U.S. GOVERNMENT PUBLISHING OFFICE

31–437 PDF WASHINGTON : 2018

OVERSIGHT OF THE SEC’S 

DIVISION OF ENFORCEMENT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

MAY 16, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–91 

( 

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(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

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 

SHANNON MCGAHN, Staff Director 

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(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

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(V) 

C O N T E N T S 

Page 

Hearing held on: 

May 16, 2018 ..................................................................................................... 1 

Appendix: 

May 16, 2018 ..................................................................................................... 29 

WITNESSES 

WEDNESDAY, MAY 16, 2018 

Avakian, Stephanie, Co-Director, Division of Enforcement, Securities and Exchange Commission .............................................................................................. 5 

Peikin, Steven, Co-Director, Division of Enforcement, Securities and Exchange Commission .............................................................................................. 6 

APPENDIX 

Prepared statements: 

Avakian, Stephanie and Peikin, Steven ......................................................... 30 

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(1) 

OVERSIGHT OF THE SEC’S 

DIVISION OF ENFORCEMENT 

Wednesday, May 16, 2018 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:04 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Present: Representatives Huizenga, Hultgren, Stivers, Wagner, 

Poliquin, Hill, Emmer, Mooney, MacArthur, Davidson, Maloney, 

Sherman, Lynch, Scott, Foster, Sinema, and Vargas. 

Also present: Representative Hensarling. 

Chairman HUIZENGA. Committee will come to order. Without objection the Chair is authorized to declare a recess of the committee 

at any time. This hearing is entitled, ‘‘Oversight of the SEC’s Division of Enforcement.’’ I now recognize myself for 4 minutes to give 

an opening statement. 

As we all know, the Securities and Exchange Commission (SEC) 

has a three-part mission: To protect investors; maintain fair, orderly and efficient markets; and to facilitate capital formation. Today’s hearing will focus on the policies and procedures of the SEC’s 

Division of Enforcement. 

The Enforcement Division investigates potential violations of the 

Federal securities laws and prosecutes these cases in the Federal 

courts or in administrative proceedings before the SEC’s own administrative law judges. 

The SEC is a civil enforcement agency—it cannot bring criminal 

charges itself, although it can refer cases for criminal prosecution 

to the Justice Department—that pursues civil money penalties, discouragement of illicit profits, and injunctions to prohibit future violations. However, the division has broad authority to subpoena documents and testimony from individuals and entities that are violating the Federal securities laws or who may have information relevant to a fraud investigation. 

In November of 2017, the SEC’s Enforcement Division released 

their annual report highlighting their enforcement priorities, which 

are guided by five core principles: First, focus on the Main Street 

investor; two, focus on individual accountability; three, keep pace 

with technological change; four, impose sanctions that most effectively further enforcement goals; and five, consistently assess the 

allocation of SEC resources. 

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In the Fiscal Year of 2017, the SEC brought 754 enforcement ac- tions and obtained almost $3.7 billion in disgorgement and civil 

penalties resulting from those actions. Additionally, $1.07 billion 

was distributed to harmed investors, which was a dramatic increase from the previous year’s $140 million. 

While this increase is significant, the SEC noted that much of 

the effort that resulted in the Fiscal Year 2017 numbers occurred 

in years prior. However, focusing on the number of enforcement actions and total amount of penalties to measure, quote/unquote, 

‘‘success,’’ can be misleading, in my opinion. 

I believe in this instance that these statistics only provide a very 

limited picture of the quality, nature, and effectiveness of a successful enforcement program. For example, violations that are prevented or deterred cannot accurately be measured by that particular statistic. 

I am pleased to see the Enforcement Division under Chairman 

Clayton’s leadership has redirected its focus away from the broken 

windows enforcement philosophy—i.e., targeting a high number of 

minor infractions in order to discourage larger securities violations—which was championed by former Chair Mary Jo White. 

In a 2013 speech, then-Chair White characterized this approach 

as, quote, ‘‘The theory is that when a window is broken and someone fixes it, it’s a signal that disorder will not be tolerated. But 

when a broken window is not fixed, it is signal that no one cares, 

and so breaking more windows costs nothing. The same theory can 

be applied to our securities markets. Minor violations that are 

overlooked or ignored can feed bigger ones and perhaps, more importantly, can foster a culture where laws are increasingly treated 

as toothless guidelines,’’ close quote. 

In a speech last week, the SEC Commissioner Hester Peirce stated that by, quote, ‘‘following the broken windows approach, perhaps 

the SEC should have changed its name to the Sanctions and Exchange Commission, because it acted like a branch of the U.S. Attorney’s Office for the Southern District of New York,’’ close quote. 

I couldn’t agree more with Commissioner Peirce. In my mind, I 

believe that this misguided approach to enforcement appears to 

have only been successful at boosting statistics, versus meaningfully improving investor protections. 

I am pleased to see that the division is shifting away from minor 

violations of securities laws, instead taking a more selective approach to enforcement. After all, we should not evaluate the true 

effectiveness of a regulatory agency or its enforcement program 

solely based on how many headlines it can generate. 

I look forward to hearing from our Co-directors of enforcement 

and on how well the rules are working and if there are regulatory 

gaps that need to be filled to allow you to do your jobs more closely 

and more carefully. 

With that, the Chair now recognizes the Ranking Member of the 

subcommittee, the gentlelady from New York, Mrs. Maloney, for 3 

minutes for an opening statement. 

Mrs. MALONEY. OK. I thank the Chairman for yielding and two 

of my minutes are going to Mr. Sherman. 

I thank you for holding this hearing. The Division of Enforcement’s job is to investigate and punish people who violate the secumcarroll on FSR431 with DISTILLER

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rities law, and it is the largest division in the SEC because its job 

is so very important. 

The Enforcement Division makes all of the other divisions at the 

SEC matter. After all, if you don’t enforce your regulations and 

rules, then you might as well not have them. But if it’s a job that 

the Enforcement Division can’t do alone—the division’s budget actually decreased slightly in Fiscal Year 2018, and it is still badly 

outspent by the financial industry and the white-collar defense bar. 

The SEC is responsible for overseeing over 8,000 public companies and more than 26,000 registered market participants, such as 

investment advisers and brokers, and there are tens of thousands 

of retail investors who rely on vigorous enforcement of the securities laws to get a fair shake. 

To cover all of this, the enforcement division has a staff of 

around 1,200. Less than 4 percent of the number of companies the 

SEC oversees, and easily less than 0.1 percent of the employees of 

those companies. Given this huge disparity, there is simply no way 

that the enforcement division can catch and punish every single 

violation of the securities laws. 

That’s why Congress gave investors the right to sue companies 

that they invest in for violations. This private right of action allows 

investors who have been harmed to recover their losses without relying on the SEC Enforcement Division to do all the work. 

This is one of the reasons why investors have so much confidence 

in U.S. markets. They know they can hold companies they invest 

in accountable when they violate the law, even if the SEC’s Enforcement Division doesn’t have the time or the resources. 

So, if you care about enforcing the securities law and punishing 

bad actors who take advantage of retail investors, which I know 

our panelists do, then you should support private enforcement of 

the securities law through investor lawsuits. 

I also want to mention that the SEC has been very active recently in cracking down on fraud in virtual currencies and so-called 

initial coin offerings, or ICOs. 

This is important because retail investors are getting killed in 

virtual currencies, which are being treated like speculative investments rather than currencies. This is a problem that we need to 

address, and the SEC’s Enforcement Division has been at the forefront of this effort. 

So I want to thank both of our panelists. I look forward to hearing from you. I yield back my time. 

Chairman HUIZENGA. Gentlelady yields back. 

I have one more minute remaining on my side, where I will recognize the Vice Chairman of the committee for 1 minute for an 

opening statement. Then we will be going to Mr. Sherman for his 

2 minutes. 

Mr. HULTGREN. Thank you for convening this hearing, Chairman 

Huizenga. Thank you to our witnesses. Enforcement of our securities laws is a critical part of achieving orderly and efficient markets. 

The SEC’s Division of Enforcement is critical to providing investors the confidence to participate in our markets. This is especially 

true for retail investors who may not have a strong understanding 

of sophisticated financial products and services. 

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Additionally, the market participants should be reasonably informed about the expectations of the Commission for following our 

securities laws. Transparency in this respect is of the utmost importance. 

Enforcement practices should be about ensuring the law is followed. Enforcement proceedings should not result from 

miscommunication or misunderstanding of the law. 

Finally, I am pleased to see that the Commission’s enforcement 

approach has prioritized protecting retail investors. I want to ensure they maintain the confidence to invest, especially given the 

historic opportunities for investment and ongoing growth of our 

economy. 

