the question about the 

fewer IPOs. I think you responded, one of the problems has been 

one-size-fits-all regulations, and you spoke favorably of scaleability. 

You also mentioned the funding options that weren’t there decades 

ago that are now there as options. 

And I wonder if it would be of benefit for the SEC to take a look 

at some of the regulations we have had over the 20 years. In a July 

12 speech, you said: The Commission should review its rules retrospectively. We should listen to investors and others about where 

rules are or are not functioning as intended. We cannot be shy 

about being introspective and self-critical. 

Can you explain how you plan for the SEC to retrospectively review regulations it promulgates as well as regulations that are already on the books to ensure that they are still effective? Take a 

look at Sarbox, take a look at the capital formation provisions within Dodd-Frank and ask are the costs outweighing the benefits of 

what these were intending? Can you shed a little light on that? 

Mr. CLAYTON. Well, I think the FAST Act and what you will see 

from our proposal is that kind of thinking. Are there ways to make 

it much—hopefully, much less expensive or burdensome to provide 

material information, without in any way diminishing investor protection? Yes, we should be looking across the spectrum of our rules. 

And what I said in that speech is the effects our rules have—because sometimes we make a rule and we think it is going to cost 

X to implement it and, lo and behold, it is three X. 

Mr. ROTHFUS. Right. 

Mr. CLAYTON. And those are the particular circumstances where 

we should be looking, because we made some assumptions, we did 

it in a reasonable way, but it turns out, looking forward, it costs 

more money, and we need to think about that. The numbers you 

cited on the costs of IPOs, to be perfectly honest, I think they are 

light. 

Mr. ROTHFUS. OK. The FASB issued their final current expected 

credit loss, or CECL, standard rule in June 2016. This rule would 

change longstanding accounting rules by requiring financial institutions to reserve for the expected life of loan credit loss when the 

loan is first issued. 

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Do you plan for the SEC to conduct its own review of this rule 

with you as chairman? 

Mr. CLAYTON. So I understand some of the concerns, particularly 

from what I will say is our regional and community banks around 

the CECL rule and the potential impact on capital. I know that 

they are talking to the banking regulators about that, but I am 

mindful of keeping an eye on where this—where the practical results of this accounting change— 

Mr. ROTHFUS. Thank you, Chair. I yield back. 

Mr. HUIZENGA. The gentleman’s time has expired. 

The chair recognizes the gentleman from California, Mr. Sherman, for 5 minutes. 

Mr. SHERMAN. Now, Mr. Chairman, first a couple of accounting 

issues to find that those are scintillating and draw much more attention to the committee in this video. 

First, for over 100 years, accountants have defined and audited 

income and expense, but investors care about other numbers: same 

store sales, backlog. And I hope that you would lead the SEC in 

moving toward a situation where either your designee, the Financial Accounting Standards Board, or the SEC itself, defines the 

terms that are important to investors in various industries and requires that they be audited. Right now, I am investing based on 

same store sales, but Nordstrom has one definition, Target has another, and I don’t trust either’s numbers because neither one is audited. 

Research and development by private companies is what we expect to lead the 21st century. We in Congress spend tens of billions 

of dollars to encourage it. The FASB, using the power you have 

given them, requires the immediate writeoff of all research, even 

successful. That is a contradiction of accounting theory, but it is 

easier for accountants. They have done it that way for 30 years. 

They did it the other way for 150 years. And I would hope that you 

would take a look at the extreme harm done to our economy, and 

look at all the research that isn’t being done and the inventions 

that are not being developed because of that unwarranted departure from accounting theory. 

As we were talking about bond rating agencies, as long as the 

bond rating agency gets selected by the issuer, we are going to 

have a situation where they are willing to give triple A to alt A, 

which is exactly what caused the meltdown. An asset manager, a 

bond manager who fails to buy double A and triple A rated securities just because they are a bunch of liars, loans, or subprime mortgages will find that that person is replaced by someone who is willing to go for the high rating. 

We have talked here about cybersecurity, and Mr. Davidson from 

Ohio and I are working on a bill to direct both the SEC and FINRA 

to develop and implement risk controls to safeguard market data 

and to direct the CAT contractor to develop risk controls to protect 

CAT data, that is a consolidated audit control, and to prevent that 

operator from accepting data until it develops the risk controls. 

And I hope, for the record, that you would respond to those concepts. 

I now want to shift toward an interesting issue, and that is rule 

30e–3. The folks—the only folks really in the financial services inmcarroll on FSR431 with DISTILLER

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dustry that can’t provide information electronically are the mutual 

funds. And the amount of wasted paper is so great that the pulp 

and paper manufacturers are lobbying against the efforts. On behalf of over 2 million trees a year, I would hope that you would 

move forward. And this rule was first introduced in 2015. It will 

allow mutual fund companies to send annual reports to investors 

electronically. Of course, investors would still have the option of receiving paper statements. 

And I want to point out how much more useful the electronic 

statement is. I get these paper statements. I put them under something and then the magazines pile on top. I can never find them 

if, God forbid, I ever wanted to look at them. And since I may not 

be able to understand them and I want to send them to somebody 

who does understand them, but I never find them, I never put it 

in an envelope, and I never mail it anywhere. If you send it electronically, then all I have to do is look under—search my email for 

emails from info@vanguard.com, I can have it any time I want it 

and forward it to anybody I want. So electronic is better. It will 

save investors $2 billion over 10 years. 

And I wonder if you could let us know when we can expect this 

2015 project to be completed. If you could answer that one. 

Mr. CLAYTON. I got them all. Should I go with that one? 

Mr. SHERMAN. Go with that one. 

Mr. CLAYTON. We are working on the rule. You make a number 

of valid points. There are some valid points in terms of people who 

want paper, but we are not just putting this in the drawer, we are 

going to look at it. 

Mr. SHERMAN. 2015. 

Chairman HENSARLING [presiding]. The time of the gentleman 

has expired. 

The chair now recognizes the gentleman from Texas, Mr. Williams. 

Mr. WILLIAMS. Thank you, Mr. Chairman. 

And thank you, Chairman, for being here today. And I am a 

small business owner, 45 years in Texas. We share some friends, 

and it is good to have you here today. And I don’t have to tell you, 

and we have talked about how burdensome regulations have just 

been hampering small business creation and—to stay in business. 

And I appreciate your involvement in that. 

Let me go to Dodd-Frank. The SEC, in the past year, has improperly utilized its resources, attempting to create overbearing 

rulemakings which do not advance the SEC statutory goals, nor do 

they help avoid other financial crisis. So in light of the previous administration’s improper use of SEC resources, what steps have you 

taken, since you were sworn in in May, to focus SEC resources on 

the stated goal of protecting investors, maintaining fair, orderly, 

and efficient markets, and facilitating capital formation? 

Mr. CLAYTON. So to go to specific steps taken. Let me talk about 

the things that in looking at what we do, I have said, there is an 

area where we need to either do better or focus. And we have spent 

a lot of time talking about cybersecurity. I have talked a little bit 

about it and I want to go back to it: retail fraud. That is an area 

that I am surprised and dismayed at how much retail, just affinity 

fraud there is—and that is an area where I think we—that is an 

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area where we make an impact when we devote more resources, 

not only in terms of terms of finding it and punishing the people 

that are committing it, but thinking creatively about ways we can 

structure what we do to make it harder to commit a fraud, particularly ones that affect our retail investors. 

In terms of efficiency and capital formation, we looked across the 

spectrum and said, what can we do quickly that is not going to impact investor protection, that is going to make a difference? Confidential filings, eliminating the requirement for financial statements that are extraneous. We have done a number of things like 

that. I think they are making a difference. 

More generally, I am focused on scaling our approach across the 

capital markets and across capital formation to reflect the size and 

type of investment that people are making. We have that going on, 

we have it going on in a kind of patchwork way. And I want to 

bring a little more systemization to that that will hopefully foster 

capital formation. So those are some thoughts. 

Mr. WILLIAMS. Thank you. I noticed in your budget request you 

asked for an additional $245 million to assist in the procurement 

of a headquarters lease. What steps have you taken to ensure that 

taxpayer funds used for any relocation are properly used for that? 

Mr. CLAYTON. So we are having the GSA run this process effectively. That is what is happening. And their process is a procurement process that has bidding procedures and competition. And the 

reason for the 245 is to enable us to effectively set up a competitive 

process so—let me put it in business terms. We need that money 

so that one party doesn’t think we are captive and that we could 

have a competitive process across a bunch of different headquarters 

locations. That is why we need it. 

Mr. WILLIAMS. What is the Commission doing to lower the monetary burdens? We have talked a little bit about that associated 

with going public. And how can we encourage more businesses to 

go public? And as you talked about, one size doesn’t fit all, we 

know that. So how do we encourage more people to go public? 

Mr. CLAYTON. So I think we have started with our confidential 

submission FAQs. People were worried about the public offering 

process and that they would have to very early on make public 

their financials, their business, et cetera. We have delayed that, 

while still enabling investors to have a long time with that information. Like I have said, I do believe the JOBS Act and saying, 

‘‘You don’t have to do 404(b) until you are a big enough company 

to warrant that.’’ Those types of measures are helping. We are 

looking at additional measures of that type to reduce the—look, in 

annual spend to be public of $2 million versus an annual spend of 

$4 million, that $2 million delta, that is real money in terms of 

valuation. 

Mr. WILLIAMS. Well, thank you. 

I yield my time back, Mr. Chairman. Thank you for being here. 

Chairman HENSARLING. The gentleman yields back. 

The chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, ranking member of our Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

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And before I begin my questioning, I was wondering if I could 

put a couple of letters in the record. I ask unanimous consent to 

put a letter in the record from the Government Finance Officers 

Association. 

Chairman HENSARLING. Without objection. 

Ms. MOORE. OK. And also I would like to put a letter in the 

record that we sent to the Honorable Walter J. Clayton, II, the 

Ranking Member Maxine Waters and I, regarding section 1502. 

Chairman HENSARLING. Without objection. 

Ms. MOORE. Thank you so much. 

Thank you for appearing, sir. It is very nice to meet you, and I 

hope that we will have a very fruitful relationship. 

Let me just start out with asking you about a piece of legislation 

that Representative Rothfus and I are planning to reintroduce regarding the money market mutual funds where the SEC has moved 

it from a stable to a floating net asset value and imposed liquidity 

fees and redemption gates on investors of these funds. 

As you may know, that our municipalities in many governmental 

agencies invested in these money market funds, and they have to 

be stable to protect public funds. And changing the main feature 

of these funds to floating net assets really meant that cities are 

forced to go to more expensive investments. And without going on 

and on, because you know this topic, at a time when our country 

needs to invest in infrastructure, it is really difficult for cities to 

do this, make payroll, and we are hoping that this is something you 

will look at. 

Mr. CLAYTON. Thank you, and we are looking at the effects of 

that rulemaking. 

Ms. MOORE. All right. Thank you so much. I was really happy 

to hear—I have been a here a long time, so I was able to hear 

much of your testimony and able to hear you say very declaratively 

that materiality is the touchstone for investors and consumers, respectively. You were talking about cybersecurity with Mr. Royce, I 

believe. But I do think that that has some applicability to section 

1502 of the SEC with regard to conflict minerals. 

As you know, the acting chair of the Commission and now only 

a commissioner, Mr. Piwowar, concluded that the court’s judgment 

in April held that—he concluded that they weren’t going to enforce 

the provisions under 1502, although the court only said that the 

descriptor requirement was inappropriate. And so you say that you 

are looking at this, and I am hoping that you are going to be informed by your commitment that you have made here today to be 

very, very proactive on enforcement. 

Mr. CLAYTON. Yes. We are looking, and I am engaged with our 

Division of Corporation Finance and our General Counsel’s office. 

It is not every day that we get a rule that— 

Ms. MOORE. But I think it was a misinterpretation of that rule 

on Mr. Piwowar’s part, particularly since you said materiality. Materiality is important to investors, whether they are investing in 

these conflict minerals, and also to consumers. We see our cell 

phones here. Nobody wants a cell phone that was financed by rape, 

murder, mutilation. Would you agree? That is immaterial. 

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Mr. CLAYTON. The way you characterize it, I agree that I don’t 

want that kind of cell phone as a consumer of cell phones. I want— 

look, the rules are on the books, it is a mandate. 

Ms. MOORE. Thank you. 

Mr. CLAYTON. I want to make sure that—I want to make sure 

that we do it in the right way. 

Ms. MOORE. OK. Thank you. You told the Senate—I have 30 seconds left—you told the Senate, on the 26th of September, that Mr. 

Piwowar’s action to prevent staff, 20 senior enforcement officials, to 

no longer be able to issue subpoenas in the wake of the Bernie 

Madoff scandal, was not affecting your ability to do enforcement actions. Do you still think that that is the case? 

Mr. CLAYTON. I made that statement based on a detailed assessment with the heads of the Division of Enforcement. The heads of 

the Division of Enforcement feel that them having the subpoena 

power—the formal authority, it is not with me, it is with them, it 

is delegated to them—they feel good about where it is now. And I 

know them. I know that if they change their minds, they are going 

to tell me. 

Ms. MOORE. Thank you for your indulgence, Mr. Chairman. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you, Mr. Chairman, very much. I appreciate you holding this hearing. 

Mr. Clayton, right over here. And thank you very much for being 

here, sir. I know you have an affection for the great State of Maine, 

and I appreciate that. Your kids and your wife will thank you forever if you vacation up there. This is a great time to go up there, 

Mr. Clayton, we need the business. 

Now, I wish Mr. Sherman were here. He is a great guy, but he 

represents Los Angeles. Now, if you have been to Los Angeles, you 

know there is a lot of cement and glass and wires over there. I represent rural Maine. We have two population centers, Mr. Clayton, 

one we call LA, but it is Lewiston Auburn, with 35,000 people. 

Then we have Bangor with 35,000 people. And in between, which 

is about an 8-hour drive from point to point, not Lewiston Auburn 

to Bangor, but beyond that, we have moose and deer and all kinds 

of critters running around the roads, and we have 400 small towns. 

And many of those small towns, Mr. Clayton, don’t have 

broadband. 

Now, the great thing about trees that Mr. Sherman is concerned 

about is cutting them down. Well, you cut them down, they grow 

back. It is one of God’s great creations. We cut down those trees, 

sir, and we turn it into paper. In full disclosure, Mr. Clayton, in 

northern Maine, the northernmost part of our State, the northernmost part of our country is Madawaska, Maine. We have the Twin 

Rivers Paper Company, the best paper makers in the world. 525 

jobs, and there aren’t many other opportunities up there, at least 

in this industry. 525 jobs, and they make a very thin, fine paper 

that mutual fund and other financial reports are printed on. 

Now, I disagree with Mr. Sherman. He is a good guy, but I disagree with him. Here is why: We have 40 million people in this 

country that live in rural America, 40 million. Forty-one percent of 

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our seniors in this country, Mr. Clayton, do not have broadband access. So over in L.A., California, they might be able to print out or 

take a look at a mutual fund report on the internet; we don’t have 

that in many parts of Maine. And we get power outages throughout 

the year, not just in the winter during the ice storms. 

Now, your job, with all due respect, sir, and the job of the SEC, 

is to make sure that our small investors are able to care for themselves. So if you are a grandparent or a parent and you want to 

take care of your kids going to college and you are saving for them 

or you are a mechanic in Lewiston, Maine, and you are getting 

ready for your golden years and you have a retirement nest egg, 

you need to know what the heck you are investing in. I don’t worry 

about the big guys in L.A., California. I worry about the folks in 

rural America. By the way, Maine is also the oldest average State 

in the country. It is not Florida, it is not Arizona. It is Maine. 

My mom is 89, I love her to death. She can’t use a cell phone. 

Having her trying to find out what her mutual fund holdings are— 

are you kidding me? So you have in front of you, sir, rule 30e–3. 

And it simply says that we think it is OK that these mutual fund 

companies send out a letter to our seniors saying you are no longer 

going to get your mutual fund reports and other financial reports 

on paper. Now, 71 percent of our seniors want it on paper. And this 

is one of the SEC’s own commission studies. 

All we are saying is what if they are on vacation? What if it got 

lost in a snowbank? What if that notice came while they were moving or they were on vacation? That is not fair, sir, and that is not 

right. All I am saying is when you have all these millennials and 

these Gen X folks, and they understand how all this works, and 

over the years more and more of rural America is going to be connected with broadband. This problem is going to go away, but it is 

not going away now. 

You have a responsibility, with all due respect, sir, not only to 

me, but to 40 million people that live in rural America, many of 

whom are seniors, many of whom don’t have broadband connection. 

Please, Mr. Clayton, please withdraw this rule. It is harmful to our 

seniors, it is harmful to our small investors, and over time, it is 

going to go away, and leave it the way it is now. If you don’t want 

your financial reports on paper, then send in the form. That is an 

opt-out. Don’t make it so complicated that you have to do something you might not be able to do. Just let it go. So I implore you 

to do that in my final 41 seconds, sir. By the way, can I get a commitment from you that you will withdraw this rule? 

Mr. CLAYTON. No, I can’t make policies sitting right here. 

Mr. POLIQUIN. OK. That to me, sir, in Congress-speak, is you are 

a lean yes. OK. 

And do you have any plans over the next 6 to 9 months to do 

anything crazy with this rule? 

Mr. CLAYTON. I don’t have any plans to do anything crazy. 

Mr. POLIQUIN. Well said, sir. I am going to take that as you will 

take this under great advisement. You have seen all the comments 

when it comes to this, how important this is to the small investors 

that you are responsible to protect, sir. And I appreciate that very 

much. 

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Sir, SEC rule 14a–8 that deals with the shareholder proposal 

process. Are you folks looking at that? 

Mr. CLAYTON. Yes. 

Mr. POLIQUIN. You are. And do you think that it makes sense to 

change the ownership threshold or the holding period? 

Mr. CLAYTON. I am taking a holistic look at it. 

Mr. POLIQUIN. What does that mean? 

Chairman HENSARLING. It means the time of the gentleman from 

Maine has expired. 

Mr. POLIQUIN. Thank you, Mr. Chairman. Thank you, Mr. Clayton, very much. 

