U.S. GOVERNMENT PUBLISHING OFFICE

32–369 PDF WASHINGTON : 2018

OVERSIGHT OF THE SEC’S 

DIVISION OF INVESTMENT MANAGEMENT 

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 

SEPTEMBER 26, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–118 

( 

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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: 

September 26, 2018 .......................................................................................... 1 

Appendix: 

September 26, 2018 .......................................................................................... 25 

WITNESSES 

WEDNESDAY, SEPTEMBER 26, 2018 

Blass, Dalia, Director, Division of Investment Management, U.S. Securities 

and Exchange Commission .................................................................................. 5 

APPENDIX 

Prepared statements: 

Blass, Dalia ....................................................................................................... 26 

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(1) 

OVERSIGHT OF THE SEC’S 

DIVISION OF INVESTMENT MANAGEMENT 

Wednesday, September 26, 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 10:16 a.m., in room 

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

Present: Representatives Huizenga, Hultgren, Stivers, Hill, 

Emmer, Mooney, Davidson, Budd, Hollingsworth, Maloney, Sherman, Lynch, Vargas, Gottheimer, and Gonzalez. 

Chairman HUIZENGA. The committee will come to order. The 

Chair is authorized to declare a recess of the committee at any 

time. The hearing is entitled, ‘‘Oversight of the SEC’s Division of 

Investment Management.’’ And I will now recognize myself for 3 

minutes to give an opening statement. 

Hardworking families in West Michigan and across the Nation 

rely on the capital markets to save for each stage of life, whether 

it is saving for college, home ownership or retirement, the capital 

markets play an integral part in each of these milestones. In order 

to help more Americans achieve financial security in the future, we 

must continually improve our capital markets so they are as efficient as possible. 

By focusing on this priority, investors will have a better opportunity to receive the greatest return on their investment. Additionally, we must continue to expand access for Main Street investors 

and ensure that they are able to invest in a better future, not only 

for themselves, but for their children and grandchildren as well. 

Today’s hearing will focus on the policies and procedures of the 

SEC’s (Securities and Exchange Commission’s) Division of Investment Management (I.M.). The role of this Division is to protect investors, promote informed decisionmaking, and facilitate appropriate innovation in investment products and services through regulating the asset management industry. 

The I.M. Division is also responsible for the Commission’s regulation of investment companies, variable insurance products, and federally registered investment advisers. These types of investment 

companies include mutual funds, closed-end funds, business development companies, unit investment trusts and exchange traded 

funds. 

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Over 100 million individuals, representing nearly 60 million 

households, or roughly 45 percent of U.S. households, own funds 

that fall under the purview of the Division of Investment Management. 

Additionally, of the over 13,000 registered investment advisers, 

approximately half of those advisers served 35 million retail investor clients with over 12 trillion in retail client assets under management. Because of the significant role the I.M. Division plays in 

the capital markets, I am pleased to see the Commission is working 

diligently on several initiatives to improve investment options and 

experience for Mr. and Mrs. 401(k). 

Main street investors should have the tools they need in order 

make informed investment decisions and build a better financial 

future. Now more than ever, sound financial advice has become 

critical for every individual looking to invest and save for their future. 

I was pleased that the SEC finally assumed leadership as the expert regulator and crafting regulations for the standard of care for 

broker-dealers and disclosures by financial professionals. 

Additionally, we need to modernize our current regulatory framework. Our capital markets are the envy of the world. But while we 

have a 21st century financial marketplace, we are operating under 

a 20th century regulatory structure. I am a big believer in looking 

at the rearview mirror in order to assess existing policies to determine whether or not they are still appropriate for today’s markets. 

For example, the I.M. Division made the right decision to withdraw the 2004 staff guidance letters, regarding investment adviser’s responsibilities and voting client proxies, and retaining proxy 

advisory firms in preparation for the November roundtable that 

will more closely examine this issue. 

Needless to say, I am encouraged by the work and priorities of 

the SEC’s Division of Investment Management. And I look forward 

to hearing more about how its agenda is consistent with the SEC’s 

congressionally mandated trifold mission to protect investors; 

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

So, my time is expired. But the Chair now recognizes the Ranking Member of the subcommittee, the gentlelady from New York, 

Mrs. Maloney, for 5 minutes for an opening statement. 

Mrs. MALONEY. Thank you so much, Mr. Chairman. SEC’s Division of Investment Management is one of the agency’s most important divisions, because it regulates the asset management industry, 

including investment advisors, mutual funds, and exchange-traded 

funds or ETFs. 

Mutual funds and ETFs have been growing at an incredible 

speed. Our mutual funds have grown from $4.4 trillion in assets in 

2000 to a staggering $18.7 trillion in assets presently. And ETFs 

have grown from just $1.5 billion in assets in 2003 to nearly $3.3 

trillion today. 

The Investment Management Division oversees more than 12,000 

registered investment advisors, and these investment advisors collectively have over $71 trillion in assets under management. 

The Division has taken some positive steps during Director 

Blass’s tenure. In particular, I was pleased that Director Blass outnshattuck on FSR297 with DISTILLER

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lined a number of critical investor protection issues that mutual 

funds need to answer before they start holding significant amounts 

of cryptocurrencies. 

There are many outstanding questions about whether 

cryptocurrencies are appropriate investments with mutual funds, 

and I want to thank you for your thoughtful investor protection focused approach on this issue. 

The Division has also taken a couple of actions that I am concerned about. For example, earlier this month, the Investment 

Management Division, suddenly and without any explanation, 

withdrew two no-action letters from 2004 relating to proxy advisors. Proxy advisors provide recommendations to institutional investors, including mutual funds, on how to vote on board of director 

elections and shareholder resolutions. 

Mutual funds typically delegate the decision on how to vote on 

shareholder resolutions to the investment advisor managing the 

fund. Because mutual funds are often shareholders at hundreds, or 

even thousands, of different public companies, investment advisors 

sometimes rely on the recommendations of proxy advisors for how 

to vote on these matters. 

The SEC had provided detailed guidance on how and when investment advisors could rely on the recommendations of proxy 

firms in two no-action letters in 2004. And this system had worked 

well for 14 years. 

But then, 2 weeks ago, the SEC’s Investment Management Division suddenly withdrew these two letters. The only reasons the 

SEC cited were unspecific developments since 2004 and a desire to 

facilitate a discussion about proxy advisors at the SEC roundtable 

in November. 

Now, this is concerning. It is unclear why the SEC needed to 

withdraw two no-action letters that have been extensively relied 

upon for years, in order to simply facilitate discussion about proxy 

advisors. Surely, it was possibly to have a robust discussion about 

this without suddenly withdrawing the guidance that the markets 

had been observing and relying on for years. 

And I would be very interested in this hearing what developments since 2004 necessitated the abrupt withdrawal of these two 

letters. 

In addition, in 2016, the SEC adopted a series of important rules 

on liquidity management for mutual funds. One of these rules 

would have enhanced the disclosures that mutual funds make 

about the liquidity, allowing investors to make more informed 

choices, and potentially avoiding investing in funds that are riskier 

than the investor wants. 

Unfortunately, about 18 months after this rule was finalized, but 

before the new disclosure took effect, the SEC voted to roll back the 

rule by eliminating the public disclosure about funds’ liquidity. So, 

I will be very interested in hearing why the SEC thinks investors 

are not capable of properly understanding statistics about a fund’s 

liquidity profile. 

I look forward from—hearing from Director Blass about all these 

issues. And I yield back the balance of my time. 

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Chairman HUIZENGA. The gentlelady yields back. And with that, 

the Chair recognizes the Vice Chairman of the committee, the gentleman from Illinois, Mr. Hultgren, for 2 minutes. 

Mr. HULTGREN. Thank you, Chairman Huizenga, for convening 

this hearing. Throughout this Congress, the subcommittee has 

made an effort to review our securities’ laws to identify reforms 

that will allow our regulators, and regulatory framework, to support capital formation and drive economic growth. This all culminated with the passage of the bipartisan JOBS 3.0 package that 

is awaiting consideration in the Senate and hopefully we will move 

forward sometime soon there. 

This review of our regulatory framework is not an endeavor that 

can be successful without regulators who are willing to do the 

same. So far, I am very pleased with the efforts put forth by the 

Commission to review the regulatory framework, and their willingness to work with Congress, industry representatives, and Main 

Street investors to support structure and certainty in our capital 

markets. 

Just 2 weeks ago, your Division withdrew staff guidance letters 

issued in 2004 regarding the proxy process. I applaud this step 

ahead of the SEC’s upcoming roundtable on the U.S. proxy process. 

These actions represent thoughtful engagements and consideration 

of how to best protect shareholders and promote transparency in 

our capital markets. 

With millions of Americans already participating in our asset 

management industry, the Division of Investment Management 

plays a critical role in protecting the average retail investor from 

fraud and abuse, as this Division regulates the investment funds 

and advisors that interact directly with these Main Street investors. 

Additionally, as Congress looks for more ways to encourage people to save for retirement, it is important that this Division continuously strive to promote transparency and accessibility to allow 

more Main Street investors to enter the markets. 

Ms. Blass, I look forward to your testimony and any recommendations that you have for protecting Main Street investors 

as they save for retirement, their children’s education, and much 

more. With that, Mr. Chairman, I yield back the balance of my 

time. 

Chairman HUIZENGA. The gentleman yields back. And with that, 

today, I am very pleased to welcome the testimony of Ms. Dalia 

Blass, Director of the Investment Management Division of the 

SEC. Ms. Blass has extensive private sector industry service, as 

well as serving at the SEC in a number of leadership roles within 

the Division of Investment Management prior to becoming Director. 

Very pleased to see that—your team behind you. You have—we 

have a few familiar faces. A couple of new faces, though, to that 

team are your kids, Alexander and Kathleen, who are here on—I 

believe, on an excused absence. If it is not an excused absence, 

have the teacher come talk to me. 

But just to—just to let you guys know, the work that your mom 

does is very, very important. And we want to say thank you to you 

because I know it might mean mom has to take some late-night 

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phone calls sometimes, or sometimes on a Saturday, or things that 

are going on. But the work that she is doing is very important for 

our country, right now, but also for the country that you guys are 

going to be inheriting as well. 

So, having a bunch of kids myself, I know that sometimes they 

are on the front end of the challenges that the jobs that mom and 

dad might have. But I just want to say thank you to you and let 

you know your mom’s doing an awesome job. So, thanks for being 

here. 

So, with that, Ms. Blass, you are going to be recognized for 5 

minutes, and thank you for being here. 

STATEMENT OF MS. DALIA BLASS 

Ms. BLASS. Thank you. Chairman Huizenga, Ranking Member 

Maloney, and Members of the subcommittee, thank you for inviting 

me to testify before you today about the work of the Division of Investment Management. 

I would also like to thank my family for their support, including 

my two oldest children who are seated behind me today. This is a 

great opportunity for them to experience government at work. 

I am honored to serve as Director of the Division of Investment 

Management, where I work every day with talented and dedicated 

staff, to develop regulatory policy for the asset management industry. It is an industry that is critical to the U.S. economy and the 

retirement and financial needs of millions of American investors. 

