[House Hearing, 113 Congress] [From the U.S. Government Publishing Office] OVERSIGHT OF THE SEC'S DIVISION OF TRADING AND MARKETS ======================================================================= HEARING BEFORE THE SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES OF THE COMMITTEE ON FINANCIAL SERVICES U.S. HOUSE OF REPRESENTATIVES ONE HUNDRED THIRTEENTH CONGRESS SECOND SESSION __________ JUNE 26, 2014 __________ Printed for the use of the Committee on Financial Services Serial No. 113-88 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] U.S. GOVERNMENT PRINTING OFFICE 91-152 PDF WASHINGTON : 2014 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 HOUSE COMMITTEE ON FINANCIAL SERVICES JEB HENSARLING, Texas, Chairman GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking Chairman Member SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York Emeritus NYDIA M. VELAAZQUEZ, New York PETER T. KING, New York BRAD SHERMAN, California EDWARD R. ROYCE, California GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts JOHN CAMPBELL, California DAVID SCOTT, Georgia MICHELE BACHMANN, Minnesota AL GREEN, Texas KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin BILL POSEY, Florida KEITH ELLISON, Minnesota MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado Pennsylvania JAMES A. HIMES, Connecticut LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan STEVE STIVERS, Ohio PATRICK MURPHY, Florida STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio RANDY HULTGREN, Illinois DENNY HECK, Washington DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada ROBERT PITTENGER, North Carolina ANN WAGNER, Missouri ANDY BARR, Kentucky TOM COTTON, Arkansas KEITH J. ROTHFUS, Pennsylvania LUKE MESSER, Indiana Shannon McGahn, Staff Director James H. Clinger, Chief Counsel Subcommittee on Capital Markets and Government Sponsored Enterprises SCOTT GARRETT, New Jersey, Chairman ROBERT HURT, Virginia, Vice CAROLYN B. MALONEY, New York, Chairman Ranking Member SPENCER BACHUS, Alabama BRAD SHERMAN, California PETER T. KING, New York RUBEEN HINOJOSA, Texas EDWARD R. ROYCE, California STEPHEN F. LYNCH, Massachusetts FRANK D. LUCAS, Oklahoma GWEN MOORE, Wisconsin RANDY NEUGEBAUER, Texas ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota DAVID SCOTT, Georgia KEVIN McCARTHY, California JAMES A. HIMES, Connecticut LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan BILL HUIZENGA, Michigan KEITH ELLISON, Minnesota STEVE STIVERS, Ohio BILL FOSTER, Illinois STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware MICK MULVANEY, South Carolina TERRI A. SEWELL, Alabama RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan DENNIS A. ROSS, Florida PATRICK MURPHY, Florida ANN WAGNER, Missouri LUKE MESSER, Indiana C O N T E N T S ---------- Page Hearing held on: June 26, 2014................................................ 1 Appendix: June 26, 2014................................................ 35 WITNESSES Thursday, June 26, 2014 Luparello, Hon. Stephen, Director, Division of Trading and Markets, U.S. Securities and Exchange Commission............... 8 APPENDIX Prepared statements: Luparello, Hon. Stephen...................................... 36 Additional Material Submitted for the Record Luparello, Hon. Stephen: Written responses to questions for the record submitted by Representative Messer...................................... 47 Written responses to questions for the record submitted by Representative Fincher..................................... 50 Written responses to questions for the record submitted by Representative Stivers..................................... 56 OVERSIGHT OF THE SEC'S DIVISION OF TRADING AND MARKETS ---------- Thursday, June 26, 2014 U.S. House of Representatives, Subcommittee on Capital Markets and Government Sponsored Enterprises, Committee on Financial Services, Washington, D.C. The subcommittee met, pursuant to notice, at 9:19 a.m., in room 2128, Rayburn House Office Building, Hon. Scott Garrett [chairman of the subcommittee] presiding. Members present: Representatives Garrett, Hurt, Neugebauer, Huizenga, Mulvaney, Ross, Wagner, Messer; Maloney, Lynch, Perlmutter, Scott, Himes, Foster, Carney, and Sewell. Ex officio present: Representative Waters. Chairman Garrett. Good morning. Today's hearing of the Capital Markets and Government Sponsored Enterprises Subcommittee is hereby called to order. Today's hearing is entitled, ``Oversight of the SEC's Division of Trading and Markets.'' And I welcome the panel. After looking yesterday where it was an elongated two-panel hearing, I welcome our one witness, Mr. Luparello, to the Capital Markets Subcommittee hearing today, and I look forward to your testimony. We will begin with opening statements. And I recognize myself for 6 minutes. Today's hearing will focus on the activities of the Division of Trading and Markets of the Securities and Exchange Commission. Director Luparello, welcome, and thank you for your testimony that you provided in writing and the testimony that you are going to present today. The Division of Trading and Markets at the SEC, as you know, has a broad swath of responsibility and authority over activities that represent some of the core functions of the U.S. capital markets. Specifically, the Division sits at the epicenter, if you will, of our Nation's equity, fixed-income, and