Chairman HENSARLING. The chair now recognizes the gentleman 

from Connecticut, Mr. Himes. 

Mr. HIMES. Thank you, Mr. Chairman. 

And welcome, Chairman. It is great to see you again, and I assure you this committee is not usually this much fun. It is really 

heartwarming for me to see somebody of your caliber and experience in the role that you are now occupying. 

And I want to touch on just three things with you this morning. 

First, I don’t want to beat a dead horse, but I do want to add my 

voice to the concern that you have heard today that has been 

raised by any number of my constituents and organizations in my 

district about the risks associated with the online transmission of 

data to the SEC. And you have heard that a lot today, so I don’t 

want to beat that dead horse, but I do want to add my voice to that 

and ask that that become a real priority, and that issuers come to 

feel confidence where I don’t think they do now. 

Second, I want to touch on just two issues that have been important to me for a long time. And to give you a little bit of context 

here, I have taken more than my fair share of lumps on this committee because I really do believe that regulation is not something 

that should be primarily discussed as though it were religious writ, 

but that there is a good balance to be found, and that sometimes 

regulation leans too heavily and sometimes it leans too light. 

One thing I do feel very strongly about is that there are areas 

in which I think there are systemic issues and possibly bad behavior. And one of those areas, it will not surprise you to know, is a 

project I have been working on for some time to look at the remarkable consistency of 7 percent growth spreads in smaller and 

medium-size IPOs. This grew out of my experience with the JOBS 

Act, where we worked really hard to try to save new issuers 

money, a 7 percent growth spread on a $200 million IPO is $14 

million; that is real money. 

I don’t want to spend too much time on this because I do have 

another issue, but your predecessor, when I asked about this and 

I pointed to academic literature that suggested that there could be 

collusive behavior in this particular product, I got back a letter 

that was not entirely satisfying. It said that academic studies have 

yielded mixed conclusions about the efficiency of the market. I am 

not sure that is true, and held up the JOBS Act as something that 

should be watched before we draw any conclusions. 

I looked up the data. There have been hundreds and hundreds 

of IPOs of the size I am talking about since the JOBS Act came 

into force. Remarkably, the mean IPO growth spread was exactly 

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7 percent. The data is suggestive, and I am not ready to convict, 

but I am ready to suggest that there is probable cause for an investigation here. 

I will also add that as you have been, I have been in the room 

where it happened. And so I would love to see the SEC take this 

up in a serious way, because it is important for our issuers not only 

to save money, but to have confidence that market dynamics are 

applying. 

Let me give you a second to respond to that, but I do have one 

other question I want to raise to you. 

Mr. CLAYTON. I think it is worth looking at. And I think the way 

you framed it shows some thought, because it is probably a—if 

there is something that we should look at here, it is in the market 

segment; it is not at the top end of the market where there is negotiating power. 

Mr. HIMES. Yes, I agree with that. Thank you. I would appreciate 

that. I will follow up on that with you. 

Look, if the facts show that that is a competitive market, I will 

let this go. But I don’t know of any other product or service that 

is so consistently priced in a purportedly competitive market. 

The other topic, Mr. Chairman, I wanted to raise with you, a couple of Congresses now I have submitted or dropped legislation that 

would clearly make insider trading a crime. You know the background here better than I do. But I am a big believer that if we 

are going to convict and send people to jail for a crime, that Congress ought to establish exactly what the law is that is being violated. 

That, of course, is not true in the realm of insider trading. Of 

course, that has led to something else that I think is suboptimal, 

which is decisions, particularly out of the second circuit, which 

have resulted in significant numbers of convictions being overturned. To me, that is no way to run a railroad. And I have dealt 

with this with your predecessor. I get that we have a long tradition 

of prosecutions here based largely on judicially established law. I 

was a little disheartened, I guess, to see your quote that you think 

we do a pretty good job here and you are not sure that legislation 

is needed. Again, I am a big believer that if we are going to spend 

people to jail, we ought to have a law that specifies very clearly 

what they are going to jail for. 

So I am wondering if you are open to that notion and whether 

you are open to the idea that this Congress ought to, actually for 

the first time, be very clear in statute about what insider trading 

is. 

Mr. CLAYTON. So on where we stand and what I said NYU, I am 

comfortable that we can do a good job. As far as your question 

about engaging on it, a concern of mine is that we will run over 

kind of the same facts and circumstances question in a statutory 

approach that we do in what I call a judge-made approach. But I 

am very happy to engage on it. It is an area where I have spent 

a lot of time, and any time you would like, I would love to talk 

about it. 

Mr. HIMES. Thank you. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

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The chair now recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, Mr. Chair. 

Chairman Clayton, thank you for being here today. You might 

hear this from others, but in the short time that I have been in 

Congress, I appreciate your style. This is—coming before this committee and being more informational as opposed to adversarial is 

incredibly refreshing. 

I loved your comments this morning when you started, talking 

about the four things that you are concentrating on. I loved the reference to the one-size-fits-all regulatory regime and how that might 

be having an impact on companies going public, because it applies 

the same whether you are big or you are small. 

In your statement that we need more companies in the public 

market so that Main Street investors, those that are saving for retirement, those that my colleague Bruce Poliquin was so concerned 

about a second ago, can participate, and I added, and realize the 

reward of growth in America. If that is our goal, that is—we need 

to achieve it. 

I am going to be very simplistic in terms of concentrating on one 

thing, the CHOICE Act—actually, last year, we passed something 

out of the this committee called the Main Street Growth Act, and 

part of it was contemplated within the CHOICE Act that just 

passed through this committee and out of the House. It contemplated the creation of venture exchanges. 

Mr. CLAYTON. Uh-huh. 

Mr. EMMER. To improve market quality for smaller companies 

and their investors. I am just wondering, if this is something that 

you are interested in—that your SEC will be looking into? 

Mr. CLAYTON. So thank you for your comments, I appreciate it. 

Thanks for the comments on a larger portfolio of public companies. 

I’m just sorry to take your time, but I want to be clear. 

I am not interested in people being able to invest in IPOs. I 

mean that is nice, it is good. I am interested in them having more 

companies to invest in. 

Mr. EMMER. Choice. 

Mr. CLAYTON. Choice. 

Mr. EMMER. It is about choice. 

Mr. CLAYTON. Choice, and a broader spectrum. 

To your question about venture exchanges, yes. Now, I am not— 

I haven’t consulted with Commissioner Stein or Commissioner 

Piwowar about what a—so I don’t want to get ahead of them, but 

from my perspective, having—and we—this is coming at us organically as well as from a regulatory perspective. 

Mr. EMMER. Right. 

Mr. CLAYTON. The technology people are using for initial coin offerings is the same kind of technology that you would use to set 

up a venture exchange. And then the question is what rules do you 

put around it so that you can have a level of investor protection 

that we are comfortable with but facilitates the same type of capital formation we are seeing in kind of that small space? 

So that is a long—sorry for the long-winded answer, but that is 

how I am looking a it, and I think it is something we should look 

at. 

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Mr. EMMER. Since you have given it some thought, do you have 

any idea what the SEC could do to allow private entities to create 

a venture exchange, or is it just too premature at this point? 

Mr. CLAYTON. Going back to my comment about coming out organically, I am sure there are a lot of smart folks who operate in 

the marketplace who are already thinking about this are hearing 

our colloquy today. They know what I care about. They know that 

I care that this works and investors get the information they need. 

They can look across the way we do private offerings today and see 

the kind of protection that people get, apply that to a venture exchange, and then we have something to talk about. 

Mr. EMMER. Right. Actually, your comment earlier today is probably the—it is one that doesn’t require a master’s degree. It is more 

common sense, and that is that money will go to where it can realize its highest return in the most efficient manner. I guess I listened to you today in talking about this very narrow issue, which 

you could start talking about a whole bunch of these issues when 

it comes to capital formation. I worry the government is going to 

make itself less than relevant, because the smart people that are 

out there, the people that have the capital are going to figure out 

how to operate if government doesn’t start doing what it is supposed to do. 

So I guess with the little time I have left, the thinking that you 

have done in this area and maybe any other that would be similar, 

is there any additional statutory authority that the SEC needs 

from this committee and from Congress? 

Mr. CLAYTON. You guys have been great today because you have 

asked me that in a bunch of different contexts. In terms of a venture exchange, if we do we will be back here. Let me take you up 

on it, but not try to be specific today. 

Can I go to just one related area on that? 

Mr. EMMER. Sure, although my time is running out. 

Mr. CLAYTON. We have talked a little bit about the cyber breach 

and the bad actors. Another area I am thinking about, and it is a 

DOJ issue, it is a Treasury issue, it is a national security issue, is 

do we have the tools to get at the bad guys or cyber breaches? So— 

Mr. EMMER. Yes. Thank you very much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The chair recognizes the gentleman from Maryland, Mr. Delaney. 

Mr. DELANEY. Thank you, Mr. Chairman. 

And thank you, Chairman Clayton, for being here all this time. 

You obviously have superb credentials for the job that you now 

have, and we are grateful for that. 

You said something recently to my colleague just a couple minutes ago about how you really care about making sure investors get 

the information that they need. Mark Carney, the Governor of the 

Bank of England, has spoken extensively about his view that investors aren’t getting enough information about climate risks, specifically valuation variability around fossil fuel related assets on the 

balance sheet of companies. 

Prior to coming to Congress, I started two companies and took 

them public. And I used to labor over the risk factors, because I 

viewed that as the place that I could get in trouble. And so I guess 

my question to you is, do you think there is enough disclosure in 

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this area? Because it is not so much of whether what is occurring 

with climate change will actually have immediate effect on the balance sheets of these companies, but it seems to me the question, 

almost like the mortgage market when mortgage assets went down 

in value very rapidly way before defaults went up a lot. But what 

happened, there was a perception that defaults would go up a lot, 

and then the assets went down materially in value. And that could 

happen with fossil fuel assets, which is even before the effects actually hit the income statements and the balance sheets of these companies, people could say, we really have to get out of these assets, 

and they could fall rapidly and it could affect the insurance industry, financial service companies, energy companies obviously. 

Do you have a view as to whether we have enough disclosure in 

that area? 

Mr. CLAYTON. Do I have a specific view on a specific company 

about whether we have enough disclosure in the area? It is hard 

for me to judge— 

Mr. DELANEY. Not specific company, but companies in general. 

Do you think there is enough information in the filing statements 

of companies for investors to allocate capital appropriately based 

on— 

Mr. CLAYTON. I think you framed the question in a very fair way. 

And you won’t like it, but I will answer it with a question that I 

don’t know the answer to, which is when the companies you are 

thinking of in your mind manage their business and they think 

about these potential impacts, which as good stewards of capital 

they should be, does their disclosure reflect that? 

Mr. DELANEY. Reflect that. Do you think it does? 

Mr. CLAYTON. I don’t know what is in their minds, but that is 

the right question. 

Mr. DELANEY. Yes. And I would think that somewhere in your 

organization people should be figuring that out, because when you 

think about macro risks, this is clearly one of them, when you 

think of the size of the assets. 

Mr. CLAYTON. And I think that applies to different businesses in 

different ways. 

Mr. DELANEY. It cuts across all industries, right? 

Mr. CLAYTON. And I agree with you. 

Mr. DELANEY. Are you committed to looking at that issue? 

Mr. CLAYTON. Yes. 

Mr. DELANEY. OK. Good. 

Mr. CLAYTON. That is—one of the things that everybody still 

says, how do you feel about regulation, if disclosure—what disclosure really should do at the— 

Mr. DELANEY. This is not even about new regulation. This is 

about just enforcing the standard that you just described. If it is 

material to you, it should be material to investors. 

Mr. CLAYTON. Exactly. One of the things I always ask myself in 

any industry is how do they manage the business? 

Mr. DELANEY. Right. 

Mr. CLAYTON. How do they look at that? And does the disclosure 

reflect how they manage the business? 

Mr. DELANEY. That is right. And you ask a lot of companies 

those questions when you are in your other seat. 

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So two quick questions. A fiduciary role, I know you want it synchronized, right? I agree, right answer, but do you support the rule 

the way it is? Do you think it is a smart rule? 

Mr. CLAYTON. It is not really clear what the rule is yet, because 

what a rule is is how it is implemented and how you demonstrate 

compliance. 

Mr. DELANEY. Right. 

Mr. CLAYTON. That is what this kind of rule is. 

Mr. DELANEY. So are you more concerned that it is—are you 

more concerned about the rule or you generally think it will get implemented well? 

Mr. CLAYTON. I like the words. 

Mr. DELANEY. Right. OK. 

Mr. CLAYTON. No conflicts. Disclose the conflicts. You owe somebody a duty, they should know what it is. The question is, are we 

going to implement it in a way that adversely restricts choice in 

terms of what type of relationship you have or adversely restricts 

what type of assets you can invest in? 

Mr. DELANEY. And the tradeoff, I guess, is it could encourage a 

lot of innovation, right? Because as you know, people are sitting in 

conference rooms right now thinking of companies they can start 

to take advantage of the rule, which might be good. 

Mr. CLAYTON. It might be good. 

Mr. DELANEY. Last question real quickly. We submitted a letter 

to you about the EDGAR filing. It was signed by 21 of my colleagues. 

I ask the chairman to submit this for the record. 

Chairman HENSARLING. Without objection. 

Mr. DELANEY. I assume you will be getting back to us about this? 

Mr. CLAYTON. I actually have it here. 

Mr. DELANEY. Good. Wow. The mail system still works. 

Mr. CLAYTON. And the questions you asked are the same questions I am asking. 

Mr. DELANEY. So what really happened here? Was it that between when companies file their forms and they became public, 

was there a breach in that short period of time that people were 

able to capitalize on? 

Mr. CLAYTON. So as far as—take this as things aren’t—it is an 

ongoing investigation. 

Mr. DELANEY. Yes. 

Mr. CLAYTON. But as an example, we have a test filing system 

in our EDGAR system, so you are going to file your earnings release. 

Mr. DELANEY. Yes. 

Mr. CLAYTON. You test it the night before. 

Mr. DELANEY. Yes, I remember that. 

Mr. CLAYTON. People happen to include. 

Mr. DELANEY. And so that is where they got it, and so that is 

where they traded. Do you think it is big or small, the amount of 

money that was made on that information? 

Mr. CLAYTON. I don’t know. 

Mr. DELANEY. You don’t know. Great. 

The CHAIRMAN. The time of the gentleman has expired. 

The chair now recognizes the gentlelady from Utah, Mrs. Love. 

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Mrs. LOVE. Thank you so much. I know it has been a long day. 

I appreciate you being here. 

Chairman Clayton, I would like to come back to an issue just of 

access to capital. The number of companies accessing the capital 

markets for financing that are going public in recent years have 

been less than half the average annual number posted in 1990. 

Most alarming has been the drop-off in small companies going 

public. Less than 20 percent of initial public offerings in recent 

years have been valued at $50 million or less. By stark contrast, 

80 percent of all IPOs in the United States between the years of 

1991 and 1997 were valued at less than $50 million. 

The reason for this—the reason why this is so concerning is that 

small companies account disproportionately for net new job—for 

new job creation, according to the National Venture Capital Association. Ninety percent of job creation by new companies occur after 

they go public. 

So my question is this: As you know, some experts have attributed the marked decline in small companies going public to the 

decimalization of stock prices, dropping minimum pricing increments by which stocks are traded, or the tick size from one-sixteenth of a dollar or 6.3 cents to one penny, which occurred in April 

2001. 

So I know that there are a variety of options regarding this 

issue. Last year, the SEC launched a pilot program to address this 

issue or a program to restore wider tick size pricing to small capitalization stocks. I know you have been there since May, but how 

is that program going so far? 

Mr. CLAYTON. I have talked to our economists about this. So far, 

the results are mixed. They believe we need to let it run a little 

bit longer to be comfortable that the data they are getting is actually something we can put value on. 

Mrs. LOVE. Have you been able to draw any initial conclusions 

at all regarding the effectiveness of wider tick sizes to the revitalization of the small-cap IPOs? 

Mr. CLAYTON. Yes. Let’s put it this way: The behavior in the 

marketplace takes a while to change. So if what you are looking 

to do is drive more volume in these names, people trade more, it 

is mixed. There are some places where we are seeing some increased volume, some increased liquidity, and other cases where we 

are not. I think we need to let it run a little bit more. 

Mrs. LOVE. OK. Given your extensive background in this field, 

does the reduction in tick sizes have anything to do, in your opinion, with the drop-off in IPOs under 100 million? 

Mr. CLAYTON. I think it could be a factor. In order for a company 

to—for it to be attractive for a company to go public, you have to 

have demand in trading. And one of the things that bankers will 

tell you, I go to a banker and I say, hey, should I go public? They 

say, you may not be of sufficient size for the market to be interested enough in your stock for there to develop a trading market 

where you are going to have pricing that you are happy with. 

Mrs. LOVE. So you don’t think it is important for companies to 

go public earlier? 

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Mr. CLAYTON. No, I do. That is a long-winded way of saying that 

if we can get more volume in trading in small-and medium-size 

companies, it would be more attractive to go public. 

Mrs. LOVE. Is there anything that you would add to this pilot 

program? Do you think it is sufficient enough to give you the answers that you need in the long term? I mean I am just— 

Mr. CLAYTON. I am hoping that that program, together with the 

access fee pilot, will give us some information. And I have some expectation. There are people who are much more expert at this than 

I am, that the way we trade large-cap stocks is not the way we 

should trade small-cap stocks if we want to attract more capital. 

So the answer is I think it is going to have value, but there are 

a lot of factors that go into whether we are doing the right thing 

in the small and mid-cap market. 

Mrs. LOVE. I think you will agree with me that we want to have 

wealth-creating vehicles— 

Mr. CLAYTON. Yes. 

Mrs. LOVE. —For the public to participate in phenomenal growth 

potential of the American economy. I hope that you will continue 

studying this issue, because this is what makes the world go round. 

This is what helps hardworking Americans be able to get there. So 

I hope you will continue to work with that. We have to work faster. 

Mr. CLAYTON. I agree with you. 

Mrs. LOVE. Thank you. 

The CHAIRMAN. The time of the gentlelady has expired. 