As you said, Mr. Chairman, by way of example is that at the end 

of last year, over 100 million investors, individuals, representing 

nearly 60 million households, that is 45 percent of U.S. households, 

owned funds. 

In light of the importance of the asset management industry to 

investors and the markets, since my appointment as Director of the 

Division last year, we have embraced three principles that guide 

our efforts in developing, assessing, and implementing policy initiatives. First, improving the retail investor experience. Second, modernizing the regulatory framework and our engagement. And third, 

leveraging our resources efficiently. 

The Division has been hard at work in 2018, so I will just touch 

on a few highlights from my written testimony. Improving the retail investor experience is about assessing the information needs of 

and our interactions with Main Street investors. Technology has 

presented us new opportunities for how we provide and solicit information. 

With that in mind, the Division is working on several initiatives 

to improve the investor experience. For example, earlier this year, 

the Commission proposed a comprehensive rulemaking package on 

the standards of conduct of financial professionals. The package is 

designed to serve retail investors by bringing the legal requirements and mandated disclosures in line with investor expectations. 

The package included regulation best interest, the relationship 

summary disclosure, and an interpretation of the investment advisory fiduciary standard. 

Our Division led the staff’s efforts on the relationship summary, 

which is designed to educate investors about whether they are 

dealing with a broker-dealer, an investment advisor, or both, and 

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why that matters when considering the services, fees, and conflicts 

of the financial professional. 

In the proposal, the Commission sought comments and ways to 

optimize delivery of information to retail investors. This rulemaking has also been an opportunity to try out new ways to reach 

Main Street investors. 

We have rolled out a new Website inviting investors to tell us 

about their experience, developed simpler ways for investors to provide comments, and held roundtables in seven cities. This investor 

feedback has been valuable to the staff as we consider the comments we have received. 

Another example is our work to improve the design, delivery, and 

content of fund disclosures. Disclosure is the backbone of the Federal securities laws and is a critical tool for investors when making 

investment decisions. With that in mind, the Commission issued a 

request for comment to gain insight in ways to improve and modernize fund disclosures. 

Moving to the second principle, modernizing our regulatory 

framework and engagement, the Division is working on several initiatives to help our markets grow and develop for the benefit of all 

market participants, including our Main Street investors. This includes work on an ETF rule and revisiting the role of fund boards. 

We are also hard at work on important initiatives, like a recommendation for adopting a rule under the FAIR Act and proposing rule changes to modernize the ways BDCs and closed-end 

funds are offered to the market. 

Finally, with respect to the third principle, we are looking at how 

we can employ our resources effectively and efficiently. We are a 

Division of around 180 people responsible for policy effecting more 

than 20,000 registered funds and investment advisors. 

In an industry that is approximately $80 trillion in assets under 

management, enhanced use of technology and continuous process 

improvements are critical to our effectiveness and our efficiency. In 

that regard, one of our main focuses is enhanced use of data analysis in our disclosure, oversight, and regulatory initiatives. 

Thank you, again, for inviting me to discuss the Division’s effort 

and the work of its dedicated and talented staff. I look forward to 

answering your questions. 

[The prepared statement of Ms. Blass can be found on page 26 

of the Appendix.] 

Chairman HUIZENGA. Thank you for your testimony. At this 

time, I recognize myself for 5 minutes of questioning. 

As the Ranking Member had brought up as well, there were the 

no-action letters, the two letters that were issued in 2014 to Institutional Shareholder Services and the Egan-Jones Proxy Services. 

Can you please elaborate on how rescinding these letters will actually help investment advisors vote in their clients’ best interests 

and manage conflicts of interest? 

Ms. BLASS. Thank you for the question. So, the investor advisors, 

the law has not changed. The Commission adopted a rule back in 

2003 with respect to proxy voting and that is the basis. That is the 

foundation, if you will. 

Since that time, there have been the two no-action letters that 

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ance thereafter. We have been undertaking a full review of all 

guidance issued by the Division. This is part of modernizing our 

regulatory framework to see which guidance should be amended, 

rescinded, supplemented as we look at market developments. 

We have been doing extensive outreach to issuers, to proxy advisors, to investors in this space. Our outreach resulted in our determination to hold a roundtable to make sure that we have a forum 

to discuss these issues, where all participants, all interested parties 

can come together and have a good discussion about the issues in 

this space, because it is extremely important to investors. This is 

how they exercise their voice in the market. 

Chairman HUIZENGA. And that roundtable is scheduled for 

when? 

Ms. BLASS. November 15th. 

Chairman HUIZENGA. OK. 

Ms. BLASS. So, looking at the—our engagement led to we needed 

this roundtable. It is a good path forward. And looking at the 

roundtable, we also looked back at a roundtable that we hosted 

back in 2013. And in that roundtable, those two letters got a lot 

of air time. 

There are significant issues that should be discussed in the coming roundtable. So, with that in mind, and also in mind the market 

developments since 2004 when they were issued, we determined 

the best course of action would be to withdraw these two letters 

and discuss the important issues with respect to proxy advice. 

Chairman HUIZENGA. OK. In light of that, do you believe that 

the SEC should provide further guidance, what it means to be a, 

quote, ‘‘independent third party,’’ or how an investment advisor can 

satisfy the fiduciary duty as required by the 2003 rule? 

Ms. BLASS. That is one of the very questions that we are hoping 

to get information about, during this roundtable, so that we can 

make appropriate recommendations to the Commission. 

Chairman HUIZENGA. OK. Well, it is interesting that the two 

largest proxy advisory firms combined control is at least 97 percent 

of the proxy advisory industry. And, obviously, they also sell services while they are then doing some of these reviews. And I am 

very concerned about the potential conflicts of interest on behalf of 

these firms and the folks that they are trying to serve. 

Let me quickly move on to exchange-traded funds, ETFs. According to recent data by the ICI, Investment Company Institute, ETFs 

contain $3.61 trillion in assets with 1,923 different ETFs. One of 

the reasons ETFs have grown so rapidly is because they offer a 

lower cost alternative to mutual funds. 

Can you please elaborate on why ETFs are less costly than mutual funds and highlight other reasons that may prove to be better—they may be a better alternative for investors? 

Ms. BLASS. ETFs are an investment company, and they are different than mutual funds. They are open-end investment companies, but they are different than mutual funds. An investor can go 

in and out of an ETF intraday. At any point in the day, they can 

buy and sell. Versus a mutual fund, you are bound by end of day. 

The structure of the ETF provides certain tax efficiencies and 

that provides lower cost. A lot of that is due to the in-kind nature 

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of how they transact with the primary market, the authorized participants. 

They also have less fees and other respects as well. For example, 

they usually don’t have a load. The transfer agency fees are less. 

A lot fewer fees in ETFs. 

Chairman HUIZENGA. And there was a June 28, 2017, the SEC 

voted to propose a new rule to modernize regulatory framework of 

ETFs. And I am curious if you can explain how the proposed rule 

leveled the playing field? 

And then, finally, really quickly, last month, the SEC rejected 

nine proposed Bitcoin ETF proposals and decided to delay the decision allowing for CBOE Bitcoin ETF. Do you believe that some 

version of Bitcoin ETF will be approved in the near future? And 

can you speak to the pros and cons of approving or not approving 

those product? 

Ms. BLASS. So, in June of this year, the Commission proposed an 

ETF that would cover the ETFs that we usually see in the exemptive application program. We have issued over 300 individual exemptive orders to ETF sponsors for them to launch and operate to 

date. 

So, a rule would create a transparent, consistent, and efficient 

regulatory framework for these ETFs that increasingly, investors 

have shown interest in holding these products. 

With respect to your question with respect to Bitcoin ETFs, those 

were actually exchange-traded products, not exchange-traded 

funds. And this is something that I do think is important, because 

there is market confusion when the term ETF is used, regardless 

of what the product is about. 

An ETF is an investment company. It comes under the 1940 Act 

and has to comply with the mandates of the 1940 Act. An ETP (exchange-traded product) is usually a commodity pool, and it is a— 

it comes to market in the same way an operating company would 

come to market. These are different products and so it is important 

to understand the differences. 

Chairman HUIZENGA. My time is well expired so we will have a 

generous gavel with Ranking Member as well, who is recognized 

for 5 minutes. 

Mrs. MALONEY. Thank you so much, Mr. Chairman. And thank 

you, Director Blass, for your testimony. 

I would like to ask you about the SEC’s 2014 rule on money market funds. As you know, the SEC’s rule made certain money market funds that invest in corporate and municipal debt, more transparent, requiring them to tell investors the fund’s true marketbased value every day, known as a floating Net Asset Value, or 

NAV. 

This is designed to take away the first mover advantage, that 

gives the investor an incentive to be the first one to withdraw their 

money, which is what leads to devastating investor runs that can 

destabilize the entire market. So, I think that this was one of the 

most important post-crisis reforms that we made. 

The rule has now been in effect for about 2 years. So, my question to you is, have you seen any major problems in money market 

funds since the rule came into effect that would necessitate major 

changes to the SEC’s 2014 rule? 

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Ms. BLASS. The rule was adopted back in 2014. The Commission, 

at the time, adopted that—the reform package for money funds— 

to address certain structural risks presented by money funds since 

their inception. 

Ultimately, to answer your question about whether any changes 

are necessary, that would be a decision of the Commission. We, the 

staff, monitor money market funds daily. We monitor them pretty 

closely. 

During the implementation, we did see a significant shift in assets from prime funds into government funds. A shift to the tune 

of over $1 trillion. We have and we will continue monitoring money 

funds, as well as our short-term funding markets, to see how they 

evolve within our regulatory framework. 

Now, we do know that certain—people believe that further 

changes may be necessary or are necessary with respect to money 

funds. I will note that our doors are always open. We are happy 

to engage and hear their perspectives. 

Mrs. MALONEY. OK. On the no-action letters, the SEC simply 

said that it had decided to withdraw the letters, because, quote, 

‘‘developments since 2004.’’ So, I just would like to know exactly 

what were the developments since 2004 that made it necessary to 

just withdraw these two letters? 

Ms. BLASS. So, the Commission adopted the rule for proxy voting 

toward the end of 2003. Since that time, investment advisors have 

had experience with how to develop policies and procedures to address conflicts. They have a better sense of what those conflicts are. 

The market has also changed significantly. Back then, the assets 

of the asset management industry were just about $7.5 trillion. At 

this point, it is well over $20 trillion. That is just the registered 

fund assets. 

The passive investing has also grown tremendously since that 

time. The regulatory landscape for those proxy advisors has also 

changed. Technological changes in data analysis and gathering has 

also been very significant in that time. There have been a lot of 

market developments in that time. 

What hasn’t changed, this is—and you mentioned it in your 

opening statement is this is about—fundamentally about how 

shareholders exercise their rights. This is about shareholder rights. 

And the proxy firms are a very important part of this ecosystem, 

if you will. We wanted to focus on discussing these issues, which 

are really important to shareholders in the upcoming roundtable, 

to see what changes, if any, should be made since the adoption by 

the Commission of the rule in 2003. 