With that, Mr. Chairman, I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

The Chair recognizes the gentleman from California, Mr. Sherman, for 2 minutes for an opening statement. 

Mr. SHERMAN. In discussing the purpose of the SEC, often the 

focus is on the fairness to the market participants, but the real 

focus has to be funding American business. You deal with the people who participate in the markets, but it is those entrepreneurs 

and companies that get funded that really affect the economy. 

As the Ranking Member pointed out, you are beginning to do 

something on initial coin offerings. I would have hoped you would 

have done more. I hope you shut it all down. 

It will be interesting to find out what barriers you face in doing 

that, because if someone is trying to fund an operating business 

that might employ thousands of people, and they try to comply 

with the securities laws, and they screw up Footnote 27, you might 

be on them like a ton of bricks. 

But, if somebody just builds on the image of the securities laws 

as an unregistered offering of, quote, ‘‘coins,’’ calls it an initial coin 

offering to be similar to an initial public offering and is selling an 

investment with no investor protection, something, like in every 

Ponzi scheme, is valuable only because another sucker might be 

found, and, furthermore, isn’t funding operating businesses. Now, 

it’s true, somebody selling an initial coin offering might give a 

small donation to the Red Cross; every scoundrel does something 

good in their life. 

But, when somebody’s trying to fund creation of jobs, they have 

to do it very carefully, or you are on them for a misstatement in 

Footnote 27. When somebody is selling cryptocurrencies to investors, it’s taking you a while to shut them down. 

You are still wondering—there is still delay. I hope that you will 

be as tougher on them than those who try to comply with the securities laws. 

Chairman HUIZENGA. The gentleman’s time has expired. 

Today, we welcome the testimony of Ms. Stephanie Avakian and 

Mr. Steven Peiken, who are the Co-directors of the SEC’s Division 

of Enforcement. 

I am going to recognize you collectively for a generous 5 minutes. 

That will save us a few minutes, actually, rather than each of you 

being recognized. Without objection, your written statements will 

be made part of the record. 

So with that, Ms. Avakian, you are recognized first. 

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STATEMENT OF STEPHANIE AVAKIAN 

Ms. AVAKIAN. Thank you. Thank you. Good morning, Chairman 

Huizenga, Ranking Member Maloney, and members of the subcommittee. My name is Stephanie Avakian, and, along with my colleague, Steven Peiken, who will address you next, I serve as Codirector of the United States Securities and Exchange Commission’s Division of Enforcement. Thank you for inviting us here to 

testify today on behalf of the Commission about the Enforcement 

Division. 

The Enforcement Division plays an essential role in carrying out 

the SEC’s mission to protect investors; maintain fair, orderly, and 

efficient markets; and facilitate capital formation. Our vigorous enforcement of the Federal securities laws in order to detect, deter, 

and punish wrongdoing and compensate harmed investors enables 

the Commission to promote confidence in our markets, which is 

critical to encouraging capital formation. 

Our efforts are aided by our regular coordination with the Commission’s other divisions and offices and our partners at the Department of Justice and other Federal, State, and foreign regulators. 

Since our appointment almost a year ago in June 2017, the Enforcement Division has remained focused on its core mission of 

strong and effective enforcement of the Federal securities laws. The 

cases we have investigated and recommended to the Commission 

over the past year are a product of the hard work, professionalism, 

and expertise of our career staff in Washington and our 11 regional 

offices. 

In November of last year, we issued a report in which we outlined five key principles that guide our decisionmaking. These are: 

Focus on the interests of Main Street investors, focus on individual 

accountability, keep pace with technological change, impose sanctions that most effectively further enforcement goals, and constantly assess the allocation of our resources. Today, we would like 

to briefly explain how we are applying several of these principles. 

Protecting retail investors has always been at the heart of the 

Enforcement Division’s mission. We have enhanced these efforts by 

forming a Retail Strategy Task Force, which is focused on identifying, punishing, and deterring misconduct that affects everyday 

investors. 

This increased retail focus does not mean that we are allocating 

fewer resources to financial fraud investigations or to policing Wall 

Street. Since we were appointed Co-directors, the Commission has 

continued to pursue cases against large corporations, financial institutions, Wall Street firms, and other market participants who 

violate the Federal securities laws. 

Focusing on individual accountability has also long been a priority, and the Enforcement Division’s recent efforts show that our 

commitment to holding individuals accountable for misconduct in 

the securities markets has not diminished. 

Since we assumed our roles, more than 80 percent of enforcement actions have included charges against one or more individuals at all levels of the corporate hierarchy, including CEOs, CFOs, 

and other high-ranking executives. Going forward, we will continue 

to hold individuals accountable, where warranted. 

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Thank you very much for the opportunity to testify today before 

the subcommittee. I would be happy to answer any questions you 

may have. My Co-director, Steven Peiken, will address you next. 

[The statement of Ms. Avakian can be found on page 30 of the 

appendix.] 

STATEMENT OF STEVEN PEIKIN 

Mr. PEIKEN. Good morning, Mr. Chairman, Ranking Member 

Maloney, and members of the subcommittee. My name is Steven 

Peiken and, along with my colleague, Stephanie, I serve as Co-director of the Division of Enforcement. I want to touch on two additional points: Our efforts to address technological change, and the 

issue of remedies and relief. 

In an effort to keep pace with technological change, we are focusing the Enforcement Division’s efforts and resources on emerging 

cyber-related threats and issues, including issues relating to hacking, data breaches, virtual currencies, and initial coin offerings. 

We think these are among the greatest risks facing investors in 

the financial markets today, and we recently formed a cyber unit 

to focus on these sorts of issues. 

Cyber-related matters are an area where we have sought to utilize the full range of tools and remedies that are available in an 

effort to balance protecting investors and allowing for real innovation. In some cases, we recommend enforcement actions against 

wrongdoers. In others, we have acted on an emergency basis to recommend the Commission suspend trading in stocks. 

The commission and the Enforcement Division have also issued 

a number of public statements and alerts to focus investors and 

others on the risks relating to ICOs, including, for example, the 

risks associated with celebrity endorsements of these products. 

The sanctions the Enforcement Division seeks in its actions are 

critical to influencing the behavior of market participants, and we 

have a wide array of tools available to us; discouragement, penalties, industry suspensions and bars, and other relief. In every 

case, we consider the facts and circumstances, and we seek the 

package of available remedies that is most appropriate. 

The Enforcement Division is also focused on compensating 

harmed investors for losses stemming from violations of Federal securities laws. We place great importance on putting money back 

into the pockets of harmed investors. In the last Fiscal Year, the 

Commission returned a record $1.07 billion to harmed investors. 

Now, despite our successes in recovering funds, a recent development threatens our ability to do so for long-running frauds. In a 

case called Kokesh v. SEC, the Supreme Court held that claims for 

discouragement are subject to a 5-year statute of limitations. As 

you would expect, many fraudsters try to conceal their schemes. 

Some are successful and defraud investors for years before they are 

discovered. 

We appreciate the need for clear statutes of limitations, and we 

are redoubling our efforts to uncover, investigate, and bring cases 

as quickly as possible. But, no matter how quickly we work, it’s 

likely that the Kokesh decision will impact our ability to obtain recovery for harmed investors in long-running frauds. 

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So thank you for inviting us here today to discuss the Division 

of Enforcement, and Stephanie and I are happy to answer any 

questions you have. 

[The statement of Mr. Peikin can be found on page 30 of the appendix.] 

Chairman HUIZENGA. Thank you very much. We appreciate that. 

I am going to recognize myself for 5 minutes at this time for questioning. 

As I mentioned in my opening statement, I believe that lawmakers should never necessarily evaluate the efficacy of a regulatory agency or a rule or enforcement program solely based on 

number of headlines or press releases that it can generate. 

But there have been some recent news articles criticizing the 

drop of enforcement actions by the SEC under the new Administration from 868 in 2016, to 754 in 2017. 

Joint question to you both and, Ms. Avakian, you had talked 

about a focus on protecting the retail investors, which I think is 

great and needs to be done—but does the statistic—this drop in actual cases—beg the question of whether the SEC Division of Enforcement has gotten soft on Wall Street, as some are accusing? 

Are you really trying to protect that retail investor? 

Ms. AVAKIAN. Thank you for the question. When we think about 

whether we are protecting and to what degree we are protecting 

the retail investor, and when we think about our effectiveness, we 

really think it’s most important to look at the nature and the quality of our actions, the actions we are taking and what it is we are 

doing. 

So, while statistics like how many actions the Commission has 

filed over a given period of time, or, the total amount of financial 

remedies ordered over a given period of time can be some measure 

of activity, we don’t think that is the way to really look at the effectiveness of our program. 