The chair now recognizes the gentleman from North Carolina, 

Mr. Budd. 

Mr. BUDD. Thank you, Mr. Chairman. 

Chairman Clayton, thank you again for being here. So you testified about some of the administrative actions the SEC has undertaken to improve capital formation. And I want to highlight specifically the SEC’s decision to expand confidential IPO registration 

and the submission process to all issuers, large and small. 

So has the initial JOBS Act provision proven popular to emerging growth companies, and what have you seen since the July finalization of the SEC decision, in terms of large issuers taking advantage of the SEC decision expanding the confidential registration option? 

Mr. CLAYTON. The initial data is positive. People—not just people 

using it, but people saying thank you, we intend to use it, and both 

from an IPO perspective but also from the perspective of the followon offerings that occur in the first year. So I think the response is 

positive. 

And we are also monitoring on the investor protection side. If 

there are any adverse views, I would like to hear them. We haven’t 

heard any. 

Mr. BUDD. So of the positive result that you have observed or 

seen and heard, why do you think they have been successful or 

why do you think they have been positive, and have they achieved 

that success without compromising fundamental investor protections and transparency? 

Mr. CLAYTON. Yes. I think this one was pretty straightforward. 

It has made it easier, but there is no change in the disclosure. And 

I think investors still have plenty of time, with the disclosure, to 

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make an investment decision. I haven’t heard anybody say they 

don’t have enough time. 

Mr. BUDD. Sure. So do you believe that the collaborative process 

represented by confidential registrations has meaningfully reduced 

the risk associated with an IPO? 

Mr. CLAYTON. I think it has reduced the risk to the company of 

the process. And I like the word you used. I think when companies 

go through the registration process and transform from a private 

company to a public company, they emerge as better companies. I 

think the staff review process and the accounting review makes 

them—I think it makes them better companies. 

Mr. BUDD. That makes sense. Chairman Clayton, I also would 

like to talk about finders. Take the example if two Main Street 

businesses come together and one would like to raise money and 

they offer the other a finder’s fee and that transaction works out 

and they actually raise capital, that the SEC has held for about 16 

years that this transaction required that a business needs to register as a broker-dealer. That puts them in the same category as 

Merrill Lynch or J.P. Morgan, like a securities trader. It is an unworkable strategy, in my view. 

So is it your view that the SEC could undertake some activity 

toward clarifying the significant regulatory uncertainty that exists 

right now with regard to finders, and what would that look like in 

your world? 

Mr. CLAYTON. So this is a line-drawing question. And I know 

that this committee has explored this issue in the terms of an NMA 

finder. I think the question you ask is, should we look at that if 

somebody is doing this on an ad hoc basis, not as a business not 

in connection with a broad capital raising or account raising, but 

just— 

Mr. BUDD. Maybe you can answer it for both, ad hoc as well. 

Mr. CLAYTON. Yes. I fundamentally agree that if someone is not 

in the business of doing this type of activity and it is clear that 

they are not and you have kind of big guys involved or sophisticated people, they don’t seem like a broker-dealer to me. OK? But 

I don’t want to go too far down the slippery slope, because when 

you start going out to five or six people and say, hey, how about 

investing in this, and by the way, I am taking 7 percent then you 

sound a lot like a broker to me. 

Mr. BUDD. Do you think there will be some efforts from the SEC 

to clarify that? 

Mr. CLAYTON. I think if somebody is worried—in the hypothetical 

you described, if somebody is worried that we are going to find 

them a broker-dealer, we probably need to address that. 

Mr. BUDD. Certainly. I want to raise the issue of Financial Accounting Standards Board or the FASB current expected credit loss 

standard. Mr. Zeldin from New York and I are working on a letter 

right now that virtually every bank in my State views that standard as unworkable. It is onerous and it is hurtful to the availability 

of credit. 

Is there a possibility that the SEC will study this rule at more 

length before going ahead with its implementation? 

Mr. CLAYTON. I can’t make that promise today. I understand 

these issues. I think most of it is a bank capital issue and whether 

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this is going to require them to hold more capital as a result of an 

accounting change. I know many of these banks are in dialog with 

their bank regulators about this. There is a pro-cyclicality to it. But 

I will look at it. 

Mr. BUDD. Thank you. 

The CHAIRMAN. The time of the gentleman has expired. 

The chair wishes to alert members that votes will be called on 

the floor soon. If remaining members would voluntarily take 4 minutes, I think we can clear all members and not have to ask our witness back after votes. 

The chair now recognizes the gentleman from Indiana, Mr. Hollingsworth, for 4 minutes. 

Mr. HOLLINGSWORTH. I will take 4 minutes. Again, I want to add 

my welcome, especially as a UPenn alumnus as well. I appreciate 

you being here. 

I wanted to cover three topics. Hopefully, I will get to all three. 

First, you have mentioned several times the desire to have more 

tailored regulation or regulatory environment for smaller businesses. And one of the things that you brought up was 404(b). 

Certainly, one of the bills that I am looking at, dropping raises, 

the current threshold from $75 million up to a higher threshold, I 

wonder what your opinion about that is and if you have come to 

a decision about what an appropriate threshold might be? 

Mr. CLAYTON. I have not come to a decision about an appropriate 

threshold, but I do think examining that threshold from time to 

time, like we talk about—I am a believer in the JOBS Act. 

Mr. HOLLINGSWORTH. Right. 

Mr. CLAYTON. And when something is working, let’s see if we can 

make it work more, being cognizant of not going too far. 

Mr. HOLLINGSWORTH. Absolutely. Well, one of the things that 

people in my district are very concerned about is ensuring that we 

have capital there for businesses at every stage in their lifecycle. 

And certainly one of the big speed bumps is going public, and especially for smaller companies that are in need of the capital. They 

don’t want to have these onerous requirements on them. Like you 

said, it makes a huge difference in valuation. So please continue 

to look at that. 

The second thing I want to talk about was the Volcker Rule and 

just better understanding how the collaboration amongst different 

agencies that are charged with this will be carried out over the 

coming years. It took over 3 years to write the rule itself, and certainly as revisions come up or other changes may be necessary that 

can’t be handled legislatively what the process looks like for both 

the enforcement changes to Volcker Rule, in terms of coordinating 

amongst the different agencies. 

Mr. CLAYTON. Maybe I am too much of an optimist, but I am optimistic that the Fed, OCC, the SEC, the FDIC, that we can work 

together on this. I said I believe in retrospective review. This is a 

rule that has a lot of impact. 

Mr. HOLLINGSWORTH. Yes, definitively. 

Mr. CLAYTON. So the greater the impact— 

Mr. HOLLINGSWORTH. Right. 

Mr. CLAYTON. —Probably the more important it is to take a look. 

I want to be clear. The policy underlying the rule that you 

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shouldn’t take depositors’ money and speculate with depositors’ 

money is a good one. The question of defining how—what is proprietary trading and what is not is one that is worthy of some reexamination, particularly some components of that. But— 

Mr. HOLLINGSWORTH. Well, I might push back against the characterization that we are taking depositors’ money and speculating 

wildly with it. And whether that actually transpired in a material 

way and whether that led to the crisis and whether the Volcker 

Rule really prevents that I think are all questions, as you said, 

that probably need some reexamination and some thoughtful research surrounding. 

I wanted to delve into one other item that is a little bit more esoteric, but has been perturbing me for the last couple of weeks. And 

thinking about the significant growth in ETFs over recent history— 

and, look, I am a big believer in financial innovation, but I think 

when you say Mr. and Mrs. 401(k) and wherever they may be 

across this country, I think when they buy or sell an ETF, they 

perceive that they have great liquidity, while the proliferation of 

ETFs have led to some more exotic strategies underlying some of 

the ETFs themselves. 

And my concern is, in periods of acute stress where money flow 

is reversed—instead of money flowing in, money is now flowing out 

in a significant way—that significant redemptions, and especially 

through the broker-dealers, might lead to challenges in unwinding 

whatever those strategies are, selling those underlying assets, and 

that there is a perceived mismatch between apparent liquidity at 

the retail investor side and actual liquidity in the underlying assets 

that underlie the trust. Is there any concern to look into that matter? 

Mr. CLAYTON. Yes. I think you articulated a risk that is not as 

well understood as it should be. 

Mr. HOLLINGSWORTH. Great. Well, thank you. 

And with that, I yield back. 

The CHAIRMAN. The time of the gentleman has expired. 

The chair now recognizes the gentleman from Arkansas, Mr. Hill, 

for 4 minutes. 

Mr. HILL. I thank the chairman. 

I appreciate, Chairman Clayton, you coming to the committee 

today. And I want to echo my colleagues, we appreciate your tone 

and your discussion on these topics and your forbearance on all of 

them. 

I want to pick up where my friend Mr. Hollingsworth left off on 

exchange-traded funds. I am pleased that we have sent a bill to 

President Trump to enhance research on exchange-traded funds. 

This was something that the Commission itself thought about 

doing back in 1987, and, by God, we have rushed right into it now 

and sent down to the President’s desk a directive on writing those 

rules. If you have questions about it along the way, I hope you will 

be in touch after that bill is enacted. 

But, like my friend said, there had been rapid growth. In fact, 

some projections show that exchange-traded funds may reach $6 

trillion. And you yourself a few minutes ago talked about the impact of passive money in the markets and price-setting. 

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For me, you have index funds, you have exchange-traded funds 

that are proposed on an index that is made up. In other words, 

someone has innovated an index. And then you have obviously 

fixed income versus equity. And this is really being, as Trey said, 

a major innovation in the markets. 

The Commission has really just used exemptive relief on approving ETFs. Do you think the Commission should write a rule about 

exchange-traded funds and approving those under certain conditions instead of just using exemptive relief as a way to tee them 

up? 

Mr. CLAYTON. Whether that is specifically what we should do or 

we should do something else, we should recognize—and this is a 

different context, but the same label—one size doesn’t fit all. Like 

you said, an ETF that follows a broadly based or broadly recognized index of large-cap stocks is a much different animal from an 

inversed leveraged ETF that follows a specific, perhaps not all that 

liquid, asset class. I think we should have a—there can be a different approach to one versus the other. 

Mr. HILL. Right. Well, I just would urge the Commission to look 

at this. We are now 15 years into this trend. And also when it 

comes to the pricing issue my friend raised, the impact out in the 

market reg world on circuit breakers geared to individual stock 

performance versus a macro move in an index and market opening 

times. In other words, the synchronization of individual stocks into 

participants in these indexes I think also merits study and something else to add to your, as Chair White referred to the 50 front 

burners over at the SEC. 

If I could, I want to switch subjects in the minute left and talk 

about the definition of credit investing. We talked about 

crowdfunding today. We talked about the JOBS Act. But I have put 

forth legislation in the past and others are interested on, in the 

committee as well is expanding the definition of accredited investor, which does allow people with the proper expertise to participate in private market issue. 

Do you think that the definition of accredited investor ought to 

be looked at and be reconsidered? 

Mr. CLAYTON. I do. 

Mr. HILL. Do you have thoughts as to—any more thoughts? 

Mr. CLAYTON. What I don’t like about it is the binary nature of 

it, which is you cross the threshold and then you can invest whatever you want. You don’t cross the threshold, you have no options. 

I am not Pollyanna enough to think that we can have 10 different— 

Mr. HILL. Parse that out, right. 

Mr. CLAYTON. But it shouldn’t be that binary, because if it is 

that binary then we do need to constrict it. 

Mr. HILL. Thanks for your time today. 

Mr. CLAYTON. Thank you. 

Mr. HILL. I yield back. 

The CHAIRMAN. The time of the gentleman has expired. 

The chair now recognizes the gentlelady from New York, Ms. 

Tenney. 

Ms. TENNEY. Thank you, Mr. Chairman. 

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And thank you, Chairman Clayton for being here today. I am 

going to echo the same sentiment that my colleague Mr. Emmer 

said. And I love your one-size-fits-all regulation leads to one size, 

and I think that goes beyond even the jurisdiction of this committee and obviously the agency you chair. It is in all sectors, as 

I come from one of the most regulated States in the Nation, New 

York. 

But I just wanted to ask you a little bit about the DOL rule 

quickly. I know Chairwoman Wagner touched on it, but many of 

my constituents, especially the 401(k)-dependent constituents and 

the regular middle income level people, really rely on the relationship with brokers. And I understand there has been a delay for 

about 18 months, and I just wondered if you could just describe 

your relationship right now with the Department of Labor, with 

Chairman Acosta, and your efforts to revise and implement this 

rule so that it doesn’t hurt our investor community and also protects seniors and others who rely on their 401(k). If you could just 

touch on your relationship and the delay that we are seeing right 

now. 

Mr. CLAYTON. As I said, as I have said many times, I thank Secretary Acosta for reaching out on this, because it is a reality. We 

have to put our heads together. We at the Commission have been 

working on where we think this ought to go, citing the things that 

I outlined quickly: Choice, clarity, consistency, and cooperation. 

We are at a point where we are ready to engage. And I look forward to engaging with the Department of Labor and Secretary 

Acosta’s staff on this. They put a lot of thought into where they got 

to. We should benefit from that thought, but we need to drive toward a consistent approach to the marketplace. 

Ms. TENNEY. So as you undergo that analysis, is that something 

that we can have in a transparent way and work with us on this 

as we go forward so we know what to expect and our investor world 

knows what is going to be happening? 

Mr. CLAYTON. Yes. It is easy for me to say yes, because the Administrative Procedures Act requires me to do that. When we are 

ready to pull it forward, you guys will have a—there will be a lot 

of people taking a fair shot at this. 

Ms. TENNEY. Thank you. I greatly appreciate it, and just thank 

you for your service and doing what you are doing. We are grateful 

to have you here for this long day, but I just wanted to say thanks 

again. 

And I yield back, Mr. Chairman. Thank you so much. 

The CHAIRMAN. The gentlelady yields back. 

And since she does yield back, the gentleman from Ohio, Mr. Davidson, is recognized for 2 minutes. 

Mr. DAVIDSON. Mr. Chairman, thank you. 

Chairman Clayton, thank you for being here today, and thanks 

for the work you are doing to uncover the facts and the truth behind what has actually been happening there at the SEC. You have 

answered a lot of questions about cybersecurity, so I won’t belabor 

points that you have really already made, but I was encouraged to 

hear the thoughtfulness that you are putting into what do we actually need to have. 

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And we are moving forward on a bill, as you know, that will provide additional instructions and give some intersection between the 

migration to Consolidated Audit Trail and the cybersecurity approach that you have been doing. 

And I guess one question is, have you given thought to layers of 

data, so that instead of all of it being in the Consolidated Audit 

Trail, all of it being in EDGAR, some of the data not necessarily 

being held but accessible as part of that approach? 

Mr. CLAYTON. I have given thought to it. The more important 

thing is that the people who know this better than I do give 

thought to it, but I have asked the same question that you asked 

and whether that is practical. There is some data that is mission 

critical for the SEC, and we need to get it, but having that kind 

of thoughtful approach is the way I am trying to do this. 

Mr. DAVIDSON. Thank you. And then on the Consolidated Audit 

Trail, the net of the cybersecurity concerns, how do you feel the 

project is moving? Any concerns for the scope and the feasibility for 

Consolidated Audit Trail? 

Mr. CLAYTON. The Consolidated Audit Trail, the genesis was the 

flash crash and our ability to get at what was happening in the 

marketplace around the time of an event like that. And we learned 

that the data was stored in a bunch of different places and it was 

hard to bring it together to do an analysis. I still want to be able 

to do that, and I want to be able to do that pretty quickly. 

That is the question I am asking the SROs and the provider. So 

I think that is context to your question. I hope I got there. 

Mr. DAVIDSON. It is intersecting interest. My time has expired. 

I yield back, Chairman. 

Mr. CLAYTON. Thank you. 

The CHAIRMAN. The time of the gentleman has expired. 

I want to thank the witness for his testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:40 p.m., the committee was adjourned.] 

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(63) 

A P P E N D I X 

October 4, 2017 

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Testimony on "Examining the SEC's Agenda, Operations, and Budget" 

by 

Jay Clayton 

Chairman, U.S. Securities and Exchange Commission 

Before the 

Committee on Financial Services 

United States House of Representatives 

October 4, 2017 

Chairman Hensarling, Ranking Member Waters, distinguished members 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). 1 

It is an honor to testifY before this Committee for the first time. Since joining the SEC, 

my experience has strongly reinforced my view that our talented and committed staff is 

fundamental to the agency's effectiveness. The SEC's mission to protect investors, maintain 

fair, orderly and efficient markets and facilitate capital formation is deeply engrained throughout 

our offices and divisions. I also want to thank Commissioners Stein and Piwowar for their 

valuable counsel and guidance to me as well as for their unwavering commitment to the 

Commission. 

With a workforce of about 4,600 staff in Washington and across our 11 regional offices, 

the SEC oversees, among other things (1) approximately $72 trillion in securities trading 

annually on U.S. equity markets; (2) the disclosures of over 8,100 public companies, of which 

4,300 are exchange listed; and (3) the activities of over 26,000 registered entities, including 

investment advisers, broker-dealers, transfer agents, securities exchanges, clearing agencies, 

mutual funds, exchange traded funds, the Financial Industry Regulatory Authority (FINRA) and 

the Municipal Securities Rulemaking Board (MSRB), among others. We also engage and 

interact with the investing public on a daily basis through a number of activities ranging from our 

investor education programs to alerts on our SEC.gov portal. Additionally, on a typical day, 

investors and other market participants view disclosure documents filed on our EDGAR system 

more than 50 million times. · 

In a July speech, I outlined the principles that should chart the course for the SEC moving 

forward. The principles reflect my interactions with the men and women of the Commission 

staff. 

1 The views expressed in this testimony are those of the Chairman of the Securities and Exchange Commission and 

do not necessarily represent the views of the President, the full Commission, or any Commissioner. 
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These guiding principles are as follows: 

l) The SEC's tripartite mission- protect investors, maintain fair, orderly and efficient 

markets and facilitate capital formation - is its touchstone; 

2) Our analysis starts and ends with the long-term interests of the Main Street investor; 

3) The SEC's historic approach to regulation is sound; 

4) Regulatory actions drive change, and change can have lasting effects; 

5) As markets evolve, so must the SEC; 

6) Effective rulemaking does not end with rule adoption; 

7) The costs of a rule now often include the cost of demonstrating compliance; and 

8) Coordination is key. 2 

While I will not go into great detail on all of the principles here, I would like to highlight 

the second principle, which is particularly important to me - that our analysis starts and ends 

with the long-term interests of the Main Street investor; or as I call them, "Mr. and Ms. 40l(k)." 