Given how much airtime, whether rightly or wrongly, these two 

letters have received, we determined the best course of action, to 

make sure that we get robust discussion in the roundtable, would 

be to withdraw these two letters. 

Mrs. MALONEY. Well, I would like to follow up by asking—you 

mentioned that the 2014 legal bulletin on proxy advisors remains 

in effect, right? So, do you believe that the guidance in this bulletin 

is effectively identical to the two 2004 letters that you withdrew, 

meaning that nothing of SEC’s substantive guidance on proxy advisors has actually changed? 

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Ms. BLASS. I don’t—I wouldn’t say those—the letters are identical to the staff legal bulletin. And the staff legal bulletin is closer 

to what the Commission said, with respect to the investment advisors’ fiduciary duty and duty to monitor—fiduciary duty. It is a fiduciary with respect to its duty to monitor the use of proxy advisory firms. 

And I will note that the staff legal bulletin and the staff statement we put out, with respect to the withdrawal, we did note that 

we expect to discuss the staff legal bulletin in the roundtable. 

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

Ms. BLASS. Thank you. 

Chairman HUIZENGA. The gentlelady’s time has expired. With 

that, the gentleman from Illinois is recognized for 5 minutes. 

Mr. HULTGREN. Thank you again, Mr. Chairman. Ms. Blass, 

thank you. Welcome. Glad you are here. 

In my opening statement, I mentioned my appreciation for the 

SEC’s willingness to review current regulations and engage with 

Congress, investors, and industry regarding reforms to fit today’s 

capital markets. 

Just recently, the SEC reinforced this idea with the announcement of a staff roundtable on the proxy process in November. Additionally, just 2 weeks ago, your Division withdrew two no-action 

letters from 2004 that were issued to proxy advisory firms. 

Your testimony states that these were revoked as part of the 

preparation for the roundtable. I wondered, is this intended to 

allow for a more complete consideration of the proxy process as it 

stands today, compared to 2004 when the letters were issued? 

Ms. BLASS. That is what we hope to have in the roundtable, a 

wholesome discussion of all aspects of the proxy process. 

Mr. HULTGREN. OK. Understanding that this roundtable is still 

to come, do you believe that rescinding these letters will bring 

more transparency and accountability to the proxy voting process? 

And is there further guidance that you already anticipate will be 

needed? 

Ms. BLASS. I think it is important for us to use the roundtable 

to get better information about the state of play, the market developments, how proxy advisors are being used. I can go on down the 

list. That is what the roundtable is about. So we can get this information. Can have folks, in a transparent fashion, talk together 

about where the state of play is. And then, we can make appropriate recommendations to the Commission. 

Mr. HULTGREN. Great. In July, I sent a letter to the financial 

regulators, with responsibility for the Volcker Rule, requesting that 

they reconsider the definition of covered funds so that it excludes 

venture capital. 

As my letter stated, the congressional record clearly demonstrates through a—colloquy between Senator Boxer and then 

Chairman Franks that investing in investor capital was never intended to be prohibited by the Volcker Rule when Section 619 was 

drafted by Congress. 

Additionally, in July when Chairman Powell came before this 

Committee, I asked him about this issue. And he stated that these 

activities are not a threat to safety and soundness. 

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11 

I understand that the comment period is still open on this issue. 

However, I would like to pose a hypothetical to you. Say that a 

bank-controlled cover funds—excuse me, a bank-controlled covered 

fund at a venture capital firm has an agreement on a $200 million 

investment into a startup company owned by the venture capital 

fund. However, the venture capital fund says they would prefer to 

have the fund make an investment into a credit or a debit instrument instead of an equity instrument. 

Based around the current construct, the bank fund would not be 

allowed to invest, unless the company was willing to sell an equity 

piece of the company. Why should it be that the Volcker Rule—why 

should it be that the Volcker Rule should differentiate between 

credit investments and equity investments? And why should a 

bank be allowed to lend through its own balance sheet but not 

through a fund? 

Ms. BLASS. We do appreciate that the definition of covered funds 

is both overinclusive and underinclusive, in some circumstances, 

and that there had been implementation challenges with the definition of covered funds. That is why we have the request for comment out. 

I believe the comment period closes mid-October, and we did ask 

a lot of questions in that regard. And we look forward to seeing 

commentaries, thoughts, and opinions about this. 

Mr. HULTGREN. Great. We are looking forward to some clarity as 

well on it. So, looking forward to resolution there. 

Finally, as you know, the standard of care that governs personalized investment has been a widely debated issue before this committee and across the asset management industry. I am pleased 

that the SEC has stepped in, following the rule by the Fifth Circuit 

Court of Appeals that nullified the DOL (Department of Labor) fiduciary rule. 

I believe that the SEC is better suited to regulate this standard. 

I have been following the regulation of the best-interest rulemaking 

process. During this process, some commenters expressed concern 

about the proposed form CRS. How do you plan to incorporate the 

feedback you receive through the comment process on that? 

Ms. BLASS. Thank you for the question. We have received thousands of comment letters. I think there are north of 6,000, at this 

point. We have also had investor roundtables. We have had the 

‘‘Tell Us’’ campaign, so investors can submit comments directly into 

the comment file through our—the feedback form that we have on 

the ‘‘Tell Us’’ page. And they have been doing so. 

So, we have received a—and we have also had third parties perform investor testing and submit these results into the comment 

file. We have a lot of great comments, and the staff is going 

through it to see what changes—what recommendations should be 

made to the—to the form—changes to be made to the form, so we 

can make recommendations to the Commission. 

Mr. HULTGREN. Thank you, Director Blass. I will yield back the 

last 30 seconds to the Chairman if he has any other questions, or 

I just yield back my time. 

Chairman HUIZENGA. It is an efficient day at the committee. 

Well, thank you. The—with that, Mr. Sherman from California is 

recognized for 5 minutes. 

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12 

Mr. SHERMAN. First, I have a comment about cryptocurrencies, 

then I will go into three questions. Cryptocurrencies are either an 

investment or a medium of exchange. To the extent they are a medium of exchange, they undermine the power of the Federal Government. 

We get seigniorage which is a huge profit center for the U.S. 

Government. If the dollar wasn’t used around the world, we 

wouldn’t get it. Second, we have lower borrowing costs. And third, 

our sanctions policy around the world can bite because the U.S. 

dollar is the medium of exchange. 

There is a libertarian, almost anarchist, philosophy out there 

that says disempower the U.S. Federal Government. As part of the 

U.S. Federal Government, I disagree. 

But you deal with investments. And if there was an investment 

vehicle that wanted to register, that invested in nothing but illegally issued securities—publicly traded securities that had never 

been registered, violations of every State and Federal law, I don’t 

think you would say, well, you can register a security whose assets 

consist exclusively of illegally issued securities. 

Cryptocurrencies are, if they are investment vehicles, illegally 

issued securities. They are an investment vehicle with none of the 

investment protection. So, I hope that you would do everything possible to stop cryptocurrencies and investments based on them, not 

to mention the billions that had been lost by various investors. 

Now, for questions. I want to congratulate the SEC on advancing 

Rule 30e-3 which modernized the default method for shareholder 

reports. You are saving $2 billion over the next 10 years and 2 million trees. What more can the SEC do to reduce the clutter that 

builds up on my desk as I get these on paper and to save the trees? 

Ms. BLASS. Thank you for the question. We have actually 

launched the investor experience initiative to broadly look at all 

fund disclosures and what we can do to improve the design, delivery, and content. So, not just how we deliver the documents— 

Mr. SHERMAN. Yes. 

Ms. BLASS. Or a disclosure, but what we can do to make the disclosure move into the 21st century. To make use of modern technology. To provide it to investors in a way that they could assimilate the disclosure— 

Mr. SHERMAN. Yes. 

Ms. BLASS. So that they can make the informed investment decisions. Disclosure— 

Mr. SHERMAN. And an advantage there, if it is delivered electronically, you could require to have a link in there. So, I click 

here, and I see some other document. 

Ms. BLASS. You can use layered disclosure. Whether you use 

paper or you use electronic delivery, you can use layered disclosure 

to provide better information to investors. 

Mr. SHERMAN. Yes. It works better electronically. I hope you will 

save as many trees as possible. And I think it is actually better for 

investors. Because when I get it on paper, I lose it. When I get it 

electronically, six—two—I get some extra time. Two weeks later, I 

can look it up and see it on my iPad. Not that I would fail to pay 

attention to what is going on in these hearings. 

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13 

I have opposed legislation that would undo the SEC’s 2014 

money market reforms. These reforms were put in place to increase 

transparency. Do you share the concerns of Chairman Clayton, that 

making major changes to these reforms would be disruptive of 

the—in particular, the insta—the money market funds that invest 

in corporate debt and are held by institutional investors? 

Ms. BLASS. So, I will let the Chairman speak for himself. I do 

believe that he was acknowledging the shift in assets that I mentioned, the one trillion dollars—over one trillion dollars—that shifted from the prime funds into the government funds. And that putting aside the merits of the rule or that outcome, we should always 

carefully consider the impacts of such shifts on investors and the 

markets. 

Mr. SHERMAN. I hope we—well, I am going to move on to the 

third question and final one. In 2014, the S&P and Russell removed business development companies from their various stock 

indexes. I spend a lot of time in this room. We are all dedicated 

to providing capital to small business. But the reason they did is 

over concerns the disclosure rule of the index fund’s overall expense ratio. 

Given that the cost incorporated into an index fund’s expense 

ratio, under this disclosure rule, when it makes an investment in 

a business development company are not additional expenses of the 

index fund, what steps is the SEC staff taking to look at the negative impacts of this, in effect, double counting of expenses and the 

negative effect it has on capital for small business? 

Ms. BLASS. I believe you are referring to the acquired fund fees 

and expenses, which the Commission adopted back in 2006 to provide transparency to investors with respect to fund-to-fund investments. 

We are aware of the—of the issue, with respect to business development companies. There has been extensive engagement. And I 

believe there is an application, exemptive application, now on file, 

which the staff is working on. 

Mr. SHERMAN. I hope you move forward with that and I yield 

back. 

Chairman HUIZENGA. The gentleman’s time has expired. With 

that, the gentleman from Ohio, Mr. Stivers, is recognized for 5 minutes. 

Mr. STIVERS. Thank you. And I want to follow up on a question 

that Mr. Sherman just asked, just to make sure I understand. So, 

obviously, the SEC’s acquired fund fee rule—fund fee and expense 

rule has had a negative impact on a lot of business development 

companies that have faced potential delisting from some indices 

and other things. 

And, as you probably know, BDCs are not a passive investment. 

They are much more like a REIT (real estate investment trust). 

And they deserve the same kind of consideration, like a REIT, with 

regard to the AFFE (acquired fund fees and expenses). Do you 

think that that is something you guys would be willing to look at? 

And do you see those as similar investment tools with the same 

kind of operating costs and expenses that could drive an artificial 

number on the AFFE that could cause problems for the BDCs that 

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14 

want to be listed? And would you be willing to look at some type 

of exemption from the AFFE, similar to what REITs have? 

Ms. BLASS. So, as I mentioned, this was a rule that was adopted 

by the Commission back in 2006. And, actually, I happen to have 

been the staff attorney that worked on that rule. 