Instead, we take a step back and look more meaningfully at what 

are the actions we bring. Are we making a difference for investors? 

Is our program focused on the worst conduct, on the fraudulent 

conduct? Are we stopping ongoing frauds? Are we stopping inappropriate practices or sales of inappropriate products at financial institutions? 

Are we focused on those cases that are most likely to get money 

back into the pockets of harmed investors? Are we getting bad actors out of the securities markets? Those kinds of things. Are we 

deterring wrongdoing? That is what we think. 

Chairman HUIZENGA. With an enforcement program, can it be 

evaluated solely on those number of enforcements and penalties 

and those kinds of things? What we are really trying to get is, and 

what should be the evaluation of the effectiveness of your particular division? How should you be measured? 

Ms. AVAKIAN. We should be measured on, are we creating deterrence against wrongdoing, are we getting bad actors out of the 

marketplace. Some of these things are measurable by statistics, but 

many are not. Are we stopping fraud on retail investors? Are we 

covering a broader range of retail investors or broader range of 

practices? 

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So not all of these things are amenable to using statistics to 

measure them. But, if you look at, for example, what we have done 

in the ICO space in a very short period of time? What our program 

has done in that time period is a good way to look at it. 

In a very short period of time, the Commission has issued a report of investigation. We have brought a number of cases. The commission has issued a number of trading suspensions. We have 

made a number of statements to the marketplace. I think we have 

gotten response to that. So it’s a more qualitative analysis. 

Chairman HUIZENGA. OK. I have about a minute and a half here, 

and I want to move on to another issue. But I may follow up with 

a written—looking at number of complaints and those kinds of 

things, just to get a better handle on that. 

In June 2017, the Supreme Court held in Kokesh v. The SEC 

that the 5-year statute of limitations applied to discouragement 

claims that the SEC seeks in enforcement actions by clarifying that 

the remedy of discouragement is a, quote, ‘‘penalty.’’ 

In your testimony, you noted that the Kokesh decision has already had significant impact across many parts of the division. Can 

you please explain the effects of it and what you have seen so far? 

Do you believe that investors ultimately will have to shoulder additional losses while fraudulent actors are able to keep ill-gotten 

gains due to this decision? 

Mr. PEIKEN. It’s a very significant decision that is having meaningful impact on our ability to recover funds and return it to investors, particularly in cases of long-running frauds, where they are 

not discovered until time has passed. 

We can’t reach back beyond 5 years and pull money out of the 

pockets of the wrongdoers and return them to investors. We have 

been keeping track of our litigated and settled cases of how much 

money we have had to forgo seeking recovery of, and the latest 

numbers are over $800 million, just in the last year or so alone, 

in our litigated— 

Chairman HUIZENGA. That was out of the total enforcement—it 

was three-something—$4 billion? 

Mr. PEIKEN. It was, last year. It’s a very meaningful percentage. 

I think, we don’t know what the ultimate impact will be, but this 

is going to have a significant impact on the recovery that we 

achieve for investors. 

Chairman HUIZENGA. My time is expired and expiring, but what 

I want to know, and we will follow up in writing, is what we as 

Congress can do to ensure that bad actors aren’t able to profit from 

their misbehavior and their fraudulent actions, and then get that 

remedy back to those investors. 

So I think this is going to be a very significant thing and look 

forward to continuing that conversation. With that, I recognize the 

Ranking Member for a generous 5 minutes. 

Mrs. MALONEY. Thank you and I look forward to working with 

you on the point that you made. 

I would like to ask both of you about initial coin offerings and 

virtual currencies. There have been a strong debate about whether 

a token that is offered as an ICO can be a security when it is first 

issued to investors, and then later evolve into something that is not 

a security. 

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Some people think that, once it is a security, it is always a security, and others think that the token’s status as a security can 

change over time. As far as I know, this is not a decision that has 

been decided by the SEC or the courts. 

So I would like to ask both of you, do you believe it’s possible for 

a token to start as a security, but then evolve to something that 

is not a security? 

Ms. AVAKIAN. That’s really a question that is primarily within 

the expertise of our Division of Corporation Finance, not us, as 

much. That said, I think it’s always going to be a facts and circumstances test as to whether something meets the definition of a 

security. If the substance of something changes over time, that 

analysis is going to have to continue to happen. 

But we really do look at the substance of the transaction, not the 

name of it, not what it’s called, and look at does it fit the test for 

a security? Is it an investment in an enterprise in order to generate 

a profit based upon the efforts of others? That is really the test 

that is going to be applied. 

Mrs. MALONEY. Have you seen any situations where this has actually happened? 

Mr. PEIKEN. Yes, we have dozens of investigations that are ongoing, and one of the subjects of many of these investigations is evaluating whether or not a particular instrument is or isn’t a security. 

I don’t think I can speak to the outcome of those, because some 

of that work is ongoing. A lot of what we have seen, though, in 

these ICOs obviously looks and meets the definition of securities. 

Mrs. MALONEY. Building on that statement, Chairman Clayton 

has stated, and I quote, ‘‘I believe every ICO I have seen is a security.’’ Do you agree with that statement? 

Mr. PEIKEN. I can’t speak to whether he has seen the broad 

gamut of instruments that our division is investigating. So I certainly don’t dispute that what he has seen, he believes is a security. 

The question, I guess, is whether some of the things that we are 

looking at do they actually meet that definition? I think that some 

more needs to be written on that. 

Mrs. MALONEY. I know that you brought a number of enforcement actions on ICOs, and I am pleased to see that you are taking 

this issue seriously. A great number of retail investors are getting 

hurt with cryptocurrencies. 

But there have been so many ICOs over the past few years, and 

none of them have been registered with the SEC as securities offerings. So, when your division is looking at all of these ICOs, how 

do you decide which cases to bring enforcement actions on? 

Ms. AVAKIAN. We have, as you noted, there are a number of 

ICOs, and we have a number of investigations in the pipeline. I 

think, just speaking very broadly, in terms of how we prioritize, 

things that require emergency action are going to come to the front 

of the priority list. 

So there are some cases we have brought in the last months, like 

the Centra ICO, which was a large ICO that involved celebrity promotion, the founders of that were arrested. Assets were seized. I 

think roughly $60 million in digital assets were frozen. 

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There are other cases, the AriseBank case, and there have been 

others where I think those ones that really do require an asset 

freeze or emergency action are going to come to the top. 

But there are others, and like many other things, the investigations take time, so some of this is going to be, when the actions 

are ready, we will bring them. 

Mrs. MALONEY. Do you believe that private lawsuits by investors 

can help supplement the Enforcement Division’s work by deterring 

bad behavior that the SEC might not catch? 

Mr. PEIKEN. So our main intersection with private securities litigation is that we often will use private securities litigation as a 

source to start an investigation of our own. 

I think our assessment of whether or not to conduct an investigation on our own isn’t impacted by whether or not there is a private 

civil litigation, because, if we think it’s worth devoting our resources to, the remedies that we can get at the end of the day often 

are much broader than what a private litigant can achieve. 

So, in addition to just getting money back for investors, we can 

also bar wrongdoers from the industry. But that is our principal 

intersection with the private securities bar. 

Mrs. MALONEY. I think that sounds helpful to me. I believe it’s 

important that the SEC not take the unprecedented step of allowing public companies to use forced arbitration clauses to prohibit 

their investors from ever suing them under the securities laws in 

court, even for securities fraud. 

No matter how good a job the SEC Enforcement Division does, 

it will never be enough to catch all of the bad actors that are out 

there in our markets. I just want to say that, while the SEC’s Enforcement Division is necessary, I don’t think it will ever be sufficient by itself. It’s so underfunded and understaffed compared to 

the challenge before you. 

That is why it’s important that investors keep their ability to sue 

public companies, including those class actions for securities fraud, 

in court. So my time is long past, and I yield back. Thank you. 

Chairman HUIZENGA. The Chair was being generous, since I had 

been a little loose on my own time. So, with that, the Vice Chair 

of our committee, Mr. Hultgren from Illinois, is recognized. 

Mr. HULTGREN. Thanks, Chairman. Thank you again, both, for 

being here. 

In your written testimony regarding the Supreme Court’s recent 

ruling on Kokesh v. the SEC, I wonder if you could explain—and 

I will let you decide who’s best to respond—if you could explain this 

decision—how this rescission could restrict the Commission’s ability to enforce our securities laws. What does this mean for retail 

investors? 