At a time when greater responsibility is shifting to Main Street investors to save for their own 

retirement, I am confident that this is the correct metric for our analysis of success in meeting our 

tripartite mission. 3 If Mr. and Ms. 40l(k) are able to invest in a better future, then the SEC is 

serving them and our markets well. 

Cybersecurity 

Cybersecurity is an area that is vitally important to the SEC, our markets and me 

personally. The prominence of this issue and the heightened focus the agency has on it is the 

result of various factors, including (1) the increased use of and dependence on data and 

electronic communications, (2) the greater complexity of technologies present in the financial 

marketplace and (3) the continually evolving threats from a variety of sources. Cybersecurity 

touches the daily lives of virtually all Americans, whether it is our accounts with financial 

services firms, the companies we invest in or the markets through which we trade. 

2 Remarks at the Economic Club ofNew York (July 12, 2017), available at 

https://www.sec.gov/news/soeech/remarks-economic-cluh-new-york. 

3 See Investment Company Institute, 2017 Investment Company Fact Book (20 17), available at 

https://www.ici.org/pdl720 17 factbook.pdf (Defined contribution plans and IRAs comprised 59 percent of 

retirement assets at year-end 2016); see also Brookings Institute, Perspectives on Securities Regulation, Featuring a 

Conversation with U.S. Securities and Exchange Commission Chairman Jay Clayton (Sepi. 28, 2017), available at 

https://www.brookings.edu/events/perspectives-on-securities-regulation/. 

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On September 20, I issued a press release and statement tbat (1) discussed the 

Commission's cybersecurity risk profile, (2) reviewed our approach to oversight and 

enforcement and (3) disclosed a 2016 intrusion that I recently discovered may have led to illicit 

trading. 4 

The press release and statement are part of an ongoing assessment of the SEC's 

cybersecurity risk profile and preparedness tbat I initiated upon joining the Commission in May. 

The initiative has various components, including the formation of a senior-level cybersecurity 

working group to coordinate information sharing, risk and threat monitoring, incident response 

and other cross-divisional and interagency efforts and an assessment of reporting and escalation 

procedures. 

I will now discuss the 2016 intrusion. In August 2017, in connection with an ongoing 

investigation by our Division of Enforcement, I was notified of a possible 2016 intrusion into our 

EDGAR system. In response to this information, I immediately commenced an internal review. 

Through tbis review and the ongoing enforcement investigation, I was informed that tbe 2016 

intrusion into the test filing component of our EDGAR system provided access to nonpublic 

EDGAR filing information and may have provided a basis for illicit gain through trading. 

We believe the 2016 intrusion involved the exploitation of a defect in custom software in 

the EDGAR system. When it was originally discovered, the SEC Office oflnformation 

Technology (OIT) staff took steps to remediate the defect in custom software code and reported 

the incident to the Department of Homeland Security's United States Computer Emergency 

Readiness Team (US-CERT). Based on the investigation to date, OIT staff believes that the 

prior remediation effort was successful. 

The first stage of our review and investigation of the 2016 intrusion consists of two 

related components. The first component focuses on the 2016 intrusion itself, including efforts 

to determine its scope and whether there were or are any related vulnerabilities in our EDGAR 

system. Various agency personnel, including members of tbe Division of Enforcement, the 

Office of the General Counsel and the Office oflnspector General (OIG) have been involved in 

this effort. The second component consists of our investigation into trading potentially related to 

the intrusion. This investigation is being conducted by our Division of Enforcement and is 

ongoing. 

4 Press Release 2017-170, SEC Chairman Clayton Issues Statement on Cybersecurity: Discloses the Commission's 

Cyber Risk Profile, Discusses Intrusions at the Commission, and Reviews the Commission's Approach to Oversight 

and Enforcement (Sept. 20, 2017), available at https://www.sec.gov/news/press-release/2017-170; Statement on 

Cybersecurity (Sept. 20, 2017), available at https://www.sec.gov/news/public-statementlstatement-clayton-2017-09-

6Q. 

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Importantly, in conducting this type of review and related forensic analysis, it is a priority 

and a constraint to maintain the security and day to day operational capabilities of EDGAR, 

which is a critical component of our disclosure-based market system and accepts filings virtually 

continuously during the week. 

In addition, I formally requested that the OIG begin a review into what led to the 

intrusion, the scope of nonpublic information compromised and our efforts in response. I 

specifically requested that the OIG provide recommendations for how the SEC should remediate 

any related system or control deficiencies. 

There are limits on what I know and can discuss about the 2016 incident due to the status 

(ongoing and incomplete) and nature (enforcement) of our reviews and investigations. 

Nevertheless, I directed the issuance of the press release and statement on September 20. I made 

this disclosure because I believed that, once I knew enough to understand that the 2016 intrusion 

provided access to nonpublic EDGAR test filings and that this may have resulted in the misuse 

of nonpublic information for illicit gain, it was important to disclose the incident and our 

cybersecurity risk profile more generally to the American public and Congress. 

The matter involving our EDGAR system concerns me deeply and on many levels. I am 

focused on getting to the bottom of the matter and, importantly, lifting our cybersecurity efforts 

moving forward. 

I recognize that I am not the only one who is deeply concerned. Rightfully, it will cause 

this Committee and others to increase their focus on whether the Commission's approach to 

cybersecurity appropriately addresses our cybersecurity risk profile. This is all the more reason 

it was appropriate to disclose the 2016 intrusion when I did, even though our review and 

investigation were, and still are, ongoing. 

I will now provide an update on developments in our review and investigation over the 

past week. Our efforts are organized into five principal work streams: 

1) The review of the 2016 EDGAR intrusion by the Office oflnspector General. Staff 

have been instructed to provide their full cooperation with this effort; 

2) The investigation by our Division of Enforcement into the potential illicit trading 

resulting from the 2016 EDGAR intrusion; 

3) A focused, operational review of and, as necessary or appropriate, uplift of our 

EDGAR system. Our EDGAR system has been undergoing modernization efforts. 

We have added, and expect to continue to add, additional resources to these efforts, 

which are expected to include outside consultants, and will increase the focus on 

cybersecurity matters; 

4) The more general assessment and uplift of our cybersecurity risk profile and efforts 

that we initiated shortly after my arrival at the Commission this past May, including, 

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without limitation, the identification and review of all systems, current and planned 

(e.g., the Consolidated Audit Trail (CA1)), that hold market sensitive data or 

personally identifiable information; and 

5) The agency's internal review of the 2016 EDGAR intrusion to determine, among 

other things, the procedures followed in response to the intrusion. This review is 

being overseen by the Office of the General Counsel and has an interdisciplinary 

investigative team that includes personnel from regional offices and will involve 

outside technology consultants. 

Each of these efforts is moving forward and, as is the nature of matters of this type, will 

require substantial time and effort to complete. 

I also have an update to previous disclosure regarding the scope of the 2016 intrusion into 

our EDGAR system. 5 Last week, I reported that, based on the information available at the time, 

we believed that the 2016 intrusion did not result in unauthorized access to personally 

identifiable information and that our investigation of these matters, as well as the extent and 

impact of the intrusion, is ongoing. As part of the investigation, our staff have been continuing 

their forensic analysis of data accessed from our EDGAR servers. 

As a result of these efforts, I was informed this past Friday that an EDGAR test filing 

accessed by third parties in connection with the 2016 intrusion contained the names, dates of 

birth and social security numbers of two individuals. We are reaching out to the two individuals 

to notify them and will offer to provide them with identity theft protection and monitoring 

services. Should our review uncover additional such individuals whose sensitive information 

may have been accessed, we will contact them and offer them identity theft protection and 

monitoring as well. I will also make sure to keep the Committee informed of the ultimate 

findings and conclusions of our internal review into the 2016 intrusion. 

I will now speak more broadly regarding our cybersecurity efforts. 

We must remain on top of evolving threats when it comes to securing our own networks 

and systems against intrusion. This is especially true when protecting systems dealing with 

sensitive market and other data involving personally identifiable information. This means 

regularly evaluating progress, pursuing improvements and making it a priority to invest 

sufficient resources so our systems keep up with the fast-changing threat environment. 

Looking forward, and to further the efforts discussed above, I have authorized the 

immediate hiring of additional staff and outside technology consultants to aid in our efforts to 

protect the security of the agency's network, systems and data. I have also directed the staff to 

5 Press Release 2017-186, SEC Chairman Clayton Provides Update on Review of 2016 Cyber Intrusion Involving 

the EDGAR System (Oct. 2, 20 I 7), available at https://www.sec.gov/news/press-release/20 17-I 86. 

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take a number of steps designed to strengthen our cybersecurity risk profile, with an initial focus 

on EDGAR. This effort includes assessing the types of data we take in through the EDGAR 

system, and whether EDGAR is the appropriate mechanism to obtain that data. Another part of 

this effort includes reviewing the security systems, processes and controls we have in place to 

protect data submitted through EDGAR. 

The staff will also conduct similar reviews of other systems we use at the SEC, assessing 

the types of data we keep and the related security systems, processes and controls. We will also 

work to enhance our escalation protocols for cybersecurity incidents in order to enable greater 

agency-wide visibility and understanding of potential cyber vulnerabilities and attacks. More 

broadly, we are evaluating our cybersecurity risk governance structure, which has included the 

establishment of our senior-level cybersecurity working group and may include additional 

enhancements to promote the management and oversight of cybersecurity risk across the SEC's 

divisions and offices. 

Other initiatives resulting from the general cybersecurity assessment we initiated in May 

are ongoing or will commence shortly. These include internal, Commission-level incident 

response exercises and continued interaction on cybersecurity efforts with other government 

agencies and committees, including the Department of Homeland Security, the Government 

Accountability Office and the Financial and Banking Information Infrastructure Committee. 

Despite the attention given to widely-publicized cyber-related incidents experienced by 

the Commission and others, I still am not confident that the Main Street investor has received a 

sufficient package of information from issuers, intermediaries and other market participants to 

understand the substantial risks resulting from cybersecurity and related issues. As a general 

matter, it is critical that investors be informed about the threats that issuers and other market 

participants face. 

To be sure, we are continuing to examine whether public companies are taking 

appropriate action to inform investors, including after a breach has occurred, and we will 

investigate issuers that mislead investors about material cybersecurity risks or data breaches. As 

is noted in my July speech and on various other occasions, I would like to see more and better 

disclosure in this area. 

Cybersecurity must be more than a firm-by-firm or agency-by-agency effort. Active and 

open communication between and among regulators and the private sector also is critical to 

ensuring the nation's financial system is robust and effectively protected. Information sharing 

and coordination are essential for regulators to anticipate potential cyber threats and respond to a 

major cyberattack, should one arise. The SEC is therefore working closely with fellow financial 

regulators to improve our ability to receive critical information and alerts, react to cyber threats 

and harmonize regulatory approaches. 

Overall, by promoting effective cybersecurity practices in connection with both the 

Commission's internal operations and its external regulatory oversight efforts, it is our objective 

to contribute substantively to a financial market system that recognizes and addresses 

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cybersecurity risks and, in circumstances in which these risks materialize, exhibits strong 

mitigation and resiliency. 

Regulatory Agenda 

We have been hard at work developing our regulatory agenda, consistent with the eight 

principles outlined above. As you know, we have a number of statutorily-mandated items that 

we need to address, and we are considering how to advance those while also pursuing other 

initiatives that are central to the fulfilment of our statutory mission. Mandated rulemakings 

include those required by both the Fixing America's Surface Transportation (FAST) Act and the 

Dodd-Frank Wall Street Reform and Consumer Protection Act. In the coming weeks and 

months, I expect the SEC's near-term rulemaking objectives to be fully reflected in our 

upcoming Regulatory Flexibility Act Agenda. As a general matter, I believe it is important that 

these publicly available agendas provide the necessary transparency and accountability for 

agency matters. If these plans are to meet their intended purpose, they must be streamlined to 

inform Congress, investors, issuers and other interested parties about what the SEC actually 

intends- and realistically expects- to accomplish over the coming year. 

Putting together a rulemaking agenda has not slowed work to fulfill the SEC's mission. 

As you know, Commissioners Michael Piwowar and Kara Stein advanced a number of important 

matters before I came on board, including moving to a two business day standard settlement 

cycle- orT+2. 

I would like to now highlight several of the SEC's accomplishments since I joined my 

fellow Commissioners and the women and men of the SEC in May. 

Facilitating Capital Formation 

The U.S. capital markets have long been the deepest, most dynamic and most liquid in 

the world. They provide businesses with the opportunity to grow, create jobs and furnish diverse 

investment opportunities for investors, including retail investors, pension funds and other 

retirement accounts. Our markets also have long provided the United States economy with a 

competitive advantage and American Main Street investors with better investment opportunities 

than comparable investors in other jurisdictions. We should be striving to maintain and enhance 

these complementary positions, including being mindful of emerging trends and related risks. 

In this regard, I continue to be troubled by the negative trend in the number of public 

companies - fewer companies are choosing to go public in their growth phase or at all and, 

consequently and significantly, there are fewer investment opportunities for Main Street 

investors. It is clear to me that our public capital markets are relatively less attractive to growing 

businesses than in the past. Based on my review and discussions with Commission staff and 

others, the reporting, compliance and oversight dynamic between private and public markets 

appears out of sync. Costs - ranging from direct compliance costs to the consumption of 

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sized companies, far outstrip those of comparable private companies. Thus, many companies 

with the choice of going public may be incentivized to stay private or stay private longer. 

I view Mr. and Ms. 40l(k) as bearing a potentially significant cost as a result of the 

shrinking number of public companies. I expect this dynamic, if not addressed, will lead to 

fewer opportunities for Main Street investors to invest directly in high quality companies. To be 

clear, it is not fewer opportunities to invest in IPOs themselves that troubles me. But without 

IPOs of growing companies, we have a shrinking and generally more mature portfolio of public 

companies. This is a significant concern. A shrinking proportion of public companies, 

particularly smaller and medium-sized companies, has costs beyond investment choices, 

including that there will be less publicly available information about the operations and 

performance of companies that are important to our economy. 

I believe a key to restoring vibrancy in our public markets is a recognition that a one size 

regulatory structure does not fit all. Fortunately, this is not just a theory- through Congress's 

enactment of, and the SEC's work on, the Jumpstart Our Business Startups (JOBS) Act, there is 

an ecosystem displaying that a scaled disclosure and regulatory system provides incentives for 

companies to conduct public offerings while maintaining the world's most robust investor 

protections. To be clear, this does not mean that we would sacrifice or limit the core principles 

of our public disclosure regime and other essential investor protections for the sake of 

accelerating public issuances. It is clear to me that companies that go through the U.S. IPO 

process emerge as better companies, with better disclosure. We want to encourage and preserve 

that dynamic. Overall, the SEC will strive for efficiency in our processes to encourage more 

companies to consider going public, which will result in more choices for investors, job creation 

and a stronger U.S. economy. 

To this end, the SEC, through the Division of Corporation Finance (Corporation 

Finance), is undertaking efforts to promote capital formation, especially in our public markets. 

Corporation Finance recently announced that it would accept voluntary draft registration 

statement submissions for certain securities offerings, including for initial public offerings and 

offerings within one year of an IPO, for review by the staff on a non-public basis. 6 This 

expanded policy builds on the confidential submission process established in response to the 

JOBS Act. We believe this approach provides a meaningful benefit to companies and investors, 

and a number of companies have already pursued this path. 

Corporation Finance also issued guidance clarifying that companies may omit from draft 

registration statements interim financial information that otherwise will not be required when a 

Draft Registration Statement Processing Procedures Expanded, Division of Corporation Finance 

Announcement (June 29, 2017) [Supplemented August 17, 2017], available at 

https://www.sec.gov/corofin/announcement/draft-registration-statement-processing-procedures-expanded. 

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company files its registration statement. 7 This guidance should enable a company to reduce 

costs associated with preparing financial information that ultimately would not be included in its 

filing. Importantly, this guidance saves costs, but investors continue to benefit from the full 

array of financial information required when a company publicly files its registration statement. 

Corporation Finance is also considering whether there are other areas in which 

interpretive guidance could assist companies without reducing investor protections, and whether 

enhancements can be made to staff processes to further benefit companies and investors. 

Additionally, we are taking steps to fill the position of Advocate for Small Business 

Capital Formation (Advocate) and form the Office of the Advocate for Small Business Capital 

Formation (Office) and the Advisory Committee on Small Business Capital Formation (Advisory 

Committee), as required by Congress in the SEC Small Business Advocate Act of 2016. Among 

other statutorily-mandated functions, the Advocate will identify areas in which small businesses 

and small business investors would benefit from changes in Commission regulations or selfregulatory organization (SRO) rules. The Advocate also will work to identify problems that 

small businesses have securing access to capital, including any unique challenges to minorityand women-owned businesses. 

We recently announced the application process for selecting the Advocate, which will 

cast a wide net that will encourage people with expertise and interest in facilitating capital 

formation throughout the country to apply. I anticipate that the Commission will select the 

Advocate in the coming months which will allow him or her to continue the agency's work 

through the Office and the Advisory Committee to facilitate capital formation for small 

businesses across the country. 

Much work remains to be done in this area, but I am pleased with the staff's efforts to 

provide additional opportunities for issuers and investors alike. 

Disclosure Effectiveness 

I expect that the Commission will move forward in the near term on a number of 

additional initiatives aimed at promoting capital formation. For example, the Commission will 

soon consider a rule proposal required by the FAST Act to modernize and simplify the disclosure 

requirements in Regulation S-K in a manner that reduces costs and burdens on companies while 

still providing for the disclosure of all required material information. 