Mr. STIVERS. Great. 

Ms. BLASS. At the time, when the rule was adopted, BDC assets 

were significantly— 

Mr. STIVERS. They were nothing almost. 

Ms. BLASS. Smaller. 

Mr. STIVERS. Rounded to zero, yes. 

Ms. BLASS. Maybe not zero, but pretty— 

Mr. STIVERS. Rounded to zero. 

Ms. BLASS. —close. 

Mr. STIVERS. Yes. 

Ms. BLASS. And we actually did not receive any input from 

BDCs, at the time, no highlight of this issue that you are raising. 

Since then, there has been outreach. They have raised this particular issue. And they have filed a request for an exemption from 

the—from this provision with the—with the Division. And that is 

being actively reviewed by the staff. 

Mr. STIVERS. Great. I appreciate your review on it. I think it is 

having a negative impact on an investment that allows a lot of 

Main Street folks to be able to participate in middle-market companies and investments that they haven’t had access to. Only accredited investors have, normally, had access to those type of investment vehicles where they can share in the upside of the growth of 

businesses. And it is a very big deal. And it also funds Main Street 

jobs. So, I think it is a big deal for our economy. It is a great opportunity for Main Street investors. And it is just a different type of 

investment than a passive investment. So, I appreciate your willingness to consider that. 

And that is all I had. I will yield back. 

Chairman HUIZENGA. The gentleman yields back. With that, the 

Chair recognizes the gentleman from Massachusetts for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman, and welcome, Director. In 

a letter this summer to the SEC commissioners, our Secretary of 

State, Bill Galvin in Massachusetts, asserted, in its best-interest 

proposal, the SEC was simply offering a weak and somewhat vague 

standard that, unless modified, would force Massachusetts to adopt 

its own rules to protect investors and require broker-dealers to provide non-conflicted advice that puts the investors’ interests ahead 

of the brokers’ interests and compensation. 

Secretary Galvin also contends that the proposal merely presents 

a veneer of a fiduciary standard and that would allow existing 

weaknesses in FINRA’s suitability standard to persist. What are 

your—what are your responses to the concerns that—and, by the 

way, I agree with Secretary Galvin. He has been very vigilant on 

behalf of consumers, especially financial consumers. 

What are your responses to his concerns? 

Ms. BLASS. Thank you for the question. If I may, I just want to 

start by recognizing my colleagues in the Division of Trading and 

Markets who led our—the staff’s efforts with respect to developing 

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15 

recommendation and regulation best interest. So, without stepping 

onto their turf too much, I will offer you my perspective. 

What the proposal does is it took the principles from the investment advisor fiduciary standard, the duty of care and the duty of 

loyalty. It looked at the principles in the DOL fiduciary rule, the 

impartial conduct standards. 

Taking these principles, it tailored the principles to the brokerdealer relationship, a model to preserve that model. This was important to provide—continue providing choice to investment advisors—to the—to the—choice to investors in the market with respect 

to commission accounts. 

What we did notice, after the DOL fiduciary rule went into effect, 

is that we did see a reduction in these commission-based accounts. 

That was—that impacted the choice of investors. So, while we were 

looking at these principles and wanted to make sure these principles moved over were applied to the broker-dealer model, we did 

it in a way we tailored it to preserve that choice for the retail investor. 

Mr. LYNCH. You suggested there is some harmony there. But we 

passed the Dodd-Frank Act, and I think it was Section 913. It says 

that the investment—regarding the standard of conduct for brokers. 

In that—we put language in there that said that the standard 

must be no less stringent that the fiduciary standard under the Advisors Act. And, clearly, it is not—I understand that the court overruled us in that effort. But there is still statutory language that insists that the standard be no less stringent. 

And I think having a best-interest standard, which is clearly less 

exacting than the fiduciary standard, we fail to meet that obligation that is set forward in the Dodd-Frank Act. Do you concede 

that that is a gap now? That there is a delta between what we 

were hoping for in Dodd-Frank and what we are—what we are receiving now under the SEC’s rule? 

Ms. BLASS. As part of the Commission’s proposed rulemaking 

package, the Commission also put out a proposed interpretation of 

the investment advisor fiduciary standard. I believe when you look 

at the standard, as outlined, the Federal fiduciary standard, and 

you look at Regulation Best Interest, you will see core principles 

that are the same. 

For example, neither—an investment advisor and a broker-dealer 

must act in the best interest in the customer, the retail customer. 

So, the principles, the core principles, are the same. They were tailored in Regulation Best Interest to apply to the broker-dealer 

model. 

All that—I think it is also important to keep in mind, this is a 

proposal. We have received north of 6,000 letters, comment letters 

to this proposal. And we are in the process of going through these 

comments to see what changes, if any, we should be recommending 

up to the Commission. 

Mr. LYNCH. That is great. Thank you very much. I appreciate 

your answer. And I hope that you do take those comments seriously and try to hew to the stricter standard to protect investors. 

Thank you. I yield back. 

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16 

Chairman HUIZENGA. The gentleman’s time has expired. With 

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

5 minutes. 

Mr. EMMER. I thank the Chair and I thank Ms. Blass for being 

here today. Appreciate your testimony. 

I have a couple of areas that I am going to try and focus on. 

First, last month, Chair Clayton announced that the SEC is working on a concept release to explore, quote, ‘‘broader access to investing in privately held companies, among other things.’’ Can you 

walk me through the role that the Division of Investment Management has in developing this concept release? 

Ms. BLASS. In my Division, we have private funds and we have 

registered funds. And that is a statutory distinction, if you will. We 

have had some requests to see how we can expand some of these 

opportunities, for example, by way of registered funds investing 

more in private funds. 

We work with folks who are interested in this. Our doors are always open to hear their perspectives. Ultimately, we balance investor protection with making sure that we are also looking to see in 

what ways we can provide more opportunities for investors, for retail investors. 

Mr. EMMER. Are—but are you—is your Division working on this 

concept release? 

Ms. BLASS. This would impact our Division, so we would be 

working closely with other divisions who are also at the center of 

this, if you will. 

Mr. EMMER. OK. And I think you have already covered, with the 

Chair’s questions, the issue about—well, I guess I would ask it this 

way because he was asking about ETFs earlier. As the Director, 

would you be willing to spend time and resources to consider ways 

for Main Street investors to benefit from private equity investments via ETFs or other investment vehicles? Particularly, if this 

helps provide capital to smaller and innovative companies? 

Ms. BLASS. So, as I mentioned, the—it is a statutory delineation 

between private and public that said we do have requests to see 

how that could be expanded. And we always welcome people’s 

thoughts. Our doors are open. And we are happy to work with 

them, as long as we balance the investor protection with the opportunities, if you will. 

Mr. EMMER. Got it. Shifting gears to proxy advisors. In the SEC’s 

view, why is there so little competition in the proxy advisor industry? 

Ms. BLASS. So, the proxy advisory industry is really high volume, 

low margin. And with that, economies of scale kick in and that is 

how you get the few numbers at hand. There are about five proxy 

advisory firms, with two being the majority in the market. And I 

do believe it is just economies of scale. 

Mr. EMMER. Well, do you believe that the SEC needs to step in 

to correct what is a distortion? Because clearly you don’t want it 

concentrated in just a few. I would imagine it would be much better, despite the low margin, high volume. Much better if you had 

many different choices out in the marketplace. Is this something 

that you think the SEC should step in and examine and try to— 

try to cure? 

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Ms. BLASS. If I may, I will offer a couple of points on this and 

this would be from the perspective of investment management. Because I do know that proxy plumbing, in general, is a bigger issue 

or a broader issue. 

First, with respect to proxy voting, the investment advisor is the 

fiduciary. The investment advisor is the one that is tasked with 

voting in the best interest of its client. So, that is one thing to keep 

in mind. 

The other is these are issues, the ones you raised, had been 

raised over time, and that is one of the reasons why we are having 

the roundtable. We want to have this discussion. We want to understand the market better. And we want this to be done in a 

transparent, public forum so that we can get the views of as many 

interested parties as possible. Including, I should mention, that 

there is a comment file that is already open for people to submit 

their viewpoints. Any point, at this point, from today onward. 

Mr. EMMER. And maybe I am beating it too much. But just very 

quickly in the couple seconds I have left. Beyond the roundtable, 

how is the SEC and your Division reviewing, in any way, the state 

of competition transparency policies in conflicts of interest among 

proxy advisory firms? 

Ms. BLASS. So, we actually have done—with colleagues from the 

Division of Corporation Finance and other—and colleagues from 

the Office of the Chief Accountant for the Commission, we have 

been doing extensive outreach. We have reached out to investors, 

to registered funds, VTO advisors, to the proxy advisory firms. 

So, we have done outreach in this area and it actually was this 

outreach that led us down the path to a roundtable, so we can have 

this broad, public forum to discuss all these issues. 

Mr. EMMER. Thank you. My time has expired. 

Chairman HUIZENGA. The gentleman’s time has expired. With 

that, the gentleman from Arkansas, Mr.—oh, I am sorry. Mr. Davidson is here. Sorry. With that, gentleman from Ohio, Mr. Davidson, is recognized for 5 minutes. 

Mr. DAVIDSON. Hi. Thank you so much for being here. Thanks for 

you prior comments on ETFs involving cryptocurrencies. I take it, 

from the fact that the SEC’s deemed Bitcoin to be a commodity, not 

a security. That is why you are calling it a product. Is that accurate? 

Ms. BLASS. Well, it depends on how the fund—what the fund 

holds. There is a test under the Investment Company Act. And 

40—at least 40 percent of the fund’s portfolio should be investment 

securities. And then, they would come under the Investment Company Act. 

Mr. DAVIDSON. OK. So, is that—what other criteria would lead 

you to call it product instead of a fund? So, an ETF versus an ETP? 

Ms. BLASS. So, when I look at ETFs, I think of them as investment companies that meet the definition of investment company 

under the Investment Company Act. 

Mr. DAVIDSON. OK. 

Ms. BLASS. So, it is the portfolio. It is the composition of the portfolio. 

Mr. DAVIDSON. OK. So, I guess in the sense that there has been 

an ongoing effort to create these, that an ETF that involves 

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cryptocurrencies or some form of token, has the SEC come up with 

guidance or—I think the concern for the industry is that we are 

getting regulation by enforcement, or regulation by rejection in this 

case. 

But it is hard to discern what actually would meet the criteria. 

Do you have something like that in the works? 

Ms. BLASS. We do. So, the Investment Company Act, since its inception in 1940, it is a—it is a very innovative act. It is very flexible. It has allowed a lot of innovation, including ETFs in general. 

Several sponsors are interested in offering exchange-traded funds 

that would hold crypto-related assets. We are engaging with these 

sponsors to make sure that our engagement is as broad and as 

transparent as possible. 

Back in January, we issued a letter to the ICI and SIFMA AMG, 

and that letter is—no, we have a Website now— 

Mr. DAVIDSON. Right. 

Ms. BLASS. —that has the letter. And we are interested in any 

comments. We encourage the comments to come in on this public 

Website, so that we can have a transparent dialog and bring different viewpoints in. 