derivatives marketplaces. The SEC is reforming or considering reforms of all three of those markets. These changes will dramatically change the way that investors invest, issuers raise capital, and businesses hedge their risk. First, let's look at the equity markets. Let me thank you again for participating in the roundtable that we held, I guess a little over a year ago up in New York City. The roundtable, as you know, served as a substantive starting point for Members and other attendees to learn about the evolution of the rules governing equity markets today. I think it was a very informative discussion we had there and provided a solid foundation from which to better comprehend the current challenges faced by the various market participants as well as the potential impact rule changes could have. And to that end, by the way, Chair White gave a speech recently where she outlined a number of prospective changes to various market practices in an attempt to address some of the issues most frequently highlighted as concerns. And so, when she did that, I applauded her, and I continue to applaud her for her continued focus on our Nation's equity markets. But I caution that moving too quickly or in an ad hoc manner without thinking through all of the possible consequences could, as I say, do more harm than good. It is so critical, then, that besides just addressing specific narrow issues being faced by market participants, that the Commission conduct a fundamental review and challenge many of the central assumptions regarding the rationale of its overall regulatory regime. Let me provide perhaps two specifics areas where I would like to see more attention from the Commission. First, the world is vastly different, we all agree, from 1975, when Congress amended the Exchange Act in response to one dominant equities exchange at the time. We live in a world of demutualized exchanges where all market centers are for-profit, providing similar functions, yet they are competing under very different regulatory umbrellas. The SEC should take the time, therefore, to thoroughly analyze the situation and eventually make changes that put these varying market participants on, as I always say, a more level playing field. Second, Reg NMS, as the order protection rule, is a very heavy-handed rule dictating explicitly how venues and orders are supposed to interact with each other in the marketplace. Now, this has been highlighted by a number of the commentators, including some of our previous panelists here, as one of the significant factors underlining market practices and, also, behavior. So I look forward to discussing these issues, as well as Chair White's recent proposals, during the questioning period that we will have after the testimony. Next, in regard to fixed income, many argue that this is often a part of the marketplace that is overlooked compared to the equity markets. Our corporate and municipal bond markets have literally trillions of dollars of outstanding issuances, and they provide investment opportunities for millions of investors, but these markets are very different than our equity markets. Chair White gave a speech on Friday outlining some proposals seeking additional practices and price transparency for investors in these less liquid markets than the equity markets. So I believe increasing transparency and competition for the benefit of the investors is appropriate, and I'm interested to see more specifics on how these new proposals that she is talking about will actually work. All that said, I do worry that the Commission's reform potentially robs from Peter to pay Paul, as they say. Specifically, how do we help investors in the corporate bond market if we improve pricing transparency, on the one hand, but if we reduce liquidity through the Volcker Rule, on the other hand? Requiring additional transparency for markets that the Commission made less liquid and where investors have to pay wider spreads is not a net win for the investors at the end of the day. A greater investor protection in this market would be to ensure greater liquidity and better ways for investors to get in and out of the positions. That is what liquidity is about. The SEC then needs to closely examine on an ongoing basis the impact of the Volcker Rule on the liquidity in the corporate bond market and keep policymakers well-informed of this important information. Finally, regarding derivatives, the Commission took a very important step yesterday in finalizing rules that specify how market participants that have affiliates overseas will be impacted under the SEC's Title VII regime. So I applaud the rigorous and thoughtful process that the Commission undertook when finalizing those rules, and I am also hopeful that the new leadership over at the CFTC, some of which we just swore in the other day, will allow this process to go forward and to follow suit and formalize their guidance which they have had in the past under a rule now so that the force of law will not be in question. Finally, another issue that has continued to be one of much debate is the proper regulatory approach for broker-dealers. Recently, one of the Commissioners gave a speech essentially saying that the SEC is now a systemic risk regulator, and that statement caught us by surprise. It is my understanding that Congress created the SEC