The staff is also developing recommendations to finalize rule amendments that would 

eliminate redundant, overlapping, outdated or superseded disClosure requirements. In addition, 

the staff is developing recommendations for the Commission on final rule amendments to the 

See Securities Act Forms Compliance and Disclosure Interpretation 101.04 and 101.05, available at 

https://www.sec.gov/divisions/cornfin/guidance/safintern.htm. · 

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"smaller reporting company" definition, which would expand the number of issuers eligible to 

provide scaled disclosures. 

Further, the agency is continuing our initiative to modernize and simplifY our disclosure 

requirements generally. We have a number of projects underway related to that effort, including, 

among others: 

(!)Considering changes to the rules in Regulation S-X related to requirements for financial 

statements for entities other than the issuer; and 

(2) Updating industry-specific disclosure requirements, such as the property disclosure 

requirements for mining companies and preparing recommendations for proposed rules to 

modernize bank holding company disclosures. 

CEO Pay Ratio Disclosure 

Corporation Finance also is examining existing disclosure rules, with an eye toward 

easing compliance burdens while maintaining the mandated disclosure. The SEC is required to 

implement rulemakings mandated by statute in accordance with applicable law, including the 

pay ratio disclosure rule adopted pursuant to Section 953(b) of the Dodd-Frank Act. This rule 

was adopted on August 5, 2015, and will continue to be implemented on schedule. 

In response to questions about the pay ratio rule, the Commission recently approved 

interpretative guidance to assist companies in their compliance efforts. 8 Specifically, the 

interpretative guidance clarifies the disclosure rules mandated by Congress in a way that is true 

to the mandate and, to the extent practicable, allows companies to use operational data and 

otherwise readily available information to produce the disclosures. Additionally, the staff issued 

guidance which includes examples illustrating how reasonable estimates and statistical 

methodologies may be used. The staff will continue to monitor the rollout of the rule, in 

particular for whether unanticipated costs or difficulties have arisen. 

Standards of Conduct for Investment Advisers and Broker-Dealers 

I have made clear in public statements that I am focused on the standards of conduct that 

investment professionals must follow in providing advice to Main Street investors. The 

extensive study of the subject to date illustrates the complexity of the issue and the fast-changing 

nature of our markets, including the evolving manner in which personalized investment advice is 

provided. Main Street investors should have access to high-quality, affordable investment 

advice and a diverse range of investment products without sacrificing the protections of the 

securities laws. 

8 Press Release 2017-172, SEC Adopts Interpretative Guidance on Pay Ratio Rule (Sept. 21, 2017), available at 

https://www.sec.gov/news/press-release/20 17-172. 

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Since my confirmation, the Department of Labor's (DOL's) fiduciary rule has partially 

taken effect. Staff conversations with investors and firms, prior to the DOL's proposed 

extension, as well as various press reports, indicate that broker-dealers are considering, and some 

have started taking, a variety of actions to comply with the DOL Rule, including: (l) increasing 

compliance resources and efforts (e.g., disclosure, documentation and training, in particular, with 

respect to costs and rollover recommendations); (2) increasing the use of robo-advice; and (3) 

reevaluating and changing the types of products and accounts (and related fees) offered to 

retirement investors, focusing particularly on products or accounts that would address the 

compliance requirements driven by the Best Interest Contract Exemption (e.g., shifting some or 

all of their retirement accounts to level-fee advisory accounts). 

Further, staff understands mutual fund complexes are considering various approach,es to 

accommodate broker-dealers' efforts to level compensation across similar types of products in 

response to the DOL Rule. These approaches include, for example: (I) issuing "clean shares" 

that do not have any sales loads, charges or other asset-based fees for sales or distribution (thus 

allowing brokers to set their own commissions that would be paid directly by investors); 9 and (2) 

issuing "T -shares" or "transaction shares" -that have uniform sales charges across all fund 

categories. 

While the SEC and the DOL have different statutory mandates, rulemaking processes and 

jurisdictions, actions taken by one regarding standards of conduct are going to have a significant 

effect on the other's regulated entities and the marketplace. In other words, effects of the DOL 

rule extend well beyond the DOL's jurisdiction, and vice versa. It is important that we 

understand these effects and work closely and constructively with DOL to implement appropriate 

standards of conduct for financial professionals who provide advice to retail investors. We are 

engaging expeditiously and constructively with our colleagues at the DOL to best serve the 

interests of investors. 

As for Commission action related to standards of conduct, the SEC has been reviewing 

this area for some time. In recognition of the vast changes in the marketplace since the SEC last 

solicited information four years ago, on June 1, 2017, I issued a statement seeking public input 

on standards of conduct for investment advisers and broker-dealers. 10 In it, I articulated some 

9 Related to this effort, on January II, 2017, the Division of!nvestment Management issued interpretive guidance to 

Capital Group clarifying that Section 22(d) of the Investment Company Act of 1940 does not prevent a broker acting 

in an agency capacity from charging its customers a commission for transacting in "clean shares" of a registered 

investment company. Capital Group used the term "clean shares" to refer to a class of fund shares without any 

front-end load, deferred sales charge or other asset-based fee for sales or distribution. Capital Group, SEC Staff 

Letter (Jan. II, 2017), available at https:llwww.sec.gov/divisionslinvestment/noaction/2017/capital-group-011117-

22d.htm. 

10 Public Comments from Retail Investors and Other Interested Parties on Standards of Conduct for Investment 

Advisers and Broker-Dealers (June I, 2017), available at https:l/www.sec.gov/news/public-statement/statementchairman-clayton-2017-05-31. 

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key principles - clarity, consistency and coordination -that I expect to guide our approach. 

Specifically, our standards should be clear and comprehensible to the average investor, 

consistent across retirement and non-retirement assets and coordinated with other regulatory 

entities, including the DOL and state insurance regulators. 

I also hope that my June 2017 statement will shape constructively the conversation on 

this important matter, so that we can properly tailor an approach or package of approaches that 

we believe will best address the issues identified. To date, we have received over 150 comments 

from investors and the industry, expressing a range of views. I also have personally met with 

various Main Street investor and industry groups and have found those conversations beneficial. 

The Commission and its staff have extensive experience regulating broker-dealers and 

investment advisers, and we are reviewing the information interested parties have submitted. I 

look forward to continuing to work with my fellow Commissioners and the SEC staff as we 

evaluate our next steps on this important topic. 

Equity, Fixed Income and Security-Based Swap Markets 

The SEC has a responsibility to ensure that our securities markets provide vibrant, 

efficient and fair mechanisms for facilitating the formation and transfer of capital. In the decade 

plus since the adoption of Regulation NMS, technological advancements and innovations and 

commercial developments have led to significant changes in the way our trading markets 

operate. Generally speaking, our securities markets continue to be highly efficient and resilient. 

That said, it is imperative that we continuously examine and reassess our regulatory market 

structure. There are a few specific market structure issues and initiatives that I would like to now 

highlight. 

Several recent Commission rulemaking proposals have been aimed at enhancing 

transparency in the market structure space. In July of last year, the Commission proposed 

amendments to Rule 606 of Regulation NMS that would require broker-dealers to disclose 

standardized information on their handling of large orders, both in response to customer requests 

and on a quarterly, aggregated basis. This proposal would also enhance existing broker-dealer 

order routing disclosure requirements for smaller orders. 

In November 2015, the Commission proposed amendments to Regulation ATS to impose 

new transparency requirements on alternative trading systems (ATSs) that facilitate transactions 

in NMS stocks. That proposal would also greatly increase the Commission's active oversight 

over the design and operation of such A TSs. 

Both of these transparency-focused rulemaking proposals, which the Commission 

released prior to my Chairmanship, have received broad support from commenters. I support 

both initiatives, and I have asked the Commission staff to prepare final rulemaking 

recommendations for the Commission's consideration. 

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Just as investors look for material information upon which to base their investment 

decisions, the Commission uses data to support and enhance our oversight function, including in 

our analysis of market structure, as well as for investigations, examinations and market analyses 

and reconstructions. The SROs also use data in carrying out their regulatory responsibilities. 

Currently, trading activity in stocks is tracked through a number of systems. No single 

system tracks the orders that are routed and executed across multiple trading venues. As the 

Committee is aware, pursuant to Commission rule and the CAT National Market System (NMS) 

Plan, a Consolidated Audit Trail, or CAT, is currently being developed by a CAT plan processor 

(Thesys) and the securities exchanges and FINRA. The CAT is intended to provide these SROs 

and the Commission with consolidated cross-market data that is more complete, accurate, 

accessible and timely than the data currently available to regulators. 

Of paramount concern to the Commission is the protection of sensitive CAT data. 

appreciate that security issues are particularly acute with respect to a data repository that contains 

comprehensive information on trading activity in the securities markets, especially in light of 

recent events. I am therefore focused on issues of data security with respect to CAT. I have 

made this point clear to both Thesys and the SROs, and will continue to do so. I expect that the 

roll-out of the various components of CAT data reporting, the first phase of which is scheduled 

to take effect on November 15, 2017 (wherein the SROs will report data to the central 

repository), will reflect an ongoing assessment of the sensitivity of the data reported and related 

security concerns and protections. 

Among the defenses built into the CAT NMS Plan are requirements for the plan 

processor to develop a comprehensive information security program that addresses the security 

and confidentiality of all information within the CAT data repository and associated operational 

risks. And the SROs, which have direct oversight of the plan processor, are obligated to monitor 

the information security program to ensure that it is consistent with the highest industry 

standards for the protection of data. For the subset of data that may be extracted from the CAT 

data repository, the SROs and the SEC have independent obligations to protect any such data. 

With respect to the SEC specifically, we have committed to review periodically the effectiveness 

of our confidentiality and data use procedures in connection with our access to the CAT. 

Other components of the Commission's analysis of market structure are two pilot 

programs- one currently in force, and the other being developed by Commission staff. The Tick 

Size Pilot, which began in October 2016, is testing the impact of wider tick sizes on the trading 

of stocks of certain smaller capitalization companies. Preliminary analyses of the pilot data 

indicate that the impact of the wider tick sizes on market quality has been mixed. For many 

covered securities, quoted spreads and depth of book have increased, and volatility has 

decreased. At the end of this month, trading center data will become publicly available and 

enable more robust analysis of the pilot data. 

I have also asked the Commission staff to develop a proposal for a pilot program that 

would test how adjustments to the access fee cap under Rule 610 of Regulation NMS would 

affect equities trading. The Equity Market Structure Advisory Committee (EMSAC) 

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recommended a pilot program of this type. I am supportive of this type of pilot program because 

it should provide the Commission, as well as market participants and the public, with more data 

to assess how transaction-based fees and rebates affect order routing behavior, execution quality 

and market quality. I expect that the Commission will consider a transaction fee pilot proposal 

ofthis nature in the near future. 

More generally, I believe that a thoughtful and methodical, data driven approach to 

market structure will help us fulfill our mission to protect investors, maintain fair, orderly and 

efficient markets and facilitate capital formation. Pilot programs such as the ones I just 

described allow us to evaluate whether adjustments to our market structure are necessary or 

appropriate, and if so, how to appropriately tailor them. At the same time, I also recognize that 

pilot programs- whether in the form of Commission or SRO initiatives- carmot simply live on 

in perpetuity~ Once pilots have achieved their purpose in terms of providing the Commission 

and SROs with adequate data for reasoned decision-making, they should either be wound down 

or, when appropriate, made permanent. 

Overall, as the Commission has evaluated equity market structure, the EMSAC has been 

a valuable and helpful resource to the Commission in providing expert advice and 

recommendations. Specifically, in addition to an access fee pilot recommendation, the EMSAC 

has provided the Commission with six thoughtful recommendations relating to NMS plan 

governance, SROs' proposals requiring technology changes, limit-up/limit-down mechanisms, 

market wide circuit breakers, the market opening and Regulation NMS Rules 605 and 606. The 

Commission recently extended the term for the EMSAC until early 2018, which will enable the 

EMSAC to continue to provide us with input as we consider market structure initiatives, 

including the contemplated transaction fee pilot proposal. 

Separately, as l have stated previously, I believe that the time is right for the Commission 

to broaden its review of market structure to include our fixed income markets. The fixed income 

markets are critical to our economy and, increasingly, Main Street investors, yet less attention 

has been paid to their efficiency, transparency and effectiveness relative to the equity markets. 

We are in the process of establishing the Fixed Income Market Structure Advisory Committee 

(FIMSAC). We hope to have the first FIMSAC meeting as soon as December of this year. 

Finally, with respect to the regulatory regime for swaps and security-based swaps, 

Commodity Futures Trading Commission (CFTC) Chairman Christopher Giancarlo and I started 

talking soon after I joined the Commission. At our very first meeting, we discussed ways in 

which we could harmonize our respective rules and regulations. SEC and CFTC staff have been 

meeting to identify initial areas offocus, and it is my hope that the continued coordination will 

result in real regulatory efficiencies. 

Regulatory Relief and Assistance for Hurricane Victims 

The SEC has been closely monitoring of the impact of Hurricane Harvey, Hurricane 

Irma, and Hurricane Maria on investors and capital markets. Agency officials have been and 

will remain in close communication with market participants and key market infrastructure 

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providers, as well as FINRA and other regulators concerning the storms and their aftermath. We 

are also actively working with firms in affected areas to ensure that investors continue to have 

access to their securities accounts. 

Last week, as part of its evaluation of impacts on regulated entities in affected areas, the 

Commission announced it was providing regulatory relief to publicly traded companies, 

investment companies, accountants, transfer agents, municipal advisors and others affected by 

Hurricane Harvey, Hurricane Irma, and Hurricane Maria.!! The loss of property, power, 

transportation and mail delivery due to the hurricanes poses challenges for some individuals and 

entities that are required to provide information to the SEC and shareholders. 

To address compliance issues caused by Hurricane Harvey, Hurricane Irma, and 

Hurricane Maria, the Commission issued an order that conditionally exempts affected persons 

from certain requirements of the federal securities laws for specified periods following the 

natural disasters. The Commission also adopted interim final temporary rules that extend the 

filing deadlines for specified reports and forms that companies must file pursuant to Regulation 

Crowdfunding and Regulation A. The exemptive relief and rules are structured for a broad class 

of companies and others affected by the hurricanes and thtiir respective aftermaths. 

Some companies and other affected persons may require additional or different assistance 

in their efforts to comply with the requirements of the federal securities laws. The Commission 

staff will address these and any disclosure-related issues on a case-by-case basis in light of their 

fact-specific nature. Those affected by the hurricanes that require additional assistance are 

encouraged to contact Commission staff for individual relief or interpretive guidance. We also 

ask any member of Congress assisting constituents on these matters to contact us as well and to 

encourage their constituents to reach out to our staff. 

Additionally, our Office of Investor Education and Advocacy issued an Investor Alert 

warning investors about the potential for investment scams in these wake of these disasters, 

including those promising high returns for small, thinly-traded companies that supposedly will 

reap huge profits from recovery and cleanup efforts. 12 The SEC brought several enforcement 

actions against individuals and companies following Hurricane Katrina in 2005. 

Enforcement 

I am committed to the responsibility of safeguarding our capital markets and American 

investors with energy and purpose and ensuring that there is no room for bad actors therein. 

Through the dedication and expertise of our Division of Enforcement (Enforcement) staff and its 

ll Press Release 2017-181, SEC Provides Regulatory Relief and Assistance for Hurricane Victims (Sept. 28, 20 17), 

available at https://www.sec.gov/news/press-release/20 17-18l. 12 Investor Alert: Be Vigiliant For Investment Scams Related to Hurricanes Harvey and Irma (Sept. 6, 20 17), 

available at https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia harvey. 

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leadership, we are able to root out fraud and shady practices effectively and with unwavering 

purpose. Enforcement is focused on protecting all investors - without favor for account size, 

geography or other measures of priority- and that is clear from recent enforcement actions 

targeting pump and dump schemes, insider trading and a boiler room on Long Island ripping off 

seniors' hard earned retirement savings. Successful enforcement actions impose meaningful 

sanctions on securities law violators, result in penalties and disgorgement of ill-gotten gains that 

can be returned to harmed investors and deter wrongdoing. 

While a vigorous enforcement program is at the heart of the Commission's work to 

protect investors and maintain the integrity of the securities markets, the SEC's enforcement 

program also plays an important part in ensuring that investors and other market participants 

have access to material information to make informed investment decisions. The SEC has 

brought significant enforcement actions against issuers that committed reporting and disclosure 

violations. Comprehensive, accurate and timely financial reporting is the bedrock upon which 

our markets are based and Enforcement remains focused on pursuing violations in this area. 

Our actions against parties who engage in insider trading also help promote investor 

confidence. Trading on material, non-public information undermines the fairness and integrity 

of the securities markets and creates an unlevel playing field. The SEC is committed to taking 

action against those who breach their duties - and subvert our markets in pursuit of personal 

gain, having charged more than 700 defendants in civil insider trading cases since fiscal year 

2010. 

Through these efforts to root out financial fraud, insider trading and other misconduct in 

the securities industry, Enforcement serves a critical role in helping the Commission fulfill its 

tripartite mission. Moving forward, the SEC will continue to focus resources - including data 

collection and analysis, which has greatly enhanced our ability to detect unlawful behavior- on 

key areas where misconduct harms investors and impairs market integrity. In particular, I have 

asked the Division of Enforcement to evaluate regularly whether we are focusing appropriately 

on retail investor fraud and investment professional misconduct, insider trading, market 

manipulation, accounting fraud and cyber matters. I believe our Main Street investors would 

want us to focus on these areas. 

Examinations 

Another critical tool for the SEC to meet its mission is our national examination program, 

led by our Office of Compliance Inspections and Examinations (OCIE). Commission staff 

conduct risk -based examinations of registered entities, including broker-dealers, investment 

advisers, investment companies, municipal advisors, national securities exchanges, clearing 

agencies, transfer agents and FINRA, among others. Our examination staff work closely with 

staff members in our regulatory divisions to provide input on policy and regulatory issues and 

initiatives and also are in regular communication with Enforcement staff to discuss trends and 

observations and provide referrals. 