That letter highlighted the issues that these sponsors should consider before they are able to offer these funds to the market. At 

this point in time, believe it or not even though we issued it in January, they are just starting now to come back to us with responses. 

Mr. DAVIDSON. OK. So, thanks for that. We will certainly, by all 

means, look at the—if you are concerned about this issue, look at 

the January 2018 letter and provide comment to the SEC. 

And then, I think the other part is one of the biggest challenges 

that has been highlighted, with cryptocurrencies or digital tokens 

of a broader range, is custody. What custody issues do you see— 

do you—ways to resolve that or concerns that it may not be able 

to be addressed? Where are you—where is the SEC thinking about 

with respect to custody? 

Ms. BLASS. Yes. So, we did raise, in the letter of the custody 

issues whether, for example, there would be a qualified custodian. 

And, at this stage, we have had some good outreach, folks who are 

considering how to structure and in a manner that would be compliant with our rules. 

Mr. DAVIDSON. And so, I get that. But the whole premise of a distributed ledger is there is a record. And, frankly, it is not just a 

record in one place. It is a record all over the planet. And it is not 

just available to the SEC. It is available to the consumer. And, 

frankly, anyone can look and say this is the—this is the address. 

So, I think the concern so far, particularly with respect to things 

that aren’t really securities that the SEC is looking at as part of 

a bundle. The underlying asset may not be a security, but it is in 

a fund, so the SEC has oversight there. 

If you look at the custody of it, you are going through a path to 

create a duplication of effort to say, we have to find a way to tag 

something that already has a ledger to say who owns this account. 

It would be like saying, ‘‘no, really, really, who owns this Fidelity 

account?’’ Well, Fidelity already shows you this is the owner. And 

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19 

son that owns the Fidelity account. But on a massive number of 

levels, because it would be every token, or every coin in the case. 

So, is there a way to address that without adding a third party 

and just using the ledger? 

Ms. BLASS. I appreciate your concerns and the question. So—and 

the promise of blockchain and distributed ledger technology and 

what it could mean, not just in the custody space, but broadly in 

the asset management space. What it could do and that, ultimately, it would go to the benefit of Main Street investors. 

Mr. DAVIDSON. Right, it would eliminate a lot of intermediaries. 

And it would benefit the investor and the consumer. 

Ms. BLASS. Yes. There is the promise of that technology. Where 

we are, at this stage, is having that conversation of, here is our law 

and this is the product you want to offer. What are the issues, and 

how can we marry the two together? 

So, that is the conversation we are having. I—the Federal securities laws, the Investment Company Act, as I mentioned, adopted 

back in 1940. Look at the innovation in the asset management 

space since 1940. Amazing products have come to markets. Different products have come to markets that provides opportunities 

for retail investors. That has always happened since 1940. 

So, with that, this is a new flavor. 

Mr. DAVIDSON. Yes, still a 1940 act that needs updating. My time 

is expired. I could talk for much longer. Thank you, Chairman. And 

I yield. 

Chairman HUIZENGA. The gentleman’s time has expired. With 

that, the gentleman from Arkansas is recognized for 5 minutes. 

Mr. HILL. I thank the Chairman. I appreciate you holding this 

hearing. And it is always terrific to have Director Blass back before 

the committee. She brings all of her knowledge and intellectual 

power to this committee. And we need it. We need it desperately. 

So, thanks for representing the Commission. 

Last Congress, it was—it was a pleasure to work with Dr. Foster 

and complete the work on our ETF research bill, H.R. 910. It was 

a bipartisan, bicameral effort to improve research available to individual investors who are using exchange-traded funds which have 

proliferated since 2000. 

And I would echo your comments about the 1940 Act. That product is an example of a product that was innovated under the act 

without really amending the 1940 Act itself. And think of all the 

people benefited by that. So, thank you for your leadership in this 

area. 

On May 23rd, you issued the notice for the rulemaking under 

H.R. 910, and comments were due in early July. So, when do you 

expect the final rulemaking to be completed on research for exchange-traded funds? 

Ms. BLASS. So, the comment period is now closed at the beginning of July, July 7th I believe. The staff has looked through the 

comments and has worked through our recommendations. And we 

hope to get that to the Commission in the near future. 

Mr. HILL. Thank you. And you also—this summer, you have been 

busy on ETFs. So, you also have participated in a roundtable that 

we had under our Chairman’s direction. And talked about how to 

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20 

kets readily accept new ideas for ETFs. And you have proposed to 

innovate that space. How do you think your rule, that you proposed 

in June, will aid the Commission in time-to-market for new exchanged-traded fund ideas? 

Ms. BLASS. So, for a sponsor to—a new sponsor to launch an exchange-traded fund, at this point, they still have to go through the 

exemptive application process. Even with a plain vanilla ETF, as 

we call it, it still takes even a few weeks. The notice period, alone, 

is about a month. That is time to market. 

Even if you put aside the process, the operating under the exemptive rubric, if you will, we are, to date, over 300 exemptive orders. That creates inconsistencies, an unlevel playing field. And an 

investor investing in an ETF, they would not know that their ETF 

may have differences in their exemptions from another ETF. They 

just think of it as an ETF. 

So, the—what the proposal is seeking to do, is designed to do, is 

create a transparent, effective, and efficient regulatory framework 

for a segment of the asset management industry that is now $3.6 

trillion and growing, significantly. 

Mr. HILL. And on that subject of ETF, as a term. You gave a 

speech, recently, where you were—expressed some concern over the 

nomenclature of an ETF, what is one and what isn’t one. Would 

that be contained in the same rule? And what is your general intent there? 

Ms. BLASS. We did request comment on this issue. 

Mr. HILL. Yes. 

Ms. BLASS. When you look at products outside and the ETF is 

used, and it could be a commodity pool, it is not an ETF. In some 

cases, I have seen the Financial Press refer to an exchange-traded 

note as an ETF. 

Mr. HILL. Yes. 

Ms. BLASS. And this creates market confusion. And investors do 

not understand—would not understand what it is, exactly, they are 

buying. So, we did request comment on this issue, and we are looking forward to seeing what folks give us. 

Mr. HILL. Good. I think that is important because they are not 

all the same. And I think some creating a design where consumers 

can easily put them in the proper bucket, when they are considering their investment suitability, would be helpful. 

In the time I have remaining, I was looking back at the investment management decision to implement Volcker. And I was—it 

seemed to me that it was—your interpretation has treated it differently, whether it is an equity investment, or a debt or a note investment. And didn’t that—interposing the SEC between the corporate finance, between a company owner and a prospective investor. Shouldn’t those be equally treated, whether it is an equity investment or a debt investment? 

Ms. BLASS. I appreciate the concerns and the question. And I appreciate all the implementation challenges— 

Mr. HILL. Yes. 

Ms. BLASS. —that have been raised. The agent—the agencies— 

the Volcker agencies, if you will, did put out a rule proposal. On 

the covered-fund definition, we have a significant amount of questions there in our request for comment. 

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21 

And, ultimately, the—our goal with this is, hopefully, to streamline the obstacle—the implementation challenges. And we do have 

questions that—in the proposal that go to your— 

Mr. HILL. I appreciate that. My time is expired. It speaks to why 

we need a bicameral solution for this Volcker Rule. It is complex. 

We need to have harmonization between the regulatory agencies. 

I yield back. Thank you, Chairman. 

Chairman HUIZENGA. All right. The gentleman makes an excellent point. With that, the gentleman from North Carolina, Mr. 

Budd, is recognized for 5 minutes. 

Mr. BUDD. Thank you, Mr. Chairman. And, Director Blass, it is 

great to have you here. And it is great to have your family, your 

children, with you. And I think it may have been mentioned earlier, but we will provide notes for school teachers if needed, absolutely. 

So, we really appreciate your service. I want to start with some 

concerns I have with the covered funds section in the recent 

Volcker NPR. And I think my friend from Michigan, Mr. Hultgren, 

touched on this earlier, but I want to echo those concerns. 

In my view, the current definition of covered funds, under the 

rule, is too broad, and includes funds that engage in long-term investing and lending which are already activities that banks can do 

directly. However, they aren’t able to do so indirectly through a 

fund which are far less risky than on-balance sheet lending. It 

doesn’t seem to make sense to capture these types of activities 

under a rule that was designed to prohibit short-term speculative 

trading activity. 

So, I asked Chairman Powell, when he was here, and I wanted 

to get your view as well this morning. So, how will you revise the 

fund’s portion of the notice of proposed rulemaking, so that these 

types of activities are no longer swept into the rule? So that 

startups and small businesses can receive the much-needed capital 

in lender banks to grow their businesses? 

Ms. BLASS. Thank you for the question. So, the request for comment is out there, and the agencies look forward to receiving information about this, and other aspects of the current fund definition 

that have raised questions. 

With respect to the long-term versus short-term investments, if 

I may offer. I do appreciate the concerns raised by banks that they 

can do this directly under the merchant banking authority. And 

they cannot under the—through a fund under the Volcker Rule. 

Two things about—we do want to ease compliance. But there are 

two things, if I—if I may, for your consideration. One is the Volcker 

Rule includes private equity funds. Just the term, private equity 

fund. And private funds invest in both short-term and long-term investments. 

And then, when you look at the—in the Volcker Rule, this is 

statutory. Not the rule. The statute. The—there—it covers the illiquid funds. And when you look at that one, that also includes 

long-term investments which could be read as an intent of Congress to cover long-term investments and not just short-term. 

That said, we do appreciate the concerns raised in this area. And 

we do have the request for comment out. 

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22 

Mr. BUDD. Very good. Thank you so much. So, I also want to ask 

some follow up questions on proxy advisors, but I think that has 

been covered already. 

So, I want to switch over to crypto for a moment. I am leading 

a letter this week with—to Chairman Clayton, asking the SEC to 

clarify the criteria used to determine when offers and sales of digital tokens should be properly considered investment contracts and, 

therefore, offerings of securities, and properly clarify what makes 

an offer a non-security or a commodity. So, the reason I am doing 

this is that not all tokens are securities, and treating all tokens as 

securities harms American innovation and leadership in the 

cryptocurrency space. 

So, I want to ask you, Director Blass, in your view, are there any 

benefits to investing in cryptocurrencies? 

Ms. BLASS. So, in my role as a member of the staff and Director 

of this Division, what I look at is the product that a sponsor wants 

to offer, the law. And work with that sponsor to see what issues 

are under the law. And work with them to see—provide guidance, 

listen to their perspectives. 

That is what we do and keeping in mind our mission which is 

investor protection, capital formation, and fair and orderly markets. So, that is our—the umbrella we work under. And what we 

do is work with the sponsor, keeping in mind our regulatory infrastructure. 

Mr. BUDD. Thank you for your engagement there. It is so critical 

that we, in this country, are on the forefront of this. So, it means 

a lot. 

I want to ask you, also, do you think that cryptocurrencies have 

the potential to help foster greater innovation and provide more investment choices for investors? 

Ms. BLASS. When I look at the cryptocurrency space, I actually 

look at the blockchain, the technology, the blockchain technology, 

the distributed-ledger technology. And I do understand that asset 

managers, and others in the financial services industry, are looking 

at that technology to see how they can bring it in-house. And, ultimately, that could really be to the benefit of Main Street investors. 