Also we want to ensure our securities laws are enforced. We need 

to have enforceable rules in order to encourage effective markets 

for companies seeking access to capital, investors, and the brokers 

that facilitate these markets. So what steps do you believe Congress should take, if any, in light of the Supreme Court’s recent decision? 

Mr. PEIKEN. So, as I said, the Kokesh decision is significant, and 

it’s going to have far-reaching impact on our ability to recover 

funds that have been stolen from victimized investors. I think that 

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11 

we don’t come with a specific proposal for a legislative fix, if one’s 

appropriate for Kokesh. 

But we, I think, would be interested in working with this committee and with the members and their staff in fashioning a proposal, responding to anything that might come forward. Because 

this will have a significant impact on investors. 

Mr. HULTGREN. Yes. Please let us know your thoughts as we 

move forward on that. 

We had floated an amendment to CHOICE Act that would expand the reforms proposed for the SEC’s enforcement division to 

the CFTC (U.S. Commodity Futures Trading Commission), and 

wonder if you could respond to—would you support a process within your office for closing investigations during this time—say, 180 

days? 

Could you make a determination to institute an administrative 

or judicial action, refer the matter to DOJ for potential criminal 

prosecution or inform the parties that investigations are closed? 

Ms. AVAKIAN. I think we are not familiar with the details of the 

legislation, but, broadly speaking, the investigations typically take 

some amount of time. 

What I will say is one of the things Steve and I have really messaged to the staff, and I think folks have taken quite seriously, is 

the importance of, first, moving quickly in our investigations, but 

also, really, once we make a determination that perhaps we 

shouldn’t proceed, there is not a securities law violation to close the 

matter; if it’s more appropriately referred to someone else, to do 

that quickly. 

But we do take quite seriously prompt movement of our cases 

and decisionmaking. 

Mr. HULTGREN. That’s great. I think that the issue for us is, obviously, this is disruptive, and to get answers or information as 

quickly as possible when these investigations are going on or when 

they can be closed—that is what we want to see happen—obviously 

not shortchanging the process; making sure the process can work, 

but expediting where possible. 

Let me move on a little bit to cyber-security expectations. In general, I wonder if you can speak to your expectations for public companies to protect themselves from cyber-security threats? 

For example, after a breach, would you be able to reach a conclusion that a company was negligent in protecting itself and therefore, its investors from cyber-security threats? Would you look at 

something like NIST standards to inform this thinking? 

Mr. PEIKEN. So we look at the question of cyber-security through 

the lens of disclosure. The Commission has issued guidance to public companies about what they should be thinking about, in terms 

of disclosing cyber risks, and how they should be thinking about 

the issue of disclosing a cyber event. 

I think we are cautious in this area. We don’t want to secondguess the good-faith disclosure decisions that companies that have 

been victimized by sophisticated actors, including even nationstates, have to face. 

We have said before that, while we don’t want to second guess 

those kinds of judgments, there could be circumstances that are so 

egregious—failures of disclosure—that we would bring enforcement 

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12 

action. We recommended, and the Commission brought enforcement action against the company formerly known as Yahoo, just a 

couple of weeks ago, for what we considered to be a case that had 

crossed over that line from good faith to an abdication of responsibility. 

Mr. HULTGREN. Thanks. In my last seconds, just at the beginning 

of your testimony, you mentioned, in Fiscal Year 2017, the Commission brought 754 enforcement actions and obtained $3.8 billion 

in penalties and disgorgement, returned a record of $1.07 billion to 

harmed investors, and awarded nearly $50 million in payments to 

whistleblowers. 

Critics of your office may point out that the Commission brought 

fewer cases since the change in leadership at the Commission. 

However, could you please explain how you were able to return a 

record amount to harmed investors? In general, what does this 

mean for how your office is approaching enforcement? 

Ms. AVAKIAN. We have taken the issue of both collections and 

distributions quite seriously. They are both within our trial unit in 

the division. The collections, folks have been incredibly aggressive 

about going out and collecting money. 

Our distributions area is an area where we have put additional 

resources and where we have put a serious focus on doing our best 

to quickly move to get money back into the pockets of harmed investors as quickly as possible. 

Mr. HULTGREN. That’s great. Thank you again. Thanks both for 

being here. 

Yield back. 

Chairman HUIZENGA. Gentleman yields back. 

With that, the Chair recognizes the gentleman from Massachusetts, Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you very much, Mr. Chairman, and thank you 

for having this hearing. 

I want to go back to the Yahoo hack. Now it’s called Altaba—I 

guess that is the new company. You are right, you just settled for 

$35 million with Altaba, formerly Yahoo. That hack effected several 

hundred million users. 

Yahoo sold their digital and e-mail services for about $4.48 billion to Verizon. I did the math on this. So the $35 million represents about $0.08 per user that was hacked, and you are very 

correct when you say that case was, as you described it, an abdication of responsibility. 

I think it was worse than that. They hid that disclosure of that 

hack for 2 years. The only reason they disclosed it was because 

they were for sale. So, I think that was the worst possible behavior 

to deceive investors. 

They eventually had to discount the sale, because they had neglected to disclose that information to the buyer. But $0.08 per 

user hacked? Do you think that is fair? 

I thought $35 million, for a company that sold for $4.48 billion, 

I thought $35 million was really selling short the damage that was 

done to users. I think it was a slap on the wrist, to be honest with 

you, because it really didn’t affect anybody other than the users 

having their information compromised. 

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13 

Mr. PEIKEN. I think it’s a great question, and fashioning the appropriate recommended penalty in a case like this, where there had 

never been a case brought before against a company for failing to 

make a disclosure like this, obviously, is a difficult situation. You 

are trying to weigh the costs and benefits and burdens of any corporate penalty. 

The penalty itself was never going to go back to compensate the 

people whose information was hacked. 

Mr. LYNCH. How about fairness? I know they weren’t going to be 

compensated. But you are also telling me now that we are not 

going to do dozens of cyber hacking cases in the future. We are 

going to shift gears. 

So I just see a lot of this. We serve on another subcommittee that 

deals with cyber issues. I just think it was a case of first impression. I agree with that. 

But I think you fell far short, or the SEC fell far short of holding 

anybody accountable here. I think, if there had been a meaningful 

penalty here, other companies would look at that and say, ‘‘Hey, we 

have to get our act together here.’’ 

Not only should we not allow this hacking to go forward and redouble our efforts to protect data, but, there is also the back end, 

the reputational damage to the company when that happens, and 

also the example to others in the future, because any company out 

there doing a sizable business in digital conduct is really going to 

blow this off, because $35 million is laughable, to be honest with 

you, for a company that is about $5 billion in value. 

These people, as I said before, intentionally concealed this information from investors and its customers. So, it was especially egregious behavior. 

I just think that example, coupled with your new policy, where 

you are not going to go after cyber hackers as you have in the past. 

So we are going from weak, to weaker. I don’t know how much 

weaker you can get than $35 million for a company of that value. 

Now, you are going to do less. I just think you are going in the 

wrong direction, to be honest with you. 

I think that some—this was a Russian hack—some of these entities are getting even more sophisticated, so your example, or the 

lesson that you are teaching is that the fines aren’t that bad, compared to the cost of stiffening your system, strengthening your system, so why spend money on it? That is the message I am getting 

from you. 

Mr. PEIKEN. I hope that the industry reads this case in a different way and that— 

Mr. LYNCH. I don’t know why they would, honestly. I am trying 

to be fair with you. 

Mr. PEIKEN. Yes, and I would say that there certainly is no intent or plan on our part to abandon bringing cases against the perpetrators of these intrusions, which continues to be a significant 

priority for us. 

We see intrusions for the purpose of stealing information for insider trading, and we have cases and investigations that were ongoing and that have been brought against the perpetrators of misconduct. I expect that will continue to be a high priority for the Enforcement Division. 

mcarroll on FSR431 with DISTILLER

14 

Mr. LYNCH. Thank you. 

I yield back, Mr. Chairman, thank you. 

Mr. HULTGREN [presiding]. The gentleman yields back. 

The gentlewoman from Missouri, Chairman Wagner is recognized 

for 5 minutes. 

Mrs. WAGNER. I thank the Chairman, and I thank our witnesses 

for being here. I want to talk about a trend that occurred at the 

SEC in the last Administration that is very concerning to me and 

that I hope is being addressed with our new leadership. 

Under the leadership of former Chairman Mary Jo White, the 

SEC increasingly turned to its own administrative law judges, 

ALJs, rather than the Federal courts to adjudicate enforcement actions. 

In fact, a 2014 Wall Street Journal article found that, for 12 

months straight, every case the SEC steered toward the agency’s 

appointed ALJs was, quote, ‘‘successful for the SEC.’’ In contrast, 

according the same article, the SEC fared far worse when they 

brought cases before the Federal court trials, winning approximately, I think, half of the time. 