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Our examination program is one of many areas where we have doubled down on our 

focus on doing more with our limited resources. In this regard, I note that registered investment 

advisers now manage more than $70 trillion in assets, which is more than triple 2001Ievels. In 

light of this trend, in 2016, the SEC reassigned approximately 100 OCIE staff to the investment 

adviser examination unit. As a result of this shift and the introduction of various enhancements 

to OCIE processes, advancements in OCIE's use of technology and other efficiencies, the SEC is 

on track to deliver an increase of more than 40 percent in the number of investment adviser 

examinations this fiscal year- to approximately 15 percent of all investment advisers. 13 

While this has been a very positive step, more needs to be done to continue to increase 

investment adviser examination coverage levels, while at the same time being careful to avoid 

decreasing examination quality. To that end, the SEC will continue to explore additional 

efficiencies and improvements to our risk-based examination program. One way to achieve this 

is through the continued leveraging of data analysis. We have developed tools that scan an array 

of data fields to help us analyze and identify potentially problematic activities and firms. This 

allows us to make better decisions concerning which firms to examine and appropriately scope 

those examinations, among other things. I expect that for at least the next several years we will 

need to do more to increase the agency's examination coverage of investment advisers in light of 

continuing changes in the markets. 

In the coming fiscal year, OCIE also plans to increase the number of inspections to assess 

compliance with Commission rules, such as Regulation Systems Compliance and Integrity 

(Regulation SCI), to ensure that the cybersecurity infrastructure that is critical to the U.S. 

securities markets is effective. 

Municipal Securities Investor Outreach 

The municipal securities market plays a vital role in building and maintaining America's 

infrastructure. State and local governments issue municipal securities to help finance a wide 

range of public projects and to provide cash flows for governmental needs, among other 

things. At the same time, municipal securities themselves provide an important investment 

option for millions of individual Americans. Retail investors hold as much as 75 percent of 

outstanding municipal securities- both directly and indirectly through mutual funds and other 

funds. 

I have concerns, however, that some retail investors do not sufficiently understand and 

appreciate the unique aspects of municipal securities and the municipal securities 

market. Therefore, I have asked the staff to prepare a new series of educational materials -

13 In fiscal year 2016, OCIE completed nearly 1,450 investment adviser exams, more than it had completed in any of 

the prior seven fiscal years and 20 percent more investment adviser exams than it completed in fiscal year 2015. In 

fiscal year 2017, OCIE completed more than 2,100 investment adviser exams, a significant increase over fiscal year 

2016. 

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including Investor Bulletins - that are geared specifically to prospective and existing retail 

investors in municipal securities. I anticipate that the Investor Bulletins will provide basic, plainlanguage information concerning the characteristics, features and pricing of municipal bonds -

including, for instance, background information on their tax status, pricing determinations and 

call provisions. 

More generally, the Commission and its staff will remain vigilant and focused on 

municipal securities issues. Our staff will continue to administer and vigorously enforce our 

rules and the statutory provisions within our jurisdiction concerning municipal securities brokers 

and dealers, municipal advisors, municipal issuers and investors in municipal securities. We will 

also continue to closely oversee and coordinate with the Municipal Securities Rulemaking 

Board. 

Agency Operations 

I have devoted a significant portion of my first five months as Chairman to developing a 

deeper understanding of the agency's internal operations and management. I have come to 

appreciate more directly what I had witnessed from my years in private practice the 

knowledge, expertise and professionalism of the SEC staff. It has been a top priority for me to 

engage with, and understand the perspectives of, the SEC's workforce. 

I am particularly excited to report that the SEC staff's engagement and morale are high, 

thanks in significant part to the leadership and efforts of division and office directors, supervisors 

and staff. Setting a new record for the agency this year, nearly 80 percent of the eligible 

workforce shared their views by completing the Office of Personnel Management's Federal 

Employee Viewpoint Survey in May and June of20!7. 

This year's survey results showed notable increases in employee engagement, overall 

satisfaction and leader effectiveness indices. These are critical indicators for our organization 

because our diverse workforce is our most valuable asset. It is only through the hard work of our 

employees that we are able to accomplish our mission. 

Since 2012, the SEC's rating on the Partnership for Public Service "Best Places to Work" 

has improved by 20 percentage points, from 56 percent to 76 percent and last year we were 

ranked 6th among 27 mid-sized agencies. In fact, this success has earned us distinction as a role 

model for other federal agencies. In April20 17, the House Oversight and Government Reform 

Committee invited the SEC's Chief Human Capital Officer to testify on the agency's survey 

results as the "most improved" mid-sized federal agency. 14 We aim to continue building upon 

these 2017 results in the years to come. 

14 April6, 2017, testimony on "The Best and Worst Places to Work in the Federal Government" by Chief Human 

Capital Officer Lacey Dingman before the U.S. House of Representatives Subcommittee on Government Operations 

can be found at https://oversight.house.gov/wp-content/uploads/2017/04/Dingman SEC Testimony.pdf. 

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Efficiencies and Resource Needs 

I take very seriously the SEC's responsibility to ensure that the SEC is a good steward of 

the funds Congress entrusts to our use, and maximizes the value ofthose funds to the American 

investor. We are engaged in ongoing efforts to find efficiencies in internal operations, including 

through automation, streamlined internal processes and better use of data. We will continue to 

develop and leverage our capabilities for risk analysis to inform our decision making, including 

how most efficiently to use staff resources. Given the pace of change in today' s capital markets, 

it is more important than ever that agency operations be nimble so we can direct resources where 

they are needed most. 

For example, with Congressional approval, the SEC in June 2017 combined the agency's 

various EDGAR filer support functions into one EDGAR Program Office. As this Committee 

knows and as discussed above, the EDGAR system is central to the agency's mission and critical 

to the functioning of the capital markets. On a typical day, investors and other market 

participants view or download more than 50 million disclosure documents filed on EDGAR. 

This new office also will coordinate and rationalize the agency's enhancements and investments 

related to EDGAR, including modifications to conform with changes to Commission rules, and 

will help consolidate the agency's filer support functions. 

Other internal improvement initiatives include combining the agency's various 

communications-related functions, crafting proposals for Commission consideration to convert 

paper filings into electronic formats and exploring ways to better apply and schedule 

examination staff resources towards significant risks to investors. We will continue to explore 

opportunities for efficiencies and cost savings in the months to come. 

The agency's efforts to streamline operations are reflected in the SEC's budget requests 

over the next two years. The President's request for fiscal year 2018 is for $1.602 billion for 

SEC operations, which holds the SEC budget at essentially the same level it has been in fiscal 

years 2016 and 2017. This request reflects savings and efficiencies in progress throughout the 

SEC, sufficient to offset required cost increases, and continues investments in technology, as 

described further below. 

It is important to note that the SEC collects transaction fees that offset the annual 

appropriation to the Commission. Whatever amount Congress appropriates to the agency will, 

by law, be fully offset by transaction fees, and will not impact the deficit or the funding available 

for other agencies. The current transaction fee rate is just over two cents ($0 .02) for every 

$1,000.00 in covered securities sales. 

Fiscal Year 2019 Budget Request 

For fiscal year 2019, the SEC's budget request totals approximately $1.7 billion for SEC 

operations. I do not make a request for additional funds lightly, especially in a tight budgetary 

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environment. But after an evaluation of the SEC's capabilities and needs, I believe this request 

is necessary for the SEC to continue the effective pursuit of our tripartite mission. 

This request would allow the agency to lift the hiring freeze implemented at the start of 

fiscal year 2017 and recruit professionals with key skills and market expertise such as electronic 

trading, cybersecurity, retail investor fraud, investment adviser oversight and market analysis. 

The agency anticipates a need to hire such individuals in key positions to effectively carry out 

our core mission. The request seeks additional funds for development, modernization and 

enhancement of information technology systems, including additional investments in protecting 

the security of the SEC's network and systems. These funds, coupled with those from the SEC 

Reserve Fund, would allow the continued implementation of a number of key multi-year 

technology initiatives, discussed further below, which will enhance the SEC's ability to collect, 

analyze and act on large amounts of data. 

Leveraging Technology 

Advances in technology have driven significant changes in securities markets. Today, 

companies support human decision-making with automated algorithms, which ingest massive 

amounts of unstructured data to make trading decisions. Investors are using innovative platforms 

to conduct transactions and research investments. Firms solicit investors through sophisticated, 

multichannel communications. 

In recent years we have seen an extraordinary increase in the volume and velocity of data 

available to the securities industry, investors and the SEC. The ever-increasing volume of data 

demands advanced analytics tools and best -in-class infrastructure that is dynamic, scalable and 

secure. Similarly, demand from the public for SEC information has never been higher. Last 

year, SEC.gov received I 0.4 billion page views- double from just two years ago and the 

public downloaded more than 2.6 petabytes of data. The information the SEC provides is 

driving the marketplace, and helping companies attract funding, grow and create jobs. 

All of these shifts require the SEC to expand our own technology capabilities and 

increase our efficiency. The SEC's budget requests seek the resources needed to stay on top of 

these critical developments and promote our mission in an evolving landscape. The Commission 

has made progress in modernizing our technology systems, with the benefits of increasing our 

use of data analytics, increasing program effectiveness and streamlining operations. 

The $234 million that the SEC plans to spend on information technology in fiscal year 

2018 is quite modest, by way of comparison, to the amounts that the major Wall Street firms 

spend on their own information technology systems. For example, in 2016 one large financial 

institution alone spent more than $9.5 billion on technology firm-wide, with $3 billion ofthat 

dedicated to new initiatives. Another large financial institution spent $6.6 billion in 2016 on 

technology initiatives. 

The fiscal year 2018 and fiscal year 2019 budget proposals would support a number of 

key information technology initiatives, such as: 

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(I) Increasing investments in intormation security to address, as a top priority, the ability to 

monitor and avoid advanced persistent threats, and to improve risk management and 

monitoring; 

(2) Expanding data analytics tools to integrate and analyze the large and ever-increasing 

volume of financial data we receive, enabling us to detect potential fraud or suspicious 

behavior earlier and allocate resources more effectively; 

(3) Improving our examination program through advanced risk assessment and surveillance 

tools that help identify high-risk areas for further examination; 

( 4) Enhancing additional systems that support out enforcement program, including applying 

sophisticated algorithms that foster the detection of potential insider trading and 

manipulation; 

(5) Streamlining public access to our EDGAR electronic filing system; and 

(6) Investing further in business processes automation and enhancements, including the 

retirement of legacy systems, which will drive cost efficiencies and improve security 

across the agency. 

Leasing 

An important component of the SEC's funding needs over the next two years is to 

support the leasing of office space. The current leases for the SEC's headquarters buildings 

(Station Place I, II and III) will expire in fiscal years 2019,2020 and 2021, respectively. In 

addition to the funds requested to support our operations, the SEC is requesting funds in fiscal 

year 2018 necessary to participate in the General Services Administration's (GSA's) competitive 

procurement process for a successor lease for the SEC's headquarters. In accordance with its 

standard process, GSA has requested that the agency set aside the funds that might become 

necessary to cover construction and related costs should the SEC need to move from its current 

building. 15 None of these funds would be used for the operations of the SEC, and the agency has 

proposed appropriation language that provides a mechanism whereby any unused portion of 

these funds would be refunded to fee payers. 

Similarly, in fiscal year 2019, funds will be required for the GSA procurement of a new 

lease for the SEC's New York Regional Office, for which the current lease is set to expire in 

2021. As with the SEC's headquarters lease procurement, GSA requires that the SEC set aside 

funds for potential construction and related costs in the event that the competitive acquisition 

15 According to GSA's schedule, a new lease would be awarded in fiscal year 2018. 

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process might result in the SEC needing to move to a new building. None of these funds would 

be used for the operation of the SEC, and any unused portion would be refunded to fee payers. 

Conclusion 

My aim for today's testimony is to provide a window into the scope of the SEC's daily 

work to advance our mission of protecting investors, maintaining fair, orderly and efficient 

markets and facilitating capital formation. In closing, I want each of you- and all of your 

constituents, including, in particular, Main Street investors - to know that the SEC is open for 

business. We want to serve you and hear from you. Whether it be through providing 

educational resources and investor alerts on investor.gov, supporting small businesses and other 

issuers seeking to raise capital or vigorously enforcing the securities laws, SEC staff and division 

and office leadership stand ready and willing to engage with any and all who we can assist, and 

who can inform us, on issues consistent with our tripartite mission. 

I thank this Committee and its members, especially the Chairman and Ranking Member, 

for their continued support of the SEC and its staff, and I look forward to answering any 

questions you may have. 

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Qt:nngr.e.s.s nf tfJ.e 1ltniteb ll}tute.s 

1llllnslfingtnn, ~~~ 20515 

The Honorable Jay Clayton 

Chairman 

September 26, 2017 

U.S. Securities and Exchange Commission 

100 F Street, NE 

Washington, DC 20549 

Dear Chairman Clayton: 

As members of the House Financial Services Commit;tee, we write in regard to your statement 

from September 20, 2017, regarding cybersecurity and the U.S. Securities and Exchange 

Commission's (SEC) Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. 

According to your statement, a "software vulnerability" in the EDGAR system was exploited and 

led to the unauthorized access of nonpublic information. This raises serious concerns for all 

market participants regarding the fairness of the capital markets and the security and accuracy of · 

information stored on the EDGAR system. 

As you know, the EDGAR system is the central location in which companies must file SEC 

registration statements, periodic reports, and other required forms. In total, the system \eceives 

and processes approximately 1. 7 million filings each year. Given the amount of information 

filed, disseminated, and stored through the system, the EDGAR system maintains an important 

role in the capital markets by increasing efficiency and fairness for all investors and companies 

while promoting transparency. However, the system only benefits all market participants when 

market participants are assured that the information contained on the system is properly 

safeguarded and that the underlying reports are accurate. 

In light of this cybersecurity breach, we request that you provide us answers to the following 

questions: 

I. When was the software vulnerability discovered and what steps did the SEC take to 

address this particular vulnerability? 

2. When did the SEC learn of potentially illicit trades using the information accessed 

through the software vulnerability? Please provide us with an overview of the potentially 

illicit trading activity, including the size and scope of the trades and number of 

companies involved. 

3. What types of information and/or filings were accessed through this software 

vulnerability? 

4. How many companies' filings and/or data were improperly accessed through this breach? 

PRJNT£0 ON RECYCLED PAPER 
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5. Has the SEC notified companies and shareholders affected by the unauthorized access of 

information? If not, does the SEC plan to do so and when? 

6. While you state that the SEC does not currently believe the breach resulted in the 

unauthorized access of personally identifiable information (PII) of investors, this is not 

guaranteed in future breaches. What steps does the SEC plan to take to ensure 

individuals' identities are protected in the future? 

7. What steps, if any, does the SEC plan to take to better address cybersecurity 

vulnerabilities in the EDGAR system? 

Cybersecurity is a growing threat in the financial services industry, and we look forward to 

working with you to better address cyber vulnerabilities moving forward. Thank you in advance 

for your timely responses to our questions. 

John K. Delaney 

~f-~-- . avid Scott 

~~ 

J 

~~ sh Gott eimer 

J'~.!!J ~flk-- Brad Sherman 
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~ Vtcente Gonzalez 

owenMOOre 

~~··-

~ 

~ d#: 

Daniel T. Kildee Charlie Crist 
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House Committee on Financial Services 

Examining the SEC's Agenda, Operations, and Budget 

Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congresswoman Joyce Beatty: 

• In December 2016, the SEC Advisory Committee on Small and Emerging Companies 

sent your predecessor, Chairwoman Mary Jo White, a recommendation regarding 

disclosure of board diversity. In this recommendation letter, the advisory committee 

found that the previous 2009 rule.regarding diversity disclosures "failed to generate 

information useful to stockholders, employees and customers in assessing board 

diversity." 

To remedy that, the Committee made a recommendation for the Commission to amend 

Item 407(c)(2) of Regulation S-K to require issuers to describe the extent to which their 

boards are diverse and require them to include each board member's race, gender and 

ethnicity, to the extent individual directors self- identify. 

Are you aware of this recommendation by the Advisory Committee? If so, what are 

your plans for moving forward with their recommendation? 

Response: 

I am aware of, and have read, this recommendation by our Advisory Committee on Small and 

Emerging Companies, and I am appreciative of the effort and thoughtfulness that underlies the 

recommendation. When the Commission adopted board diversity disclosure requirements in 

2009, it recognized that companies may define diversity in different ways and noted that for 

purposes of the disclosure requirements, companies should be allowed to define diversity in 

ways that they consider appropriate. While I believe it is important for the rule to maintain its 

flexibility, if a company considers diversity in identifYing board nominees, it should provide 

clear disclosure about how it does so. For example, companies should be transparent to investors 

about the experiences, perspectives, qualities and/or attributes they consider, which may include, 

but are not limited to, race, gender, and ethnicity. 

I have asked the Division of Corporation Finance to continue to (l) monitor disclosures in this 

area, evaluate compliance with the existing rule, and consider the Advisory Committee's 

recommendation and other feedback we receive from investors, registrants and other parties and 

(2) make recommendations to the Commission regarding additional Commission action, if any, 

as appropriate. 
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Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congressman Hultgren : 

Capital Formation!FSOC 

• As you know, since the passage of the Dodd-Frank Act, members of the House 

Committee on Financial Services have raised concerns about the encroachment of banklike regulation on our capital markets. 

I) Generally speaking, what has been your experience as a member of the FSOC during 

your time as Chairman of the SEC? 

2) Do you believe other members of the FSOC are sensitive to how the regulations from 

their agencies impact the capital markets? 

3) What do you feel your role is on the FSOC for ensuring the SEC's jurisdiction is not 

encroached upon by other regulators, such as the Federal Reserve? 

Response: 

The SEC, together with the U.S. Commodity Futures Trading Commission (CFTC), is a primary 

regulator of the U.S. capital markets, and we have developed significant expertise over the years 

in regulating these markets. The SEC shares oversight of the broader financial services industry 

with other financial regulators charged with overseeing related or overlapping financial activity 

and market participants. Understanding the impact of regulatory activity among financial 

regulators was important prior to the formation of the Financial Stability Oversight Council 

(FSOC) and is no less important today. Overall, I believe that the FSOC has proved to be a 

useful mechanism for engagement and consultation on regulatory initiatives that affect the 

capital markets. More broadly, the FSOC provides an important forum for identifYing systemic 

risks across different markets and market participants. 