We would—we are—our doors are always open. We would love to 

hear about what they are doing, how they are doing, and what obstacles there are out there. But that is technology that we are definitely very interested in. 

Mr. BUDD. I appreciate you drawing the distinction between the 

currencies and the numerous currencies out there and the technology that underlies it. So, thank you so much. 

I want to appreciate you and thank you for joining us today. And 

I yield back to the Chairman. 

Chairman HUIZENGA. The gentleman yields back. With that, seeing no other further questions, we would like to say thank you to 

the—to our witness today, Ms. Blass and her special guests. It 

might not have been the most exciting day for you. There were a 

lot of acronyms. We call that the alphabet soup of government. Lots 

of—lots of letters all attached to it. But, again, I just want to say 

thank you for your—for what you do and your family. And this is— 

this is important stuff. And we really appreciate your time. 

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23 

So, with that, I would like to allow—sorry, I have to get back on 

script here. 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, Ms. Blass, thank you for your—for your time and your 

expertise. And we look forward to working with you more in the 

future. 

With that, our hearing is adjourned. 

[Whereupon, at 11:24 a.m., the subcommittee was adjourned.] 

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(25) 

A P P E N D I X 

September 26, 2018 

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Testimony on "Oversight of the SEC's Division of Investment Management" 

Dalia Blass 

Director, Division of Investment Management 

Before the United States House of Representatives Committee on Financial Services, 

Subcommittee on Capital Markets, Securities, and Investment 

September 26,2018 

Chairman Huizenga, Ranking Member Maloney, and Members of the Subcommittee, 

thank you for inviting me to testify before you today about the work of the Division of 

Investment Management (the "Division"). I would also like to thank you for your interest in 

asset management and the efforts of our Division in this space. 

The asset management industry is critical to the U.S. economy and for the retirement and 

financial needs of millions of American investors, particularly our Main Street investors. Over 

the last two decades, assets in mutual funds have grown from around $4.5 trillion to over $19 

trillion, a growth of over 330 percent. 1 During this same time period, exchange-traded funds 

("ETFs") have grown from around $6.7 billion in assets2 to be an over $3.6 trillion market3 

Money market funds have grown from around $1.3 5 trillion in assets in 19984 to over $3. 14 

trillion today. 5 Investment advisers employ over half a million people,6 and the staff has seen the 

number of investment advisers registered with the Commission grow to over 13,000, with total 

reported assets under management rising to nearly $84 trillion7 These assets represent the 

earnings and investments of millions of Americans who are saving for retirement, college tuition, 

and other goals. 

Investment funds and investment advisers depend on the Division to review and respond 

to thousands of registration statements, requests for exemptions, requests for assistance, and 

other inquiries each year. As the division with primary responsibility for providing policy 

recommendations to the Commission concerning asset management, a dedicated team within the 

1 See 2018 Investment Company Fact Book (ICI, 58th ed. 2018), available at 

https://www.ici.org/pdf/2018 factboolu2Qf; Investment Company Institute, Trends in Mutual Fund Investing (July 

2018), available at https://www.ici.org/research/stats/trends/trcnds 07 18. 2 Seeid. 

3 See ICI ETF Assets and Net Issuance, available at https://www.ici.org/research/statsletf/etf._, 07 18; see also 

Investment Company Act Notices and Orders, Category Listing, available at 

https://www.sec.govirulesiicreleases.shtml. 

4 See 2018 Investment Company Fact Book, supra note !. 5 Based on analysis of data filed on Form N-MFP as of August 31, 2018. 6 Based on analysis of data filed on Form ADV, Form BD, FOCUS Reports, and Form U4 filings as of December 

31,2017. 

7 Based on analysis of data reported on Form ADV through the Investment Adviser Registration Depository (lARD) 

system as of August 31,2018. It consists of assets that are reported by both advisers and sub-advisers, including 

mutual fund and ETF assets. 
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Division also focuses on rulemaking and rule reviews8 In light of the importance of the asset 

management industry to investors and the markets, since my appointment as Director in 

September 2017, the Division has embraced three principles that guide our efforts in developing, 

assessing, and implementing policy initiatives: (1) improving the retail investor experience; (2) 

modernizing our regulatory framework and engagement; and (3) leveraging our resources 

efficiently. 

I. Improving the Retail Investor Experience 

Main Street investors should have the tools they need to make informed investment 

decisions. Americans increasingly depend on investments in mutual funds and ETFs and advice 

from investment advisers to help them save for retirement and other financial goals. As of the 

end of 2017, over 100 million individuals representing nearly 60 million households-45 percent 

of U.S. households--owned funds 9 Of the over 13,000 investment advisers registered with the 

Commission, approximately 7,600 serve 34 million retail investor clients with over $12 trillion 

in retail client assets under management. 10 As a result, the experience of individual investors 

when they seek out information to help them choose a fund or an adviser is more relevant now 

than at any time since 1940. At the same time, technology has presented new opportunities to 

provide that information in ways that may be more effective. For these reasons, the Division is 

working on several initiatives that seek to improve the investment experience for Main Street 

investors. 

Financial Professional Relationships 

Earlier this year, the Commission proposed for public comment a comprehensive 

rulemaking package designed to serve retail investors by bringing the legal requirements and 

mandated disclosures of financial professionals in line with investor expectations.'' The 

proposals were the result of collaboration among several divisions and offices across the 

Commission. The Division of Investment Management led the development of two of the 

recommendations included in the proposals. 

8 The Division administers the Investment Company Act of 1940 (the "Investment Company Act"") and Investment 

Advisers Act of 1940 (the "Investment Advisers Act"), which includes developing regulatory policy for investment 

companies (e.g., mutual funds, including money market mutual funds, closed-end funds, business development 

companies, unit investment trusts, and exchange-traded funds) and for investment advisers. 9 See 2018 Investment Company Fact Book, supra note l. 10 See Fomr CRS Relationship Summary; Amendments to Fonn ADV; Required Disclosures in Retail 

Communications and Restrictions on the use of Certain Names or Titles, Exchange Act Release No. 83063 (Apr. 18, 

2018) [83 FR21416 (May 23, 2018)]. 11 See SEC Proposes to Enhance Protections and Preserve Choice for Retail Investors in 11reir Relationships with 

Investment Professionals (Apr. 18, 2018), available at https://www.sec.gov/news/press-release/2018-68; see also 

Fonn CRS Relationship Summary; Amendments to Fomr ADV; Required Disclosures in Retail Communications and 

Restrictions on the use of Certain Names or Titles, Exchange Act Release No. 83063 (Apr. 18, 2018) [83 FR 21416 

(May 23, 2018)]; Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; 

Request for Comment on Enhancing Investment Adviser Regulation, Investment Adviser Act Release No. 4889 (Apr. 

18, 2018); Regulation Best Interest, Exchange Act Release No. 83062 (Apr. 18, 2018) [83 FR 21203 (May 9, 

2018)]. 

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First, the Division developed a recommendation for a proposal that is designed to help 

educate investors about whether they are dealing with a broker-dealer, an investment adviser, or 

both, and importantly, why that matters when considering the services of a financial professional. 

Under this proposal, firms would be required to provide investors with a new, succinct disclosure 

that the Commission refers to as a "Relationship Summary." As proposed, the Relationship 

Summary would highlight key differences between broker-dealers and investment advisers, 

including: (I) the principal types of services offered; (2) the legal standards of conduct that apply 

to each; (3) the fees the customer would pay; and (4) certain conflicts of interest that may exist. 12 

It also would include key questions for investors to ask their financial professional. 

Because the proposed Relationship Summary is designed to benefit Main Street investors, 

the Commission has been seeking input from retail investors, investor groups, and others on this 

proposal. To help foster feedback from investors, the Commission has made available a website, 

www.sec.gov/tell-us, where investors can view examples of what the Relationship Summaries 

might look like and submit feedback on key questions from the proposal. The Chairman and 

SEC staff also have held roundtables across the country-in Denver, Houston, Miami, 

Washington, DC, Philadelphia, Atlanta, and Baltimore--where Main Street investors have had 

the opportunity to speak directly with Chairman Clayton, SEC Commissioners, and senior staff 

about the Commission's efforts to enhance retail investor protection and promote choice and 

access to a variety of investment services and products. 13 This feedback has been very valuable. 

Investors want to better understand their relationship with their investment professional-that is 

clear. A short, accessible summary of these matters can help improve that understanding. I 

believe the comments we have received will substantially improve the Division's development of 

a recommendation of the final product. 

Second, the Division developed a recommendation for a proposed interpretation that 

would reaffirm and, in some cases, clarify the Commission's views on the investment adviser 

fiduciary duty standards. This proposed interpretation would draw together a range of statements 

from different sources about investment advisers' fiduciary duty and provide advisers with a 

reference point for understanding their obligations to clients. 

The Division of Trading and Markets has led the developments of other aspects of the 

proposals, including Regulation Best l.nterest, which is designed to enhance the standard of 

conduct for broker-dealers when making recommendations to their retail customers. The 

Division also collaborated with the Division of Trading and Markets on a recommendation for a 

proposal to require a financial professional firm be direct and clear about whether it is a 

12 See Form CRS Relationship Summary Mock-ups, Appendices A, B, C. D, E, F of Form CRS Relationship 

Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use 

a[ Certain Names or Titles, Exchange Act Release No. 83063 (Apr. 18, 2018) [83 FR 21416 (May 23, 2018)]. 1 See SEC Chairman Clayton lnvites Main Street Investors to Tell Us' About Their Investor Experience (June 29, 

2018), available at https://ww\v.sec.gov/news/press-release/2018-125; see also SEC Chairman Clayton Announces 

Additional Investor Roundtable in Baltimore for Main Street Investors to 'Tell Us' About Their Investor E<perience 

(Aug. 22, 2018), available at https://www.sec.gov/newsipress-release/2018-162; Jay Clayton, Statement on Public 

Engagement Regarding Standards of Conduct for Investment Professionals Rulemal:ing (Apr. 24, 2018), available 

at https://www.sec.gov/news/public-statement/public-engagement-standards-conduct-investmcnt-professionalsrulemaking. 

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registered investment adviser, a registered broker-dealer, or both in its communications with 

investors and prospective investors. The proposed rules also would restrict standalone brokerdealers and their financial professionals from using the terms "adviser" and "advisor." The 

proposal discusses whether these terms are so simi Jar to the statutory term "investment adviser" 

that their use may mislead the broker-dealer's prospective customers. 

Regulatory consistency is important in this effort given that financial professionals may 

be subject to oversight by more than one agency. We in the Division, along with the Division of 

Trading and Markets, have sought to engage with fellow regulators, including the Department of 

Labor, state insurance and securities regulators, state attorneys general, and others on this 

important initiative. We invite further engagement from our regulatory colleagues. 

The comment period on these rulemakings closed in August, and in addition to the 

feedback gathered through outreach efforts, the Commission has received many letters with 

thoughtful and varying perspectives. The Office of the Investor Advocate is also in the process 

of performing investor testing on aspects of the rulemaking package, and I anticipate that the 

results of that testing will be made available in the comment file. SEC staff are carefully 

reviewing this information and will continue to consider public comments as we develop a 

recommendation for the Commission on next steps. 