At the time, former Enforcement Director Andrew Ceresney, I 

think was his name, stated, quote, ‘‘We are using administrative 

proceedings more extensively because they offer a streamlined 

process with sophisticated fact-finders.’’ 

Let me start off by asking this. Are SEC administrative law 

judges the same as judges with lifetime tenure, appointed under 

Article 3 of the Constitution? 

Ms. AVAKIAN. The judges are appointed in a different fashion. I 

am not sure of the exact mechanism, but they are different— 

Mrs. WAGNER. So they are not appointed under Article 3 of the 

Constitution? 

Ms. AVAKIAN. That’s correct. 

Mrs. WAGNER. Should SEC administrative law judges be interpreting and developing Federal securities laws, for example, insider 

trading laws, even though they aren’t Article 3 judges? 

Ms. AVAKIAN. There are, I think, some sorts of cases that make 

sense for administrative law judges to consider, given their securities background and the fact that the appellate rights are to the 

Commission of the—and to the Circuit Courts. 

But I should step back and make it clear that, since we have 

been in this job, which has now been just about a year, the circumstances in which we have filed litigated actions as administrative proceedings have been fairly limited. 

I would say, broadly, they have been limited to circumstances 

where either the charges that we are pursuing are only available 

in the administrative forums—so think failure to supervise of a 

broker-dealer, or something like that—or where the principal relief 

we are seeking is only available in the administrative forum—so 

barring someone from being in the securities business—or where 

the person involved is a registered person, like a registered brokerdealer or investment adviser. 

So I think we have filed a far fewer number of litigated actions 

as administrative proceedings. Many of them are settlements. 

Mrs. WAGNER. Maybe things have changed. I am going to reclaim 

my time, because I have several other questions. It’s very clear the 

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15 

SEC’s lately been using these administrative judges for complicated 

cases, including several involving insider trading. How’s their performance evaluated, quickly? 

Ms. AVAKIAN. The administrative law judges? 

Mrs. WAGNER. Yes. 

Ms. AVAKIAN. I am not sure how their performance is evaluated. 

Mrs. WAGNER. Doesn’t this create a potential for conflicts of interest or undue bias in favor of the Commission in administrative 

proceedings? 

Ms. AVAKIAN. Probably worth noting that, in the last year, we 

fared much better in litigation in District Court than we did in our 

administrative forum. I think our success rate was less than 60 

percent in the— 

Mrs. WAGNER. I am very concerned about the bias. So what steps 

are being taken to prevent bias, or at least the appearance of bias, 

in all ALJ proceedings? 

Ms. AVAKIAN. Again, the administrative law judges are appointed 

unrelated to anything we do, in an independent fashion. But I will 

say that the appellate rights are initially to the Commission, but, 

after that, to the U.S. Circuit Court of Appeals, which is the same 

appellate path that a case takes if it goes through the District 

Courts. 

So, I think, if there is concern, ultimately, there is a path for appeal that is very similar to that. 

Mrs. WAGNER. Does the defendant have a choice about which 

path he can take? 

Ms. AVAKIAN. No. As the plaintiffs, as the filers— 

Mrs. WAGNER. Now, that is of concern to me. Does the SEC bring 

similar cases, for example, insider trading cases in both Federal 

District Court and administrative proceedings? 

Ms. AVAKIAN. We have not filed an insider trading case as an administrative proceeding. 

Mrs. WAGNER. Does this create the potential for different legal 

interpretations of the same or similar laws and potentially inconsistent enforcement actions? 

Ms. AVAKIAN. I don’t think any differently than you get by being 

in front of any number of District Court judges who decide the 

same set of facts in a different fashion. I understand the question, 

but I am not— 

Mrs. WAGNER. Yes, these are complicated issues, and I have 

great concerns of this overreach of authority, especially given the 

fact that these are not Article 3 judges. 

I look forward to working with you and the agency as we go forward to get the most proper outcome concerning these issues. So 

I thank you. I have run out of time. I yield back, Chairman. 

Mr. HULTGREN [presiding]. Gentlewoman yields back. 

Gentleman from Georgia, I think, Congressman Scott, is recognized for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. 

Mr. Peiken and Ms. Avakian, let me ask you this: You listed in 

your testimony the recent Supreme Court decision of, I think it was 

Kokesh v. the SEC. 

You said that that, along with President Trump’s Administration’s hiring freeze, put headwinds before you and could very well 

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16 

severely affect the effectiveness of your enforcement duties. Would 

you share with us why you have come to that conclusion? How serious would these impediments be? 

Mr. PEIKEN. So, Mr. Scott, appreciate the question. I think, really, a couple points in response; the first is the Kokesh decision, if 

not changed, it’s going to limit our ability to recover funds that 

have been stolen from investors as part of long-running frauds. 

Some cases, like Ponzi schemes, for example, are self-covering, 

and so they often go on for many years before they are discovered, 

and then we can’t reach back and get money that has been stolen 

from investors. 

The question of hiring is one that we think about a lot. We have 

been operating under a hiring freeze. We think we are adequately 

resourced to do our jobs. We have asked, in the current budget request, for an additional 17 slots for enforcement, which we will use 

for our cyber efforts and our trial unit and other key areas. 

But we are working, we are trying to use the resources we have 

to make decisions about how to allocate scarce resources. Like 

every other law enforcement agency, we have a broad area to cover. 

We are doing things like using data analytics and trying to leverage our investigations to work smarter to try to make the biggest 

impact with the resources that we have. 

Mr. SCOTT. Yes. There was a case, I believe, in Dallas, with this 

company who’s running a scam operation. You may remember that. 

My information is that they were trying to develop a false federally 

insured bank. Could you tell us about that, so we could see the ingenuity of folks doing that? It was AVS Bank, I believe. I know it 

starts with an A. 

Mr. PEIKEN. I think that you are talking about a case called 

AriseBank, where an initial coin offering was supposed to fund a 

banking operation. This is one of the cases that Ms. Avakian referred to, where we acted to obtain emergency relief. It turned out 

that it was a total scam, as we allege. The individuals were ultimately arrested, and we seized digital assets. 

So I think it’s a great illustration of how these initial coin offerings can present real risks to investors and how we have been trying to work quickly to stop this fraud from going on. 

Mr. SCOTT. All right. Now, in my last minute and a half here, 

we are now in the grips of dealing with Russia and China and their 

use of their very sophisticated technology of really breaking into 

our security systems. 

What I would like to get from you is, how serious is this nationstates’ threats? Who would be the leaders that we have to worry 

about the most? How so? 

Mr. PEIKEN. So I am not sure that I am in a position to really 

answer that question fully, but I will tell you that our cyber unit, 

which is focused in large part on addressing securities law violations that are perpetrated by cyber criminals, including nationstates, seize, actors in the Russian Federation and other places 

that you have mentioned trying to steal nonpublic information to 

trade, forcing trading by breaking into people’s brokerage accounts 

and the like. 

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The Yahoo case, which I mentioned before, is one in which actors, which, I think, we allege were associated with the Russian 

Federation were involved in stealing the information from Yahoo. 

Mr. SCOTT. So you have actually seized Russian operatives who 

are acting physically, correct? 

Mr. PEIKEN. I believe, in the Yahoo case, the allegation is that 

the people who were identified, broke in to Yahoo and stole user 

information were associated with the Russian Federation, so yes. 

Mr. SCOTT. In your enforcement capacities, what has been the 

disposition of these Russian operatives? 

Mr. PEIKEN. As you can imagine, for a civil investigative agency 

that polices the securities markets, we are often looking at people 

who trade on that information or benefit from the theft of that information. So, whether we can actually bring action against the 

perpetrators depends on the case. 

Mr. SCOTT. Thank you very much. 

Chairman HUIZENGA. Gentleman’s time has expired. 

With that, the gentleman from Minnesota, Mr. Emmer, is recognized for 5 minutes. 

Mr. EMMER. I want to thank the Chair, again, for convening this 

hearing, and the Co-directors, for joining us today and for the job 

that you are doing. 

As I have listened today, clearly, I must have a different point 

of view when it comes to some of my colleagues on 

cryptocurrencies. I will say that you just testified that these initial 

coin offerings present real risks to investors. 

But let’s not forget they also present real opportunities, and we 

are talking about a technology, blockchain technology, that has an 

amazing potential. 

I would like to go back to some of the questions earlier and ask 

them a little bit differently. I want to thank you before I start, because I think it was Representative Maloney that started the hearing this morning by suggesting that Secretary Clayton had said 

every initial coin offering is a security. 