It is, of course, important for other regulators to be sensitive to the effects of their regulatory 

regimes and actions on the capital markets and market participants. In this regard, my 

experience to date is that the FSOC's members generally recognize that the federal regulatory 

members operate under distinct statutory mandates and have different regulatory missions. I am 

able to share with the FSOC's members my perspective about potential impacts of current and 

proposed regulations of other regulatory bodies on capital markets, and our respective staffs also 

have ongoing engagement on such matters. I am committed to working closely and 

cooperatively with my fellow regulators to further the work of the FSOC, while at the same time 

being sure to focus on furthering the Commission's own mandate. 

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Equity Market Structure 

• There has been a lot of speculation regarding what is next for equity market structure. 

How will exchanges continue to differentiate themselves, and where will traders look for 

an edge? There's a lot of conversation about the speed race and complexity between 

trading venues, but one development that has not gotten a lot of consideration before the 

Commission is what is happening inside the matching engine of exchanges. Instead of 

having competing trading algorithms, we may end up with competing order type 

algorithms within the exchange matching engines. 

I) What do you believe are the implications for our market structure of new order type 

algorithms within the exchange matching engines, if any? 

Response: 

Regarding the general premise of your question, I believe you are correct. Exchanges are 

continually seeking ways to compete for order flow by offering new order types with complex 

functionalities that may appeal to market participants. In general, I believe competition for order 

flow among exchanges is beneficial because of the incentives it can generate for innovation and 

lower fees. That said, market participants have commented that, to some extent, innovative 

and/or complex exchange order types may enable a wider range of benefits from algorithmic 

strategies. It also has been asserted that those benefits may not extend to the market more 

broadly. Staff will continue to monitor the innovations in order types and their impacts on the 

capital markets, market participants and investors. 

2) Do you believe this trend could lead to excessive market complexity as the exchanges 

use this as a means to differentiate their trading venues? For example, what happens 

if certain order types that claim to account for or "predict" future market conditions 

actually contribute to new market conditions? 

Response: 

I believe you are correct in this area as well. The U.S. equity market structure is complex. 

Currently, twelve registered securities exchanges, dozens of alternative trading systems, and 

many more broker-dealers compete for equity order flow and volume. The increasingly diverse 

array of order types offered by exchanges adds to this complexity. New algorithmic order types 

and strategies can alter market conditions and lead to responses from other market participants 

that may be difficult to predict or value from an market integrity and efficiency perspective One 

of the ways in which self-regulatory organizations have sought to address the potential of 

algorithmic trading to create instability has been to develop automated mechanisms that 

moderate price volatility. For example, the "Limit Up-Limit Down Plan" is a national market 

system plan that imposes limits on the extent to which prices can move too far too fast within a 

five-minute period. Staff will continue to explore these issues and proactively analyze their 

implications for our markets and investors. 

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3) Does the Commission plan to opine on this topic? Or, does the Commission intend to 

put this question before the Equity Market Structure Advisory Committee? 

Response: 

A registered exchange must file a proposed rule change with the Commission when it wishes to 

offer a new order type that materially affects its operations. The proposal is published for public 

comment, and the Commission then must decide whether to approve or disapprove the proposal. 

The process thereby provides an opportunity for the public to raise concerns about the effect of a 

proposed new order type on, among other things, market stability and integrity. The 

Commission's order either approving or disapproving the proposal provides an opportunity for 

the Commission to address these issues. 

The SEC's Equity Market Structure Advisory Committee's (EMSAC) charter expired in January 

2018. Going forward, rather than extending EMSAC, our plan is to organize targeted 

roundtables and other meetings among market participants on discrete equity market structure 

issues, which will feature experts on each topic representative of a broad diversity of viewpoints. 

I expect that order type and order complexity will be discussed in one or more of these meetings. 

More broadly, these meetings will provide further opportunities for discussions about these 

critical issues affecting our equity markets. 

Money Market Fund Rules 

• On July 23, 2014, the Securities and Exchange Commission adopted amendments to the 

rules that govern money market funds. The rules, which went into effect last fall, require 

a floating net asset value (NA V) for institutional prime money market funds, and 

implement liquidity fees and redemption gates. 

On December 8, 2016, the Capital Markets Subcommittee held a hearing that included 

testimony regarding the impact of these rules on our fixed-income markets. Testimony of 

Anthony Carfang, Managing Director of Treasury Strategies, noted, "SEC regulations 

that went into effect in October 2016 have crippled the market for private sector and 

municipal money market mutual funds (MMFs). The regulations contain a number of 

provisions which make these funds less attractive to investors. The result has been a $1.1 

trillion dollar shift of capital out of the private sector and into government funds, limiting 

capital availability and raising borrowing costs for America's businesses and 

municipalities." 

Following implementation of the rules: 

I) Has the Commission conducted a review of the 2014 Rules and their impact on fixed 

income markets? If not, does the Commission intend to conduct such a study? 

2) Are the findings of Treasury Strategies consistent with the findings of the Commission? 

a. Specifically, is the "$1.1 trillion dollar shift of capital out of the private and into 

government funds" attributable to the 2014 Rules? 

b. How much of this shift is attributable to the 2014 Rules, if any? 

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c. Are there any other factors, such as the interest rate environment, that contributed 

to this shift? 

3) Has the Commission considered if the 2014 Rules contribute to an increased cost of 

borrowing for states and local governments issuing debt? If so, how does the Commission 

weigh this against investor protection and broader market implications? 

4) The history of this rulemaking suggests that, through the Financial Stability Oversight 

Council, the Federal Reserve exerted pressure on the Commission to institute new rules 

covering money market funds. 

Response: 

a. Have you discussed the 2014 Rules with the Chair of the Federal Reserve, Janet 

Yellen? 

b. Do you believe there is an increased risk investment companies sponsoring money 

market funds could be designated as systemically important by the FSOC if the 2014 

Rules are repealed? Have you discussed this with the current Chairman of the FSOC, 

Secretary Mnuchin? 

The staff of the Commission has been monitoring the implementation of the 2014 reforms on an 

ongoing basis, including reviewing their impact on money market funds (MMFs), municipal 

issuances and the short-term funding markets. Based on their review and analysis, the staff has 

shared the following observations: 

• As MMFs were implementing the 2014 reforms, there was a shift in assets of 

approximately $1.1 trillion from prime MMFs into government MMFs. 1 Although there 

was a large reallocation among fund types, overall MMF assets remained largely stable 

(at about $3 trillion) throughout this period and to date. 

• The time period after the Commission adopted the 2014 reforms was a period of 

extraordinarily low and stable interest rates, which may have affected investments in 

MMFs and allocation of investments across different types ofMMFs. As a result of these 

low and stable interest rates, the yield differential between prime and government MMFs 

has been relatively low and relatively constant compared to historic spreads. While it is 

difficult to separate actions driven by regulated change from actions driven by market 

factors (and the two may not be independent), the minimal difference in return between 

prime MMFs and government MMFs may have led some investors to move to 

government MMFs to avoid any potentially higher risk associated with holding prime 

MMFs. More recently, we have experienced a rising interest rate environment, with the 

Federal Reserve raising short-term interest rates several times. This has resulted in yield 

increases for MMFs generally, and also may affect investment choices among MMFs 

going forward. 

The staff has further informed me that as the reforms went into effect, many fund managers 

chose to realign some of their fund offerings and close other funds, many of whose assets had 

been shrinking during the extended low interest rate environment. These changes have led to 

1 Based on staff analysis of Form N-MFP data. 

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some reductions in investment in municipal MMFs, particularly when combined with the 

reallocation of assets from prime to government MMFs that I mentioned above. 

Some market participants and municipal issuers suggest that this decrease in demand for shorttenn municipal securities from MMFs and related increase in demand for government securities 

from MMFs as discussed above may have adversely affected the short-tenn municipal funding 

market. The staff has observed the following: 

• Although the amount of outstanding municipal securities increased by 5% from $3,617 

billion in 2013Q4 to $3,803 billion in 2017Q3, the municipal securities held by all types 

of MMF s decreased from 8.1% in tenns of amount of outstanding in 20 13Q4 to 

3.6% in 20 17Q3. 2 This decline may be attributable to the shift to government MMFs as 

well as a number of other factors, including a reduction in the creditworthiness of third 

party providers of credit and liquidity enhancements for municipal securities held in 

MMFs, a trend that preceded the 2014 refonns. 3 . 

• More broadly, it is noteworthy that: ( 1) other types of mutual funds have increased their 

holdings of the total outstanding municipal securities from 13.9% in 2013 to 17.9% as of 

2017Q3; and (2) US-chartered depository institutions have also increased their supply of 

capital to municipal issuers from 10.9% of the total in 2013 to a total of 14.7% as of 

2017Q3. 

Regarding the cost of short-tenn municipal borrowing, staff has infonned me that in the recent 

interest rate environment, yield spreads for short-tenn municipal securities (compared to shorttenn Treasuries) have been similar to yield spreads prior to implementation of the 2014 refonns, 

although more recently the absolute yield has increased as a result of the increasing interest rate 

environment. These yield spreads did increase right around the October 2016 implementation 

date for the refonns, but the increase dissipated shortly thereafter. 

In considering potential adverse effects on short-tenn funding markets against goals of the 

refonns, it is important to note that the Commission at the time indicated that the impetus behind 

the refonns was a concern that MMFs, as they existed then, could pose risks to investors and the 

broader markets. The Commission in particular was concerned by MMF features that may have 

created a first-mover advantage that would, in tum, incentivized investor runs during periods of 

market stress. The Commission's adopting release further noted the hann that can result from 

rapid investor redemptions during periods of market stress, as the Reserve Fund's Primary Fund 

"broke the buck" and other prime institutional funds experienced heavy redemptions - which in 

tum caused fund managers to retain cash, and that in tum constrained liquidity in short tenn 

financing markets. Ultimately, as the 2014 release describes, the Department of the Treasury 

intervened with its Temporary Guarantee Program- extraordinary measures that helped quiet 

2 See Federal Reserve Board's Flow ofFunds, Balance Sheets, and Integrated Macroeconomic Accounts Third 

Quarter 2017 available at https://wvvw.federalreserve.gov/releases/zl/current/zl.pdf. 3 See https://wwvv.moodys.comlresearch!Moodvs-downgrades-US-muni-obligations-backed-by-banks-andsecurities-·PR 248937. 

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the market disruptions. Treasury was subsequently prohibited by statute from undertaking such 

measures in the future. The Commission's 2014 rulemaking therefore included certain structural 

measures that were designed to mitigate run risk in MMFs. These measures include new tools 

that are designed to allow funds. to manage heavy redemptions and additional price transparency 

to potentially mitigate the first mover advantage incentives. I caution that these measures, while 

believed by many with market experience to be beneficial for various reasons, have not been 

tested in practice. 

The FSOC, of which the Chairman of the SEC is a member, is charged with making 

determinations on whether certain nonbank financial companies and financial market utilities are 

designated for heightened supervision and prudential standards. The FSOC also has the ability 

under Section 120 of the Dodd-Frank Act to make recommendations to primary regulatory 

agencies to apply new or heightened standards and safeguards for financial activities or practices. 

It was under that authority that the FSOC previously proposed recommendations for structural 

reforms ofMMFs. 

Because, as the SEC Chairman, I am only one voting member of the FSOC, and designations of 

systemically important financial institutions are made by the FSOC as a whole, I cannot speak 

with any meaningful degree of certainty as to whether, if the SEC's 2014 MMF rules were 

amended or repealed, there would be an increased risk of designation of individual investment 

companies sponsoring MMFs. Furthermore, I note that on November 17,2017, in accordance 

with a Presidential Memorandum, the U.S. Department of Treasury issued a report that provides 

several recommendations on the FSOC determination and designation process. For similar 

reasons, I cannot predict whether those recommendations will be implemented, and, if so, how 

those changes might affect any decision about designating companies sponsoring MMFs as 

systemically important. 

Finally, I have not had any substantive discussion regarding the potential repeal ofthe SEC's 

2014 MMF rules or the potential impact of repeal with either the former Chair of the Federal 

Reserve Board, Janet Yellen, current Chairman Jay Powell, or the Chairman of the FSOC, 

Treasury Secretary Steven Mnuchin. 

RegABII 

• When the SEC put forward its revised 2017 regulatory agenda, one of the items that 

appears to have fallen off the list from the previous Fall (2016) is continued work on 

Regulation AB II, the rules designed to enhance transparency and disclosures for assetbacked securities (ABS). We appreciate that the Commission has done a lot of work with 

respect to certain asset classes (finalizing in August 2014 a portion of the asset level 

disclosure rules for several asset classes including auto, CMBS, and RMBS), but to date 

asset level disclosure requirements for many asset classes are still considered an open 

item per the Final Reg. AB II rules. 

l. Does the SEC intend to finish its work on Regulation AB II? 

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2. Will the market see regulatory guidance in the areas of credit card, student loan, 

equipment loans/lease and floorplan ABS? 

Response: 

Since adoption of the Regulation AB II disclosure requirements in 2014, there have been a 

number of developments in this space. Among other things, the U.S. Department of the Treasury 

released its report on the U.S. capital markets in October 2017 recommending that the SEC 

signal that it will not extend Regulation AB II disclosure requirements to additional securitized 

asset classes (which include asset backed securities collateralized by equipment loans or leases, 

floorplan financings, student loans, and revolving credit card debt) in the near term. 

We are continuing to monitor this area, and amendments to Regulation AB appear on the 

Commission's Longer Term Regulatory Flexibility Act agenda for future consideration. I have 

asked the staff to continue to monitor regulatory and market developments in this area and, to the 

extent necessary or appropriate, make recommendations to the Commission. 

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Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congressman Tom MacArthur: 

• Please describe the pros and cons of the current relationship between the exchanges 

regulatory role as SRO's and commercial interests as market participants? 

Response: 

In designating the national securities exchanges as self-regulatory organizations (SROs), the 

Securities Exchange Act of 1934 assigns to them the responsibility to oversee trading on their 

respective markets, regulate the conduct of their members, and enforce compliance by their 

members with the federal securities laws. 

The SRO model is viewed as having several benefits. Given the complexity of the U.S. 

securities markets, it can be more efficient and effective for the exchanges, which are more 

intimately familiar with the nuances of market and member operations, to develop and enforce 

rules relating to their markets and the conduct of their members. Moreover, direct supervision at 

the federal level could involve a significant expenditure of public funds, while self-regulation 

allows the government to leverage its resources through its oversight ofSROs. SROs can 

establish and enforce standards of conduct for market participants that go beyond the legal 

requirements of the federal securities laws, including ethical standards. Moreover, the flexibility 

afforded by self-regulation can be important in regulating a complex, varied, and dynamic 

securities industry. 

On the other hand, conflicts can arise. For example, funding is limited and exchanges must 

choose between funding their business operations and funding regulation, oversight and 

enforcement. This conflict has become more apparent as exchanges have transitioned to forprofit businesses that operate in a highly competitive environment and have shareholders to 

whom they must answer. Exchanges also can face conflicts when regulating members that send 

significant order flow to the exchange or that may even be competitors (e.g., members that 

operate an alternative trading system). Exchanges are responsible to monitor their listed issuers 

for compliance with the exchange's listing standards, and to de list those issuers that no longer 

are compliant with the listing standards. However, exchanges also must compete with other 

exchanges to attract and retain listings. 

The Trading Venues Subcommittee of the SEC's Equity Market Structure Advisory Committee 

(EMSAC) looked at these potential conflicts, and, more specifically, at existing limits on 

exchanges' liability, the impact of their role in the governance of National Market System 

(NMS) Plans, and their operation of consolidated market data feeds. The Subcommittee 

concluded that overall the current regulatory structure works well and generally is operating 

fairly and effectively and did not believe that a significant overhaul of the current structure was 

necessary. The EMSAC supported the Subcommittee's recommendations that the SEC take 

action to make the role ofNMS Plan Advisory Committees more significant, formalized, and 

uniform and to promote more efficient technical implementation of SRO proposed rule changes. 

I have asked the staff to continue to monitor this issue, and we welcome continued dialogue with 

you as well as with market participants. 

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Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congressman Robert Pittenger: 

• Mr. Chairman: I am concerned about unintended negative consequences of the CECL 

accounting standard recently developed by FASB. Forecasts by many respected 

corporate CFOs of slower economic growth and fewer consumer choices under CECL are 

worrisome, and I believe, deserving of an in-depth examination before the standard is 

implemented. The new standard is likely to incentivize short-term lending and adversely 

affect the price and availability of loan products such as the 30 year fixed rate mortgage, 

small business loans, and loans to non-prime customers. I am also concerned that 

through its effect on the cost and availability of capital, CECL will drive pro-cyclicality 

so that economic downturns are accelerated and recoveries are delayed. I urge the SEC 

to do everything in its power to delay the rule pending a thorough quantitative impact 

study (QIS) by a respected third party, and, if significant negative consequences to 

growth, credit availability, financial stability, or employment are identified, prevail upon 

FASB to re-issue the standard so it may accomplish FASB's narrow accounting 

objectives without broadly detrimental effects on the US economy. 

Response: 

The FASB's project that led to the issuance of the new credit losses standard has its origins in the 

financial crisis, where some market participants believed the existing "incurred loss" model 

resulted in the untimely and delayed recognition of credit losses, and ultimately, lower levels of 

loan loss reserves than otherwise may have been anticipated by management. Accordingly, 

F ASB' s stated objective for issuing the new credit losses standard was to provide users of 

financial statements with "more decision-useful information about the credit risk inherent in 

financial assets and the change in expected credit losses occurring during the period." As 

opposed to the prior "incurred loss" model, the new credit losses standard is intended to more 

closely align an entity's financial reporting with management's estimate of expected credit 

losses. 

The FASB, as an independent accounting standard setter, focuses on developing accounting 

standards for financial reporting that provides investors with the information they need to make 

informed investment decisions. When setting standards, the F ASB 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. It is of course true that information can affect the 

analysis of what capital allocation decisions should be made or what actions should be taken by 

management. However, the FASB does not seek to influence the outcome of those decisions in 

determining what standards should apply. While I share your concerns about the availability of 

credit and liquidity, particularly in times of stress, I believe that it is appropriate for the F ASB to 

focus on the quality of the information provided to investors, and not specific outcomes, in order 

to ensure continued investor confidence in the accuracy and quality of reported information, 

which is critical to capital formation over the long term. I further believe that the way 

management evaluates performance and assesses risk in practice should be a touchstone for 

FASB's standard setting, and they have assured me that is the case in this instance. 