Modernizing Fund Disclosure 

Disclosure is the backbone of the federal securities laws and is a critical tool for investors 

making investment decisions. While mandated fund disclosure is now available online, its 

design, delivery, and content have seen few fundamental changes over the decades. To begin the 

process of modernizing fund disclosure, the Commission recently issued three releases based on 

the recommendations of the Division that, together, seek to improve the experience of Main 

Street investors considering fund investments. 

The Commission issued a request for public comment to gain insight from the public on 

ways to improve and modernize fund disclosures. This is an opportunity to examine, in light of 

advances in technology and design techniques, whether fund disclosures are working as well as 

they can for the more than I 00 million individuals that invest in funds. The request for comment 

invites Main Street investors, experts, and others to inform the Division's policy 

recommendations on these disclosures. In order to facilitate retail investor engagement and 

comment, the Commission has provided a short "Feedback Flier," which highlights key 

questions from the request for comment and can be viewed and submitted at www.sec.gov/tell-

!!li· The comment period ends October 31. 

The Commission also adopted a new rule that creates an optional "notice and access" 

method for delivering fund shareholder reports. 14 Currently, fund shareholders can receive a 

shareholder report in two ways: in paper through the mail or electronically. New rule 30e-3 

permits a third option. Under the rule, a fund may deliver its shareholder reports by posting 

14 See Optional Internet Availability of Investment Company Shareholder Reports, Securities Act Release No. I 0506 

(June 5, 2018) (83 FR 29158 (June 22, 2018)]. 

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them on a website that is free of charge and sending investors multiple notices in paper through 

the mail letting them know that the report is available either on the website or in paper. The rule 

includes protections for those without internet access or who simply prefer paper. For example, 

the rule preserves an investor's ability to easily continue to receive reports in paper, either by 

making a one-time request to receive all future reports in paper, or by requesting individual 

reports in paper whenever they desire. To inform investors in advance of this new delivery 

method, the rule includes an extended transition period so that the earliest a fund could begin to 

rely on the rule would be January I, 202!. In the two years prior to that date, funds that want to 

implement the new delivery method must provide prominent disclosures in prospectuses and 

other shareholder documents that will notify investors of the upcoming change in delivery 

method, ensuring investors will have multiple opportunities to receive these reports in the form 

that they prefer. 

Finally, the Commission issued a request for public comment on the current framework 

for fees that intermediaries, including, for example, broker-dealers, charge funds to deliver 

disclosure documents such as fund shareholder reports. These fees currently are set by rules of 

the New York Stock Exchange ("NYSE") and other self-regulatory organizations like the 

Financial Industry Regulatory Authority ("FINRA"). Among other questions, the release asks 

for public input on the transparency of these fees and whether the fees should be overseen by 

FINRA. 15 The comment period ends October 31. 

Variable Insurance Product Summary Prospectus 

Investors in variable annuities and other variable insurance products often have to 

navigate a complex set of disclosures about the variable contract and underlying investment 

options when deciding whether to invest. The Division is considering a recommendation that the 

Commission propose rules designed to provide investors with more user-friendly, layered 

disclosure about variable insurance products. Variable insurance products are generally more 

complex than other retail investment products, like mutual funds, because they combine both 

investment and insurance features. In addition, the products typically offer a number of 

underlying fund investment options that have their own fees, and often include a variety of 

optional features, like living benefit riders that have additional charges. The Division is 

considering whether to recommend a new summary prospectus that would help investors better 

understand these products' costs and risks, and also produce cost savings that could be passed on 

to investors. 

IL Modernizing Our Regulatory Framework and Engagement 

Our capital markets are the envy of the world. I believe that when the Division is 

dynamic and responsive, it can help our markets continue to grow and develop for the benefit of 

all market participants, including Main Street investors. Modernizing our regulatory framework 

and engagement with market participants begins with looking back at existing policies and 

approaches and assessing whether they are (or remain) efficient, effective, and appropriate. 

Current policies may not be doing what they were originally intended to do, may not take into 

15 FINRA regulates the broker-dealers who deliver the disclosure documents. 

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account advancements in technology, business, and investor relationships, or may have 

unintended consequences and costs. In order to be as dynamic and responsive as the markets we 

regulate, the Division is undertaking several initiatives to modernize our regulatory approach 

under the Investment Company Act and Investment Advisers Act in light of significant 

developments in the asset management industry. 

Exchange-Traded Funds 

ETFs are a type of exchange-traded product organized as an investment company under 

the Investment Company Act. ETFs possess characteristics of both mutual funds, which issue 

redeemable securities, and stocks or closed-end funds, which generally issue shares that trade at 

market-determined prices on a national securities exchange and arc not redeemable. Because 

ETFs have characteristics that distinguish them from the types of funds contemplated by the 

Investment Company Act, they require exemptions from certain provisions of the Act in order to 

operate. Today, before a fund sponsor may begin offering ETFs, it must obtain an order from the 

Commission providing several exemptions from the Investment Company Act. This may result 

in delay and cost for new sponsors. 

Modernizing the current regulatory regime for ETFs is important because the $3.6 trillion 

ETF market is currently operating under more than 300 individually issued exemptive orders, 

which have varied over time in wording and termsi 6 Such an important segment of the asset 

management market would benefit from a clear regulatory framework. To address this, the 

Commission proposed a new rule to replace the process of individually-issued orders for 

exemptive relief. 17 The proposal is designed to create a consistent, transparent, and efficient 

regulatory framework for the types of ETFs that routinely receive exemptions today and to 

facilitate greater competition and innovation among ETFs. Our exemptive review process is a 

key part of how innovation takes place under the Investment Company Act. A final rule for 

routine ETF relief would enable Division staff to focus more of its resources on requests for 

exemptions that represent the next generation of potential developments under the Act. 

Covered Investment Fund Research Reports 

The Commission recently proposed rules and amendments that are intended to reduce 

obstacles to providing research on investment funds in furtherance of the congressional mandate 

of the Fair Access to Investment Research (FAIR) Act of2017. 18 The proposed rules would 

harmonize the treatment of investment fund research with research on other public entities by 

establishing a safe harbor for a broker or dealer to publish or distribute research reports on 

16 See January 2018 ETF Data; see also Investment Company Act Notices and Orders, Category Listing, available at 

https://www.sec.gov/r~k§Licreleases.shtml. 

17 See SEC Proposes New Approval Process for Certain &change-Traded Funds (June 28, 20 18), available at 

https:i/www.sec.gov/news/press-release/2018-118; see also Exchange-Traded Funds, Investment Company Act 

Release No.IC-33140 (June 28, 2018), [83 FR 37332 (July 31, 2018)]. 18 See SEC Proposes FAIR Act Rules to Promote Research Reports on Investment Fund< (May 23, 20 18), available 

at h!tps://www.sec.gov/ncws/press-release/2018-92; see also Covered Investment Fund Research Reports, 

Investment Company Act Release No. 33106 (May 23, 2018) (83 FR 26788 (June 8, 2018)], available at 

h!tps://www .sec.gov/rules/proposed/20 18/'13-l 0498.pdf. 

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investment funds under certain conditions. This proposed safe harbor is similar to a regulatory 

safe harbor that currently exists for research reports about other public entities. Overall, these 

proposed rules would promote research on mutual funds, ETFs, registered closed-end funds, 

business development companies ("BDCs"), and similar covered investment funds and provide 

investors with greater access to research to aid them in making investment decisions. The 

Division is reviewing comments from the public on the proposal as we move forward with 

providing a recommendation to the Corrunission for adoption. 

Offering Modernization for Business Development Companies and Closed-end Funds 

The Division is working to develop rule recommendations consistent with congressional 

mandates to modernize the way BDCs and closed-end funds arc offered to the market. The 

Small Business Credit Availability Act directs the Commission to revise almost 20 securities 

offering and proxy rules and related form requirements in order to harmonize registration and 

reporting requirements for BDCs with those for public corporate issuers. Similarly, the 

Economic Growth, Regulatory Relief, and Consumer Protection Act directs the Commission to 

issue rules to allow certain registered closed-end funds to use securities offering and proxy rules 

similar to those available to public corporate issuers. Division staff is preparing 

recommendations for the Commission to propose these rules. 

Use of Derivatives by Registered Funds and BDCs 

Funds use derivatives for a variety of purposes, including, for example, to seek higher 

returns through increased investment exposures; hedge interest rate, credit, and other risks in 

their investment portfolios; gain access to certain markets; and achieve greater transaction 

efficiency. The current regulatory framework for funds' use of derivatives has developed on an 

instrument-by-instrument basis over many years, starting with a Commission general statement 

of policy in 1979, 19 and over 30 staff no-action letters and other guidance that followed. In 2015, 

the Commission proposed a new exemptive rule to address the use of derivatives and fmancial 

commitment transactions by registered funds and BDCs and received a significant number of 

comment letters on the proposal's regulatory approach. Based on these comments, the Division 

is considering a recommendation that the Commission re-propose a new rule designed to 

enhance and modernize the regulatory framework for registered investment companies' use of 

derivatives. 

Amendments to the Marketing Rules under the Investment Advisers Act 

Registered investment advisers are subject to a rule governing marketing that has not 

changed significantly since its adoption in 1961. Since that time, the asset management market, 

technology and the types of investors that investment advisers serve has evolved. For example, 

in 1961, investors did not have resources like the internet to research and select investment 

advisers, and social media in its current form did not exist. As this landscape has evolved, the 

Division is considering recommendations for the Commission to modernize this rule, for 

19 See Securities Trading Practices of Registered Investment Companies, Investment Company Act Relea'e No. 

I 0666 (Apr. 10, 1979). 

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example, by revisiting the prohibition on use of testimonials given that a growing number of 

today's consumers and businesses look to the experiences and recommendations of others in 

making informed investment decisions. The Division also is considering recommendations for 

changes to the rule governing payments for soliciting business on behalf of registered investment 

advisers. This rule was adopted in 1979, and also may need to be updated to address current 

market practices. 

Fund Board Outreach Initiative 

Since 1940, shareholders have relied on fund boards to help represent their 

interests. While the importance of boards has not changed, directors' responsibilities have 

grown significantly over the years and their areas of focus have expanded. Last fall, the Division 

established a new initiative to holistically revisit the responsibilities of fund boards. This 

initiative seeks to identify the areas where board oversight is most valuable and to assess whether 

changes, such as those in technology or the securities markets, warrant reconsideration of board 

responsibilities in certain areas. This initiative also seeks to inform future policy decisions about 

the appropriate role of the board in fund governance. 

In connection with this initiative, the Division, in coordination with the Commission's 

Office of the Chief Accountant, is considering recommendations for updates to Commission 

guidance on the valuation of portfolio securities and other assets held by registered funds and 

BDCs to reflect evolution in the markets and the standards for accounting, auditing, and 

reporting. This effort, in part, seeks to modernize guidance to fund boards on performing their 

responsibilities concerning valuation in a way that recognizes that evolution. 