That’s not what I heard you say. You are reviewing these, and 

you are developing what your view is of the different types of 

cryptocurrency. Problem is a lot of people up here with white hair, 

without hair, or people that have been around for awhile don’t even 

understand what they are talking about. We worry that too much 

government could kill this thing before it can grow into something 

that is very good for our economy. 

So I would like to know, since you have been getting involved in 

some of these enforcement actions and investigations, what has 

been your level of engagement with cryptocurrency exchanges— 

with the actual exchanges about their decision process around listings? Are you actually communicating with them and having a 

back-and-forth? 

Ms. AVAKIAN. We, as an agency, broadly speaking, are engaging 

with the marketplace, to some degree, the exchanges, although we 

are not necessarily in the best position to answer that particular 

question. 

The reason is, as an agency, we have really worked together 

across divisions and across offices. So we have a distributed ledger 

technology working group. That’s an interagency group. We have a 

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18 

fintech working group. That’s an interagency group. Those groups, 

particularly the fintech group, have been working closely with the 

marketplace, with folks who are coming to us, with folks we are 

doing outreach to. 

I would say the Division of Corporation Finance is probably on 

the frontline of a lot of it. The Division of Trading and Markets is 

going to be on the frontline of the exchange issue. But we are working with industry, and we encourage market participants to come 

to us, whether it’s through the fintech e-mail box, which we have 

set up, fintech@sec.gov, or whether it’s to reach out directly to a 

particular division or office. 

Mr. EMMER. I would go the next step, then. How does the SEC 

distinguish between an ICO and the sale of a token for use on a 

blockchain platform? 

Ms. AVAKIAN. That’s always going to be a real facts-and-circumstances question. We are going to take a step back and look at 

exactly what the substance of that particular transaction or token 

is, not the name of it. 

Is it something that someone’s investing something of value in? 

Is it an enterprise someone’s investing something of value in order 

to generate a profit? I think it’s based upon the efforts of others. 

That’s the basic definition of what is a security. 

Mr. EMMER. Is that evolving? Are you—because it could be a security. It could be a commodity. It could be a currency. There have 

to be some delineated lines so that people understand where they 

are at and who has jurisdiction over them, because we want to 

make sure that they are continuing to explore the opportunity and 

not just going out of business. 

Ms. AVAKIAN. Yes, I think that is right. We have spoken a lot 

publicly about it. Certainly, the Chairman has spoken a lot publicly 

about it, to the extent something is a pure currency, a pure medium of exchange, that is not a security. 

I think we are relying on the experts in the marketplace; the 

gatekeepers, the lawyers, others like that to really take a step back 

and take a true look at what is the underlying substance of a 

transaction. That is really going to be, I think, what guides someone. 

But we are open in terms of having folks come to us and help 

work through that analysis with them. 

Mr. EMMER. Let me ask you this last one. When looking at potential enforcement actions, what specific factors are used by the 

division to determine which token presales will be targeted? 

Ms. AVAKIAN. When we think about enforcement action and what 

we are going to look at, we are working together with our Division 

of Corporation Finance, to a large degree, to analyze what it is we 

know about the substance of an underlying product. Is it a security? Is it potentially a security? That will guide how we think 

about it. 

Mr. EMMER. OK. I look forward to working with you as this 

evolves. I want to thank you again for the work that you are doing 

and your light-touch policies so far. 

Thank you. I yield back. 

Chairman HUIZENGA. Gentleman yields back. 

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19 

At this time, we are going to stay on the Republican side, and 

the Chair will recognize Mr. Davidson from Ohio for 5 minutes. 

Mr. DAVIDSON. Thank you, Chairman. I thank you both for your 

testimony and for the work you are doing to protect our markets 

and to make sure that America remains the world’s best place to 

raise capital and see it grow. 

I will spend a fair bit of time on ICOs and cryptocurrencies, but 

I want to pick up where Mrs. Wagner left off on due process with 

administrative law judges. 

I couldn’t have used 5 minutes better. For that reason, I introduced H.R. 2128, the Due Process Restoration Act, which seeks to 

give defendants the option of Federal court, versus a no-option path 

to an administrative law judge proceeding. 

I have some of the concerns about a near 100 percent batting average for the ALJs and, I think, over time, about a 670 batting average for the courts, which says that the SEC’s good about picking 

their cases, but it does raise concerns about the path of ALJs. 

Director Peiken? I guess, are you concerned that the SEC administrative proceedings have fewer due-process rights than in the 

courts? 

Mr. PEIKEN. So let me just make a couple of reactions to that. 

So, one, I think, as Stephanie said earlier we have been much more 

restrained in the use of administrative proceedings in the last year, 

and really using them in only the limited categories for litigated 

cases that she outlined. 

When you look broadly at the success rate of our litigated cases 

over a broad period of time in the administrative forum, versus 

Federal court, they actually are pretty close. Now, don’t get me 

wrong, when we bring a case, we are looking to win them all. We 

don’t. We win about 75 percent of our cases in Federal court and 

about 85 percent in administrative forum. They are roughly equivalent success rates. 

There are protections. There are obviously different processes in 

administrative proceedings from in Federal court. But the rules 

around administrative proceedings have been modernized in recent 

years to, for example, allow for depositions from each side. 

There are some protections in the administrative forum that 

aren’t even available in Federal court. So we have to turn over our 

entire file immediately in an administrative forum. We don’t have 

to do that in Federal court. We have to turn over Brady or Giglio 

information which is exculpatory or helpful to the other side. We 

don’t have to do that in Federal court. There is a balance. There 

are obviously different rights and procedures in both forums. 

Mr. DAVIDSON. There is a case pending before the Supreme 

Court. So we look forward to that outcome and we look forward to 

vote on the Due Process Restoration Act here. 

But we also look forward to regulatory certainty around initial 

coin offerings, in particular. The CFTC also has claimed some jurisdiction. You have a working group, as you referenced earlier. 

Is it clear where the CFTC’s jurisdiction is? Because we do have 

court proceedings, and we have CFTC, who’s staked out claims on 

cryptocurrencies since 2015. What do you make of these folks that 

are clearly a cryptocurrency today, yet, if they had raised capital, 

might be seen as a security at the time? How do you resolve that? 

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20 

Mr. PEIKEN. Yes. I think some of this, we are obviously encountering a new area with new products and changing technology. 

Some of these issues are being worked out in the courts, as we 

speak. 

Our financial system has operated for a long time with regulators with different jurisdictions, the CFTC regulating derivatives 

and commodities and SEC focused on securities. 

I think the way things have fallen out recently, where we have 

been focused on the tokens and crypto-assets that fit the definition 

of a security, and the CFTC has then focused its jurisdiction on 

currencies and mediums of exchange. I am not sure I am the expert 

to say where that exact line is drawn. I think some of this is going 

to be worked out over time. 

Mr. DAVIDSON. Yes, OK. So our office is working on an initial 

coin offering bill that would provide certainty about how a security 

is—it’s fundamentally—is the Howey Test still relevant? What is 

the role of SAFS? Is a whitepaper going to cut it, or are you going 

to use SEC forms that already exist? How do you advise proceeding 

forward with your office? 

Mr. PEIKEN. So, obviously, we would be interested in providing 

technical assistance and working with you and your staff on any 

proposal. Our Division of Corporation Finance is probably a critical 

participant in that, because some of this is beyond the expertise of 

the Enforcement Division. 

Mr. DAVIDSON. All right. Thank you, my time is expired. I yield. 

Chairman HUIZENGA. Seeing no further questioners on the Democrat side, we will move to Mr. Poliquin from Maine for 5 minutes. 

Mr. POLIQUIN. Thank you very much, Mr. Chairman. I appreciate 

it. Thank you both for being here today. I represent the great State 

of Maine. I know you folks are new at your job. You have been 

there for a year. You probably have a very stressful situation at the 

SEC. 

So I want to remind everybody that Maine is vacationland. If you 

haven’t booked your vacation in Maine, you should do it. We don’t 

have any air conditioning. We get a lot of moose, a lot of critters 

everywhere, a lot of blueberry pie and lobsters. 

So, with that, let’s get right into it. 

I am concerned about small investors, because rural Maine is, 

like, the most beautiful part of the world. We are the hardest-working people. I don’t worry as much about folks who have big, fat accounts. But I worry about small investors. 

In particular, when you look at small investors who are starting 

out to build their nest egg, maybe for the first time, through a mutual fund, and they mark-to-market every day, and it’s public, and 

it’s one portfolio for the asset manager. I don’t worry as much 

about that. 