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To be more specific, while financial institutions are still evaluating the effect of the new 

standard, some have indicated that the new requirement to immediately recognize expected 

losses instead of deferring losses until "incurred" (as under the existing standard) could 

adversely impact an entity's ability to lend in an economic downturn or slow an economic 

recovery. I am concerned by these issues. But I would also be concerned if fmancial reporting 

standards were not providing investors with relevant, reliable, and timely information about a 

financial institution's credit risk and its change in expected credit losses. Many ofthe concerns 

expressed appear to me to be the result of the interaction of the new standard with existing 

regulatory capital requirements. 

We at the SEC want to be as helpful and constructive as is practicable. Specifically, with regard 

to knock-on regulatory effects, I appreciate that financial institutions need to plan for potential 

changes to their regulatory capital requirements and am aware that these regulatory capital 

requirements are currently being analyzed by the appropriate banking regulators and other 

supervisory bodies in connection with the changing accounting standards. In particular, the 

Basel Committee on Banking Supervision, which provides a forum for regulator cooperation on 

banking supervisory matters, recently issued transition guidance with respect to the impact of 

accounting changes on regulatory capital and specifically indicated that it will further monitor 

the effect of the new standard's impact on capital. In addition, the U.S. Treasury, in response to 

the President's Executive Order on Core Principles for Regulating the United States Financial 

System, recommended that the potential impact of the new standard on banks' capital levels be 

carefully reviewed by U.S. prudential regulators with a view towards harmonizing the 

application of the standard with regulators' supervisory efforts. Most recently, the Office of the 

Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the 

Federal Deposit Insurance Corporation jointly noted that they are considering whether it would 

be appropriate to make adjustments to their capital rules in response to CECL and its potential 

impact on regulatory capital. 

The Commission's Chief Accountant has expressed his encouragement and support for these 

efforts to ensure regulatory requirements are updated, if necessary, to account for the impact of 

any change resulting from the new standard. I also support the ongoing efforts by the 

appropriate banking regulators and other supervisory bodies to analyze the regulatory capital 

requirements in connection with the changing accounting standards. Our experience 

demonstrates that when an accounting standard is changed in a way that provides investors with 

better information but has unwarranted results under other regulatory standards, it may be 

necessary to consider modifying those standards (e.g., the bank capital rules) to address that 

unwarranted result. SEC staff will continue to engage with the prudential regulators on this issue 

and provide any assistance they require as they undertake their process for reviewing their 

standards. 

Separately, the Commission staff has actively monitored the FASB's standard-setting process 

and continues to monitor implementation activities undertaken by stakeholders and the F AS B. 

In particular, the Commission staff has actively monitored the FASB's Transition Resource 

Group for Credit Losses (TRG}, whose members include financial statement preparers (including 

community banks and credit unions}, auditors, users, and financial services regulators, and has 

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encouraged banks to bring questions about the accounting standard before the TRG for 

discussion. The staff of the Office of Chief Accountant has been and will continue to assess 

whether FASB's standard is having its intended effect of aligning reporting with management's 

analysis and whether there are any unintended negative consequences. 

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Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congressman Brad Sherman: 

• Will you move the SEC toward a situation where either you or the Financial 

Accounting Standards Board defines non-GAAP terms that are important to investors, 

like "same store sales" and "backlog"? 

Response: 

The F ASB establishes accounting standards that companies follow in preparing financial 

statements that are included in periodic reports filed with the SEC. The SEC establishes rules for 

information presented elsewhere in those reports, which would include non-GAAP financial 

measures that are included in documents submitted to the SEC. 4 As has been discussed in some 

detail, in principle, the F ASB could define a non-GAAP term by adding it to the Accounting 

Standards Codification (i.e., writing it into GAAP), or modifying an existing GAAP item that is 

frequently modified by issuers to create a non-GAAP measure. In addition, while the SEC 

already regulates the way in which non-GAAP items are disclosed to investors, the SEC could 

implement more specific requirements around certain terms. Deciding whether to exercise that 

authority involves both policy and practical considerations. 

With respect to the policy considerations, on the one hand, bringing greater defmition to nonGAAP terms could enhance comparability and also minimize the possibility that the non-GAAP 

number would be used inappropriately. On the other hand, investors also value understanding 

the key metrics that an issuer's management uses in running the particular business at issue, and 

requiring the use of certain uniform metrics that are not those used by the managers of that 

business may diminish key investor insights into management's decision-making. Thus, the 

SEC's requirements to date focus on prohibiting misleading metrics and requiring disclosures to 

help investors put the non-GAAP numbers into their proper context. 

With respect to the practical considerations, the F ASB recently solicited broad stakeholder input5 

regarding standard setting projects it should consider adding to its agenda, including financial 

performance reporting (which includes non-GAAP financial measures). The FASB has also 

conducted other outreach to investors as well as other stakeholders to better understand their use 

of non-GAAP financial measures. SEC staff has observed from comment letters and other 

forums that market participant feedback indicated that constituents wanted the F ASB to prioritize 

projects on distinguishing liabilities from equity, segment reporting, and financial performance 

reporting. With respect to financial performance reporting, the feedback suggested that market 

participants were most interested in a project that provided disaggregated information regarding 

financial performance. 

4 Item lO(e)(l)(ii)(C) ofRegulation S-K states "a registrant must not ... present non-GAAP financial measures on the 

face of the registrant's financial statements prepared in accordance with GAAP or in the accompanying notes." 5 See F ASB Invitation to Comment: Agenda Consultation at: 

http://www. fasb.org/jsp/F ASS/Document C!DocumentPage?cid= 1176168357653&acceptedDisclaimer=true. 

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The F ASB also received feedback that highlighted resource concerns relating to potential new 

standard setting projects. In recent rears, the F ASB has completed major standard-setting 

projects regarding revenue, 6 leases, and credit losses. 8 Market participants indicated that they 

are focused on successful implementation of these new standards and thus have limited resources 

to devote towards additional major standard setting projects. Recognizing the importance of 

being able to solicit and receive market participant feedback throughout the standard-setting 

process, the F ASB ultimately decided to limit the number of new projects. 

Notwithstanding the above, the FASB has demonstrated a willingness and ability to take on a 

standard setting project in an attempt to improve the GAAP standards where the existing 

standards may not best reflect the underlying economics. 

Beyond the work of the F ASB, I also would like to highlight that over the past two years, the 

SEC staff has been active in assessing the non-GAAP financial measures used by companies and 

investors, including ensuring that the existing requirements contained in SEC rules and 

regulations are adhered to in connection with the presentation of any non-GAAP financial 

measures. The Division of Corporation Finance and the Office of the Chief Accountant have 

worked together to analyze the wide range of non-GAAP financial measures presented in the 

marketplace and, where appropriate, have issued comments asking companies to provide 

disclosures required by SEC rules and regulations or to revise the disclosures in order to comply 

with those rules and regulations. In the staff's view, this process has led to significant 

improvements in non-GAAP financial measures, including the related disclosures. 

• F ASB, using the power you've given them, requires the immediate write-off of all 

research and development costs, even successful ones. This is a contradiction of 

accounting theory. I would hope that you would take a look at the extreme harm done 

to our economy and look at all the search that is not being done and the inventions 

that are not being developed because of that unwarranted departure from accounting 

theory. Will you do that? 

Response: 

In 2003, the SEC determined that the Financial Accounting Foundation (FAF) and the FASB met 

the criteria for its financial accounting and reporting standards to be recognized as "generally 

accepted," as set forth in the Sarbanes-Oxley Act of2002. 9 The FASB focuses on developing 

accounting standards to show a complete, transparent, and unbiased picture of a company's 

financial position and performance, providing investors with useful information upon which to 

make informed investment decisions. 

6 See FASB ASC Topic 606 7 See FASB ASC Topic 842 8 See FASB ASC Topic 326 9 See SEC Release Nos. 33-8221; 34-47743; IC-26028; FR-70, available at https://www.sec.gov/rules/policy/33-

8221.htm. 

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You have highlighted research and development costs in your question. Expenditures for 

individual research and development projects normally have a degree of uncertainty, although 

the element of uncertainty may diminish as a project progresses to become a new or improved 

product or process. 

The theoretical question for the standard setters has been whether it serves a useful purpose to 

investors for companies to expense those expenditures as incurred or to accumulate them as an 

asset that is allocated over some future period. This question represents a fundamental challenge 

of associating, on a direct cause and effect basis, research and development expenditures, on the 

one hand, with uncertain revenues on the other hand. Other than costs relating to inventory and 

internally developed software costs, research and development costs are generally recorded and 

expensed as incurred. 

The approach to recording research and development costs as expenses is intended to reflect the 

uncertainty of future benefits involved. For example, if expenditures are undertaken for research 

and development to create a new product or service and they are recorded as assets, but those 

activities lead to abandoning old efforts in favor of new discoveries, or the market evolves, or a 

competitor comes to market first, and the expenditures for the original research fail to produce 

revenue (or even sufficient revenue) to recover the accumulated costs, a company would need to 

expend further costs for the accounting effort of determining whether, and by how much, the 

"asset" may have to be written off, with the critical accounting judgments of "when" and "how 

much" presenting a possible risk for manipulation. I understand these issues have significance in 

F ASB 's analysis. That said, it is possible to strike the balance differently, as the International 

Accounting Standards Board (IASB) does for certain types of costs. 

Regardless of the expense and/or capitalization treatment for research and development costs, 

disclosure requirements are important. Where material, companies are required to provide 

informative disclosures regarding, among other things, research and development activities in 

Commission filings, including in the business description, management's discussion and 

analysis, and the financial statements. 

SEC staff has continued to observe that standard setting considerations for costs are not limited 

to just research and development but also include financial statement treatment of a wide range 

of other costs. I believe that the F ASB could consider as part of its agenda setting activities the 

need for a broader project on accounting for costs that would expand to more than just research 

and development costs. As discussed above, the F ASB monitors and considers standard setting 

requests received from constituents in prioritizing the projects on its agenda. I am supportive of 

the F ASB' s process of soliciting and monitoring feedback from constituents in determining 

which projects should be taken on by the FASB. Mindful of the practical considerations 

mentioned above, I am supportive of the F ASB further exploring whether a broader project on 

accounting for costs should be added to the agenda in the future. 

• Mr. Davidson of Ohio and I have introduced a bill to direct the SEC and FINRA to 

develop and implement risk controls to safeguard market data and to direct the CAT 

contractor to develop risk controls to protect CAT. The CAT operation would be 

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Response: 

prevented from accepting data until it develops risk controls. What is your response to 

this concept? 

Establishing risk controls to safeguard Consolidated Audit Trail (CAT) data is critically 

important. SEC Rule 613 and the CAT NMS Plan require the self-regulatory organizations 

(SROs) and the CAT Plan Processor to develop and implement such controls. 

Specifically, the CAT NMS Plan approved by the Commission requires the SROs to ensure that 

the CAT repository meets specific data security requirements, including those regarding 

connectivity and data transfer, encryption, storage, access, and personally identifiable 

information (PH). The Plan Processor must develop a comprehensive information security 

program that addresses the security and confidentiality of all information within the CAT 

repository and associated operational risks, which includes all relevant standards from the 

National Institute of Standards and Technology (NIST) Cybersecurity Framework. The CAT 

NMS Plan also requires regular security audits performed by a qualified third party auditor. 

In addition, any PII data that CAT collects must be subject to heightened security protocols and 

standards. For example, PII must be stored in a database that is physically separate from the 

transactional database, access to PII must follow a role-based access model, and any login 

system that is able to access PII must be further secured via multi-factor authentication. Because 

of the sensitive nature ofPII, I have directed Commission staff to evaluate the need for PII in the 

CAT. This evaluation--which is ongoing-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 SROs. 

The SROs, which have direct oversight of the Plan Processor, are obligated to monitor the 

CAT' s information security program to ensure that it is consistent with appropriate industry 

standards for the protection of data and are required to implement comparable information 

security policies and procedures with respect to their handling of CAT data. The CAT' s Chief 

Information Security Officer is required to review each SRO' s CAT -related information security 

policies and procedures to ensure that such policies and procedures are comparable to the 

information security policies and procedures applicable to the Plan Processor. 

Similarly, the Commission, in approving the CAT NMS Plan, committed to implementing 

policies and procedures relating to the Commission's handling of CAT data that are comparable 

to the standards applicable to the SROs (and, in tum, the CAT repository), and the Commission 

will periodically review the effectiveness of these policies and procedures. A cross-divisional 

steering committee of senior Commission staff has been tasked with designing policies and 

procedures regarding Commission access to, use of, and protection of CAT data. 

The CAT repository also is expected to be a facility of each SRO. The SROs are "SCI Entities," 

and the CAT system is an SCI system. As a result, the CAT repository is subject to the 

requirements of Regulation SCI. The CAT NMS Plan states that data security standards of the 

CAT System shall, at a minimum, satisfy all applicable regulations regarding database security, 

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including provisions of Regulation SCI. The SROs are responsible for ensuring that the CAT 

repository as operated by the Plan Processor complies with Regulation SCI, including the 

establishment, maintenance, and enforcement of written policies and procedures reasonably 

designed to ensure that the CAT system has levels of capacity, integrity, resiliency, availability, 

and security adequate to maintain its operational capability. 

In addition to these data security controls, I expect that the roll-out of the various components of 

CAT will reflect an ongoing assessment of the sensitivity of the data reported and related 

security concerns and protections. 

• When do you expect to complete the rulemaking process for 30e-3 regarding allowing 

mutual fund companies to send annual reports to investors electronically? 

Response: 

Proposed rule 30e-3 under the Investment Company Act of 1940 would permit funds to transmit 

their reports and certain other materials to their shareholders by making the reports accessible on 

their websites subject to certain conditions being satisfied relating to (1) the availability of the 

report and materials; (2) obtaining shareholder consent; (3) notice to shareholders; and (4) 

delivery of materials upon request of the shareholder. We received a significant number of 

comment letters on the proposal, including from consumer advocates, the fund industry, 

intermediaries and other service providers, environmental groups, and other constituencies. 

The staff continues to consider all of the comments received and the issues raised regarding this 

proposal and, at my direction, is evaluating available options with regard to this rulemaking. As 

expressed in the Commission's Fall20 17 Regulatory Flexibility Act Agenda, I expect the 

Commission to take further action on recommendations from staff on rule 30e-3 during 2018. 

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Questions for Record for the Honorable Jay Clayton, Chairman of the U.S. Securities and 

Exchange Commission, from Congresswoman Nydia M. Velazquez: 

• Chairman Clayton, the hack of the EDGAR system raises serious questions about the 

SEC's cyber defenses and potentially puts at risk the safety of our financial system. 

The SEC currently houses sensitive information from some of our largest most 

systemically important financial entities, and our securities markets' technological 

infrastructure. That information is often obtained in the course of examinations under 

Reg SCI. If such information were to be compromised, it could leave some of our 

most systemically important financial institutions vulnerable to attack. During your 

review of the SEC's cyber policies, what steps were taken to ensure this extremely 

sensitive information is properly safeguarded on the SEC's servers? 

Response: 

Recognizing that in today's environment no system can be immune to a potential intrusion, it is 

critically important that Commission systems storing sensitive data are subject to appropriate 

management, operational, and technical security controls. The SEC, like all federal agencies, is 

required to follow the National Institute of Standards and Technology (NIST) Risk Management 

Framework, which is a framework designed to improve information security and strengthen risk 

management processes. In addition, we are in the process of implementing the NIST 

Cybersecurity Framework (CSF), which is a framework of industry standards and best practices 

to help organizations manage cybersecurity risk. We have submitted an implementation plan to 

the Department of Homeland Security and are executing on that plan-its successful 

implementation is a priority. 

We are also working closely with the Government Accountability Office (GAO) to address its 

findings regarding our information technology and critical system infrastructure. To date, SEC 

staff has implemented all but two information technology security recommendations from GAO 

that were open as of the start of fiscal year 2017 and has either completed or are working to 

address all of the recommendations issued as part of the GAO's July 27, 2017 audit report on 

information security. We have prioritized completing these recommendations and will continue 

to track them until GAO is satisfied with our implementation. 

The SEC has a number of additional efforts underway to review and uplift our EDGAR system 

as well as other systems that hold market sensitive data or personally identifiable information. 

We are reviewing the security systems, processes, and controls we have in place to protect the 

data we maintain. As an important part of this effort, we have engaged an independent 

consultant to conduct its own assessment and make recommendations. 

In addition, as I announced at the Committee's hearing, I have authorized the creation of a new 

position, the Chief Risk Officer, whose responsibilities will include identifYing, monitoring and 

mitigating risks across our Divisions and Offices. I have also authorized the hiring of additional 

staff and outside technology consultants to aid in our efforts to protect the security of the 

agency's network, systems, and data. 

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Follow Up Question: 

• Chairman Clayton, have you looked at alternative ways to ensure this sensitive 

information is shared with the appropriate regulators while limiting the potential for it 

to be compromised? 

Response: 

Active and open communication between and among regulators is critical to ensuring that the 

nation's financial system is robust and effectively protected. Information sharing and 

coordination are essential for regulators to anticipate potential cyber threats and respond to a 

major cyberattack, should one arise. Such information sharing, however, necessitates regulators 

to put in place protections for sensitive information they receive from, and produce to, other 

regulators. The SEC has information sharing arrangements with other regulators, which, among 

other things, set forth the types of information to be shared as well as the means for safeguarding 

it. These safeguards can include, for example, requirements to use appropriate security measures 

when transmitting the data as well as restrictions on who can access the data. Recently, I have 

asked our staff to catalogue, prioritize, and assess these arrangements, starting with the federal 

financial regulatory agencies that we interact with the most often. This project is in its early 

stages and involves multiple offices, including our Offices of Information Technology and 

General Counsel. 

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