Investment Company Liquidity Disclosure 

Investors in mutual funds and ETFs expect to be able to exit these funds promptly, and 

the Investment Company Act requires redemption requests to be fnlfil!ed within seven days. As 

a result, managing the liquidity of a fund's portfolio is a fundamental aspect of a fund adviser's 

responsibilities. In 2016, the Commission adopted an important rule designed to promote 

effective liquidity risk management practices among open-end funds 20 After adoption, the staff 

and fund sponsors turned to the work of implementation. The staff responded to a significant 

number of frequently asked questions to address important implementation questions raised by 

fund sponsors and others as they sought to establish programs responsive to the rule's 

requirements21 After carefully gathering input from interested parties about the implementation 

of this requirement, in February, the Commission extended the compliance date for the 

classification elements of the rule22 In addition, the Commission recently adopted targeted 

20 See rule 22e-4 under the 1940 Act [17 CFR 270.22e-4]; see also Investment Company Liquidity Risk Management 

Programs, Investment Company Act Release No. IC-32315 (Oct. 13, 2016) [81 FR 82142 (Nov. 18, 2016)]. 21 See Investment Company Liquidity Risk Management Programs Frequent(v Asked Questions, available 

at https://www.sec.gov/investment/investmcnt~company-liquiditv-risk-managernent-programs-faq. 

22 See Investment Company Liquidity Risk Management Programs; Commission Guidance for In-Kind ETFs, 

Investment Company Act Release No. 33010 (Feb. 22, 2018) [83 FR 8342 (Feb. 27, 2018)]. 

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amendments to the public reporting requirements of the rule23 These amendments are designed 

to enhance the disclosure funds provide to investors about liquidity risks and reduce the risk that 

investors may be misled about the comparability of certain fund liquidity metrics. 

Fund Innovation and Cryptocurrency-related Holdings 

The success of the U.S. investment fund market can be attributed, in significant part, to 

the commitment of fund sponsors to innovation and continuous improvement ofthe products 

they offer for investors. This commitment is especially important because many Main Street 

investors rely on registered funds to help them build toward their financial goals. The Division 

has a long history of supporting fund innovation, with exemptive authority serving as a key 

feature of the Investment Company Act. For example, dialogue between fund sponsors and the 

Division over the years has facilitated the development of new types of investment products, like 

ETFs and money market funds. 

There has been interest among some fund sponsors to offer registered funds that would 

hold cryptocurrencies and cryptocurrency-related instruments. As we have in the past, the 

Division has sought to engage in a dialogue on this potential product innovation. To help 

facilitate a transparent and productive dialogue, the Division published a letter identifying some 

questions that we believe need to be examined for funds to invest in crypto-related holdings in a 

manner consistent with the substantive requirements of the Investment Company Act and its 

rules. 24 Areas of inquiry in the letter are valuation, liquidity, custody, arbitrage for ETFs, and 

potential manipulation of cryptocurrency markets. We have included a copy of the letter and 

public responses received on our Division website25 and continue to engage with fund sponsors 

on this dynamic product development and the evolution of the cryptocurrency markets. 

Review of the Proxy Process 

Shareholder engagement is a hallmark of our public capital markets, and the proxy 

process is a fundamental component of that engagement. Recently, the Chairman announced a 

staff roundtable on the proxy process to provide the staff an opportunity to engage with 

investors, issuers, and other market participants on topics including the voting process, retail 

shareholder participation, and the role of proxy advisory fmns 26 In developing the agenda for 

the roundtable, the Division staff has been considering, among other topics, whether prior staff 

guidance about investment advisers' responsibilities in voting client proxies and retaining proxy 

advisory firms should be modified, rescinded, or supplemented27 With this pending roundtable 

"See Investment Company Liquidity Disclosure, Investment Company Act Release No. 33046 (Mar. 14, 2018) [83 

FR 11905 (Mar. 19, 2018)]. 24 See Staff Letter to ICI and SIFMA AMG: Engaging on Fund Innovation and Cryptocurrency-related Holdings 

(Jan. 18, 2018), available at https://www.sec.govldivisions/investmenUnoaction/2018/cryptocurrencv-OI I SIS.htm. 25 See https:/lwww.sec.gov/investmentifund-innovation-cryptocurrency-relatcd-holdings. 06 See Statement Announcing SEC Staff Roundtable on the Proxy Process (July 30, 20 18), available at 

https://www.sec.gov/news/public-statement!statement-announcing-sec-staff-roundtablc-proxy-process. 

27 See Statement Regarding Staff Proxy Advisory Letters (Sept. 13, 2018), available at 

https:l lwww .sec. gov /news/pub lie-statement/statement-regarding-staff-proxy-advisory-letters. Staff guidance is 

nonbinding and does not create enforceable legal rights or obligations. Id. 

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and other policy considerations in mind, the Division staff has recently reexamined the letters 

that the staff issued in 2004 to Egan-Jones Proxy Services (May 27, 2004) and Institutional 

Shareholder Services, Inc. (Sept. 15, 2004) and has determined to withdraw these letters28 We 

look forward to a robust discussion from stakeholders with multiple perspectives at the 

roundtable about the SEC's proxy rules. 

III. Leveraging Our Resources Effectively 

In the Division, I have the privilege to work with a staff of lawyers, accountants, 

quantitative analysts, industry experts, and other employees who are dedicated to the agency's 

mission. We are a Division of around 180 people responsible for policy affecting more than 

20,000 registered funds and investment advisers.29 Employing our resources efficiently is 

critical to our ability to serve American investors and develop informed policy in today's 

dynamic asset management space. 

Use of Data and Analytics 

The Division is committed to increasing the efficiency and effectiveness of our regulatory 

programs through the enhanced use of technology and data analysis. We also work closely with 

the Office of Information Technology, particularly with regard to protecting market sensitive 

data, as part of the Commission's broader efforts to assess and improve the agency's 

cybersecurity risk profile. We appreciate how technology has changed the markets and are 

seeking ways to harness technology and data for our regulatory purposes. The staff in the 

Division's Analytics Office has advanced our ability to interpret data, to focus our resources, and 

to respond with rigor to questions about asset management. 

One example of their work is an internal tool we in the Division call "MAGIC"-an 

acronym for Monitoring and Analytics Graphical User Interface ("GUI'') for Investment 

Companies. MAGIC allows us to pull together a number of data sets and analyze funds in a 

variety of ways, allowing the staff to ask questions about specific funds to determine, for 

example, how a fund's portfolio compares to its strategy or how a fund's holdings are aligned 

with its investment restrictions. Staff can also use this tool to run custom queries across 

thousands of open-end and closed-end funds. For example, we are able to quickly identify which 

funds may have exposure to certain assets, like cryptocurrencies. MAGIC also has been 

powerful in helping to improve our disclosure review process. Ultimately, we expect this tool to 

help us to implement a risk-based approach to reviewing disclosure that will improve the 

effectiveness and efficiency of our work. As new data and technological advancements become 

available, the Division has the ability to extend MAGIC's capabilities. 

28 https:i/www.sec.gov/news/public-statement/statement-regarding-staff-proxy-advisory-lctters. 29 See Investment Company Institute, Trends in Mutual Fund Investing (Jan. 2018), available 

at https://www.ici.org/rcsearch/stats/trends/trends 01 18; Investment Company Institute: ETF Assets and Net 

Issuance (Jan. 2018}, available at https://www.ici.org/etf resources/research/etfs 01 18; U.S. Securities and 

Exchange Commission, Information About Registered Investment Advisers and Exempt Repotting Advisers, 

available at https://www.sec.gov/help/foiadocsinvafoiahtm.html. 

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The Division also is exploring the use of technology-based tools to improve the 

efficiency of our internal processes. One example of these efforts is the staffs development of a 

tracking tool to conduct Sarbanes-Oxlcy Act reviews. The Division is required to periodically 

review fund annual reports, including financial statements as required by section 408 of the 

Sarbanes-Oxley Act and other disclosures by management investment companies ("SOX 

reviews"). Division staff developed an internal tool that automates information that the staff 

previously tracked and compiled manually for these SOX reviews. This tool saves hundreds of 

hours of manual tracking each year and inforn1s risk-based reviews of fund annual reports. The 

tool also facilitates consistency in staff comments and areas of focus in fund annual reports, 

thereby increasing the efficiency and effectiveness of our regulatory oversight. 

Process Improvements 

In addition to the increased use of analytical tools in our regulatory oversight, the 

Division continues to make efforts to improve the efficiency and effectiveness of our internal 

processes. This pertains to some of the core work of the Division, including the review of 

disclosures of over 12,000 investment companies by our Disclosure Review and Accounting 

Office3 ° Funds make many filings and their complexity varies. To better focus our resources, 

the staff generally takes a risk-based approach to reviewing disclosure filings, devoting particular 

focus to (I) filings by novel and complex funds; (2) new disclosures; and (3) disclosures that 

most directly influence investment decisions, such as disclosures on investment strategies, risks, 

fees, and performance. 

In addition, the Division is working to improve the transparency of our fund disclosure 

review process. We recently launched a new webpage that is designed, in part, to provide more 

clarity and practical guidance on the preparation of fund disclosures 31 For example, the 

webpage has accounting and disclosure information for practitioners that covers various practical 

topics like how to request selective review of a disclosure filing or request relief to avoid making 

multiple filings when a fund complex makes substantially identical disclosure changes to 

multiple funds. The website allows us to share with the public accounting and disclosure topics 

that are frequently raised with the staff. The goal of this effort is to help funds and practitioners 

navigate our disclosure review process. 

Human Capital Planning 

As the asset management market continues to evolve, the Division's staffing also must 

adapt. In recent years the Division has seen growth in types of investment companies that 

require expertise in specialized areas of finance, law, and operations, such as BDCs and ETFs, as 

well as funds with more complex investment strategies or investments, such as funds that use 

derivatives in more complex ways than in the past. In addition, the Dodd-Frank Act resulted in 

the Commission having greater responsibility for advisers to hedge funds and other private 

30 The Division is responsible for reviewing filings such as prospectuses, proxy statements, and shareholder reports 

for mutual funds, ETFs, closed-end funds, variable insurance products, UITs, and similar investment funds. 31 See U.S. Securities and Exchange Commission, Fund Disclosure at a Glance, ami/able at 

https://wv,;w.sec.gov/investmenUfund-disclosure-at-a-glance. 

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funds. In light of these developments, we have placed a priority on hiring and retaining talented 

professionals with experience in these growing areas. Further, it is vital to our mission that the 

Division recruits not just lawyers, but individuals with background as financial analysts, 

accountants, traders, and even salespeople who want to use their real-world experience in the 

investment management business to help protect investors. Accordingly, human capital planning 

is one of my highest priorities as Director, and the SEC's fiscal year 2019 budget request would 

allow the Division to hire additional staff to advance our mission. 

Conclusion 

Thank you again for inviting me to discuss the Division's efforts. The information I have 

shared with you today highlights the tremendous work and commitment of the staff of the 

Division to inform and protect investors, facilitate capital formation, and effectively regulate the 

securities markets. I look forward to working with all of you and am happy to answer your 

questions. 

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