But what happens if one of our small investors builds up that 

nest egg to a point where they might want a separate account from 

an investment adviser? Or maybe they participate in a 401(k) plan 

or a defined benefit pension plan, and that account is managed by 

an asset manager in a separate account. 

Now, I used to be in the asset management business. What you 

are providing for your investors, for your accounts, if you are in 

that business, is trust and security. The product you are selling, in 

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great extent, is your rate of return, your performance record over 

time. 

So what I worry about and what I want to ask you folks is how 

you deal with this. When you go look at an asset manager—it’s 

time for their review—and you are trying to make sure that the 

rate of return that they are showing their prospective clients—how 

do you make sure there is accuracy in the performance data that 

they are submitting, because that is what people are buying, past 

performance; no guarantee of future performance. But that is what 

they are selling. 

So, for example, if you walk into an asset manager’s firm and 

they have a hundred different accounts, how do you know they are 

all fully discretionary? How do you know there are no restrictions 

on tobacco or alcohol or gambling? 

How do you know about the size of the account? Are they diversified enough so that you are getting a true reflection of what the 

performance is, such that investors are able to make the decisions 

with confidence that the data is accurate? Tell us how you do that. 

Ms. AVAKIAN. Sure. I think the first line of defense on the potential problems you are worried about really is our Office of Compliance Inspections and Examinations, OCIE. 

They are the ones that go in and do the examinations. They do 

risk-based examinations. They do other sorts of examinations. This 

is one of the things they are looking at: Is what an investment adviser’s representing to its clientele—is it accurate? Is it true? Is 

their performance what they say it is? 

So that is one of the things that OCIE looks at. I would note that 

we have done some risk-based proactive work within the Division 

of Enforcement’s Asset Management Unit. One thing we have 

looked at is performance reporting. Our economic folks in DERA, 

the Division of Economic Research and Analysis, have also spent 

time looking at this issue broadly. 

It’s a very, potentially, real concern that you raise, and it’s a very 

good question. But it is one that, I think, our examination folks 

take seriously. 

Mr. POLIQUIN. Mr. Peiken, have you found that these wonderful 

examination folks that work over at the SEC, that there is a problem? 

Or is the oversight, the enforcement, the audits that you perform 

on behalf of the investors and savers in Maine and beyond is 

enough to keep folks in line? Or have you seen there have been 

problems here? 

Mr. PEIKEN. So the issue of valuation is, it has been a problem 

in a number of instances, and we have brought a number of enforcement actions against wrongdoers for giving investors false information about the true value of any performance returns. 

We have a very close relationship with our Office of Compliance 

Inspections and Examinations, and they refer to enforcement results from their examination. So, if they go in and they find something that is sufficiently serious that they don’t just issue a corrective letter, they will refer it over to enforcement, and we open investigations. Some of our most significant cases have been brought 

based on these examinations. 

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Mr. POLIQUIN. What type of penalties are common with an asset 

manager who might be cooking the books? 

Mr. PEIKEN. So it could be the whole gamut. That could be 

disgorgement and return of money to victims, penalties, barring 

them from participating in the investment advisory business altogether. Anything up to and including being kicked out of the business. 

Mr. POLIQUIN. Please keep working at what you are doing. Make 

sure you vacation in Maine. But don’t forget about the small investors, the small savers. We need to make sure they have confidence 

when they turn over their hard-earned savings to an investment 

manager. 

Thank you very much. Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentleman’s time has expired. If it is 

fine with our Co-directors, we are going to do a quick second round 

of questioning, which, at this point, we think will be rather limited. 

We might not decide whether it’s Laurel or Yanny, but let’s at least 

continue the conversation. 

I am going to turn to my friend, the gentleman from Georgia, for 

5 minutes. 

Mr. SCOTT. Sure. Let me get to what I think is really the gist 

of the matter here. 

I have recently read a Wall Street Journal report, and it says 

this: It says that U.S. regulators have repeatedly put 

cryptocurrency companies and their advisers on notice, in recent 

months, about what officials say are widespread violations of security rules designed to protect investors. 

Could you share what these widespread violations are? 

Mr. PEIKEN. So I think when we look at these crypto-asset-related issues, they really fall into two buckets. So, on the one hand, 

we have the out-and-out frauds, like the one that you were talking 

about with the Dallas bank company. 

These are people who are trying to just trade on whatever newsworthy event there is and make money. In the past, it’s been in the 

marijuana industry or hurricane relief, and this just happens to be 

a newsworthy thing, this technology, so they are trying to take advantage of investors by trading on that. 

So we see those out-and-out frauds. Then we also see, in another 

bucket, the failure to register broad offerings of what we think 

meets the definition of a security. 

If you are going to make a general solicitation of a security offering broadly to investors, if you are not subject to an exemption 

from registration, that has to be registered with Securities and Exchange, and you have to comply with the various rules and requirements. 

If you don’t meet an exception, then investors are presented with 

an investment opportunity without the information that the Commission has decided they are entitled to have. 

So those are the two real buckets that we see these issues falling 

into. 

Mr. SCOTT. Yes, but this whole move in our technology, the 

cryptocurrencies, all of this seems to be moving at warp speed, and 

with some worriation that what we are doing isn’t enough. 

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Just to carry this point further, in this same article, your Chairman, Jay Clayton, said this: He said, Many promoters of ICOs and 

cryptocurrencies are not complying with our current security laws. 

Then he also said that he has urged his staff, meaning you the 

enforcers, to be on high alert for approaches to ICOs that may be 

contrary to the spirit of these laws. 

However, with all these warnings from you and from your Chairman—it goes on, this article. Very good, I hope more people will 

read this Wall Street Journal article. 

It says, such warnings have failed to chill the booming market for digital tokens. Coin offerings have already raised about $1.66 

billion this year and are on pace to even top last year’s $6.5 billion 

tally, according to research and data from Token Report. 

Then he went on to say, we are just dealing with the tip of the 

iceberg. When you are just dealing with the tip of the iceberg, you 

have problems with the ship below. 

All we have to do is look at the great sinking of the Titanic. If 

we have just reached the tip, the real serious part of this iceberg 

is down below, as it was with the Titanic. If that happens, our nation’s going to be in serious trouble. 

Is this article accurate? Are they sounding the necessary alarms? 

Do you agree with it? 

Mr. PEIKEN. So you raise a great point. If you look at the work 

that the staff has done, there have been enforcement actions that 

we have brought. 

There are many investigations that are ongoing, and those will 

take time, but many of them will likely lead to enforcement actions. I don’t know how many, but many of them will. We have also 

communicated with people, and they have stopped a token offering 

because— 

Mr. SCOTT. Good. 

Mr. PEIKEN. They have been told that they were about to violate 

the Federal securities laws, so no violation occurred. 

Mr. SCOTT. But let me ask you—I have 10 seconds here. 

Mr. PEIKEN. Yes. 

Mr. SCOTT. Is there anything that we in this committee, we in 

Congress can do to help you with your forward progress in this 

great challenge? 

Mr. PEIKEN. I think we have adequate statutory tools, but, obviously, we would be willing and interested in working with your 

staff and the staff of any members here on any proposed legislation. 

Mr. SCOTT. All right, thank you. 

Chairman HUIZENGA. All right. Gentleman’s time has expired. 

We are going to go back, for the PSA for pure Maine, with Mr. 

Poliquin from Maine for 5 minutes. 

Mr. POLIQUIN. Thank you very much, Mr. Chairman. I appreciate 

it. 

Folks, if one of you could take a stab at this? Ms. Avakian, am 

I pronouncing that right? 

Ms. AVAKIAN. Avakian. 

Mr. POLIQUIN. Great. In February, you folks made an announcement about your share class selection disclosure initiative. I believe 

it deals with investment advisers and reporting and self-reporting 

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and so forth, so on. Could you explain that program to us and how 

it might help investors? 

Ms. AVAKIAN. Absolutely. Happy to explain it. We do except it to 

directly impact and help retail investors in particular. So one of the 

problems we have seen over the years, both our Office of Examinations and in enforcement, are problems where investment advisers 

are recommending higher-fee mutual fund share classes for which 

they are being compensated, when there are lower or no-fee share 

classes of the exact same product available. 

Mr. POLIQUIN. Now, does this only apply to, if I may, to fund 

companies 

It doesn’t deal with managers who manage separate accounts. 

You are just talking about mutual fund companies, is that correct? 

Ms. AVAKIAN. The share classes in mutual fund companies—the 

self-reporting initiative is targeted to investment advisers. 

Mr. POLIQUIN. Got it. 

Ms. AVAKIAN. OCIE has identified this problem in a number of 

exams over the years. We have brought in the Enforcement Division, in a number of cases, for failure of investment advisers to 

identify this conflict of interest for their clients. The fact that there 

is this higher-fee share class for which they are being compensated, 

while there is a— 

Mr. POLIQUIN. Now, does this apply to no-loads, as well as load 

funds, where you are just talking about the H2Bs that are—not the 

H2Bs. The fees that are charged by the— 

Ms. AVAKIAN. Typically the 12B–1 fees, yes. 

Mr. POLIQUIN. Yes, thank you very much. 

Ms. AVAKIAN. The self report—and we have brought a number of 

cases against financial institutions, in each of which the Commission assessed penalties in connection with the resolution of those 

cases. 

The self-reporting initiative provides a defined period of time— 

4 months—for investment advisers who have this problem, who 

have identified this problem to come forward and self-report, and, 

in exchange for that, we will recommend to the Commission standard settlement terms. 

Those standard settlement terms require these investment advisers to disgorge the moneys and to repay them back to investors. In 

exchange for that, we will have standard settlement terms that will 

not include a financial penalty. 

Ultimately, what we are trying to do here is take a problem we 

identified on a broad scale, investigations that take a substantial 

amount of time to complete, and, instead, say, all of you who have 

this problem come forward, identify it to us, and hopefully attract 

and get a much larger universe with way fewer staff resources invested in it and money back into the pocket of investors. 

Mr. POLIQUIN. In doing your work, do you find there is a common 

thread among the asset manager community that participates in 

these practices that—there are not? 

Mr. PEIKEN. No. 

Mr. POLIQUIN. There’s no common— 

Mr. PEIKEN. We have seen it from the smallest advisers, to the 

biggest financial services firms on Wall Street. 

Mr. POLIQUIN. OK, good. Thank you. 

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Mr. Chairman, I yield back my time. Thank you. 

Chairman HUIZENGA. Gentleman yields back. 

We will give the Ranking Member an opportunity, as well. 

Mrs. MALONEY. OK. I apologize. I have another hearing taking 

place. There are just many, many hearings today, with a lot of 

work to cover. 

I want to go back to the Kokesh decision. I want to understand 

how you got a 9–0 ruling. That’s very rare in the Supreme Court. 

Yet there seem to be a concern on both the Republican and Democratic side, and from you, that this would limit very much the Securities Exchange Commission in your mission to protect investors. 

Can you give me some insights on the Kokesh case and ruling? 

Then, what do we do about it? You identified it as a problem as 

did many of my colleagues on both sides of the aisle. Would it take 

legislation to correct it? But what were the circumstances of this 

case that so overwhelmingly came out in a 9–0 ruling? 

I don’t know of any other 9–0 ruling. It’s court seizing. So, if you 

could give me some more understanding of the Kokesh case—and 

I am responding, really, to both of your testimony that this is a big 

challenge for the SEC. 

Mr. PEIKEN. Yes. So the Kokesh decision—a couple things. 

So, first of all, the case itself involved a pretty egregious fraud in which Kokesh stole, I think, like $35 million from investors. 

That took place over a 10-year period. By the time he was prosecuted, enough time had lapsed that, in the end, as a result of the 

Supreme Court’s decision, he was allowed to keep all but, I think, 

about $5 million of that $35 million that was misappropriated from 

investors. 

The Supreme Court’s decision was unanimous, and we obviously 

accept it and it’s the law of the land. The issue is not with the decision, but, rather, with the effect of it, which is that, going forward— 

Mrs. MALONEY. But, if it was a huge crime where they abused 

investors, you would think that the court would be sympathetic to 

investors being reimbursed. In other words, they cut off their ability to be reimbursed. There has to be a reason why. 

Mr. PEIKEN. I think they were addressing a technical, legal question of how did the statute of limitations apply to the remedy of 

disgorgement. So, I think, absent an extension of the statute of limitations that is, we are going to live with this, and we will have 

to act faster. 

But there will be cases where there is some ongoing fraud for 

years, we don’t discover it until some of that money is out of our 

reach. I just would note that we respect the fact that statute of limitations are important. They put limits on the government in appropriate cases. 

But there are many statute of limitations that apply to financial 

fraud cases that are much longer than 5 years. For example, the 

Justice Department has the ability to use the Financial Institutions Recovery and Reform Act, which has a 10-year statute of limitations. So it’s not without precedent for there to be a longer statute of limitations available. 

Mrs. MALONEY. But the way Congress could react is by legislating, correct? 

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Mr. PEIKEN. Absolutely. 

Mrs. MALONEY. We constantly legislate after Supreme Court decisions that we disagree with. Most notably, the one I was involved 

in was the Lilly Ledbetter Act that allowed people to sue when 

they have been discriminated against. But, in any event, I just 

want to thank you for your testimony today. It’s a very difficult job, 

and we want to help you in any way we can. 

I yield back. 

Chairman HUIZENGA. Gentlelady yields back. 

I am going to take a couple of moments here, as well, for a quick 

question on—explore, maybe, a little bit of the differences between 

corporate and individual penalties and how that might affect 

things. 

Former SEC Chair Mary Jo White emphasized the need to seek 

more admissions of wrongdoing from defendants as a condition of 

really settling the enforcement cases. 

Mr. Peiken, you have noted that, for people that resolve cases 

with the Commission without admitting wrongdoing, but still 

agreeing to all points of relief, most people don’t particularly view 

that as, hey, I got away with one here. 

But can you explain how other tools, such as obtaining 

disgorgement, monetary penalties, mandatory business reforms, 

compare with the admission of guilt in settling? Is there something 

more significant that comes with that admission? 

Does settling help obtain relief more promptly, rather than going 

on and risking a trial and the time and effort and costs of that? 

Mr. PEIKEN. Thank you, Mr. Chairman. 

We continue to consider whether seeking admissions is an appropriate part of the resolution of any case. Obviously, though, we 

have to balance, as you note, that against the possibility that, by 

demanding admissions, rather than getting all the other remedies 

that we might seek, like disgorgement and the ability to return 

money to investors today— 

Chairman HUIZENGA. So the SEC still can go for these admissions of guilt, right? 

Mr. PEIKEN. Yep, and we do. 

Chairman HUIZENGA. You do, OK. 

Mr. PEIKEN. But, if there is a case where a respondent says, I 

am willing to give you everything expect those admissions, we have 

to make a cost-benefit analysis about whether it’s worth going 

through what could be years of litigation. 

In some cases, that might well be worth it. In others, maybe not. 

We evaluate the full package of potential remedies and relief as 

part of every resolution. 

Chairman HUIZENGA. Do you mind addressing, briefly, maybe, 

individual versus corporate penalties and how that may affect people’s actions? 

Mr. PEIKEN. Chairman Clayton has said, individual liability, in 

his view, and I agree this drives behavior more, even, so than organizational liability. So we put a high premium on bringing— 

Chairman HUIZENGA. I think, at one point, he said, well, look, it 

is shareholders that, then, are paying for that penalty, correct? 

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Mr. PEIKEN. Yes. I think that the way we look at it is, in every 

case that we recommend to the Commission, we are seeking, where 

appropriate, to recommend action against an individual. 

In some cases, that is not possible. But, over the last year, it’s 

been possible, in about 80 percent of all the cases that we bring, 

there are charges against an individual, as well as, potentially 

against an institution. 

So we are looking at both. There is a place for corporate liability 

and corporate penalties, and there are places for individual responsibility and individual penalties, and—including getting bad actors 

out of the markets. 

So some of the individuals that we come across in our investigations are recidivists or have engaged in serious wrongdoing, and 

they have no place being in our markets. We will recommend, as 

part of our proposal that we seek to suspend them or bar them entirely from participating in the industry. 

Chairman HUIZENGA. Previously, we had Bill Hinman here from 

Corporate Finance Division and talked a lot about ICOs and those 

kinds of things. It’s been pretty clear that most of these seem to 

be birthed as a security, and then some migrate into a futures. 

How I have been describing it is, is it fish or is it fowl? It turns 

out these are platypuses. Somehow or another, they don’t quite fit 

into categories. 

So I appreciate the opportunity to explore that a bit more. We 

certainly are working on that issue and needing some clarification—again, how that works for you all to, then, enforce what is 

being laid out. 

So, with that, I just want to say thank you. I appreciate the time. 

Thank both of you for your efforts on behalf of the SEC and that 

retail investor, as well. Without objection, I would like to submit 

the following statements for the record. I think we can. 

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. 

So, again, Mr. Peiken, Ms. Avakian, thank you for your time 

today here, and our hearing is adjourned. 

Ms. AVAKIAN. Thank you. 

[Whereupon, at 11:30 a.m., the subcommittee was adjourned.] 

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Æ 

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