as a markets regulator with three-part function of: protecting the investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. I served on the Dodd-Frank Act conference committee, and nowhere in that do I recall the mission of the SEC actually changing to a systemic risk regulator. So I am very concerned that the Division of Trading and Markets actually might be losing one of its primary responsibilities, which is oversight of broker-dealers. It appears that the Federal Reserve--without any proper authority whatsoever from Congress, what they are trying to spread is a regulatory and bailout net over even the broader marketplace and over the broker-dealer community as well. So we must stop enlarging the government's safety net and, instead, remove moral hazard and reinstate market discipline. The Division of Trading and Markets has many important tasks at hand. Other issues that I have not gone into in detail, but are nonetheless important, are: regulating clearing agencies and transfer agents; overseeing FINRA and other SROs; determining whether or not to change the duty of care for broker-dealers; and conducting oversight of the out-of-control and anti-investor Security Investor Protection Corporation. So, Director, thank you for taking on this very difficult assignment and also for being here today. This subcommittee wants to make sure we work closely with you in the future and also with Chair White and the rest of the Commission as well as you carry out your important duties. With that, I now recognize the ranking member of the subcommittee, the gentlelady from New York, Mrs. Maloney, for 5 minutes. Mrs. Maloney. Thank you, Chairman Garrett, for holding this very important and timely hearing. And welcome, Mr. Luparello. Mr. Luparello also participated in your meeting on trading and markets that you held in New York earlier, which was tremendously informative and a fine experience for all of us who were fortunate enough to attend. The SEC has a critical role in our economy because it is responsible for overseeing and regulating the Nation's capital markets. Without vibrant capital markets, companies would have a difficult time raising money to expand their businesses and create jobs, and our economy would be stalled. The SEC's mission is to simultaneously protect investors, encourage capital formation by businesses that are seeking to grow, and maintain fair, orderly, and efficient markets. Balancing these overlapping objectives is a difficult job, but I believe the SEC has performed admirably under Chair White, who, incidentally, is from the great City of New York. And I look forward to hearing your testimony as well. There is, however, one common theme that runs through each of the SEC's three missions. In order to accomplish any of the SEC's three missions, investors have to feel confident in the fairness and integrity of our capital markets. If they are not confident that they will get a fair shake, they will not put their money at risk in our capital markets and they will not invest in U.S. companies. I have always said that markets run more on confidence than on capital, and I believe that is particularly important right now. Over the past decade, the incredible advances in technology, along with major overhauls of the regulatory framework for trading stocks, has fundamentally changed our equity market structure. Some market participants have seen some huge benefits from these changes, particularly retail investors. They have seen their trading costs fall to some of the lowest levels on record. And other market participants have not fared as well. The lower trading costs for retail investors has come at the expense of certain brokers and intermediaries. This is all to be expected. Any fundamental overhaul of our market structures has winners and losers, but these changes in our market structure have at the very least caused many market participants to take a step back and question whether they are still getting a fair shake. That is why I think confidence is so important right now. If there are problems, we need to fix them, because investors' confidence can disappear in the blink of an eye. I was pleased to hear Chair White say in our April hearing in response, really, to the chairman's question that the U.S. stock market is not, in fact, rigged, as some have claimed. And I will say that almost all of the market participants that I speak to have expressed tremendous appreciation for the SEC's careful, data-driven approach to market structure issues. I was also pleased to see that just last night, the SEC announced a pilot program that will test whether wider tick sizes will increase capital formation for smaller companies. This committee passed unanimously a bill last November that required the SEC to conduct such a pilot program, and that passed the House overwhelmingly. So I am pleased to see that the SEC has shown a willingness to work with this committee on these important and other very complex market structure issues. I look forward to working with our witness, Mr. Luparello, who recently took over as the Director of the SEC's Division of Trading and Markets. Even though he has only been on the job for a few short months, his Division has already announced several major initiatives, and I look forward to hearing from him today. Thank you very much. And I yield back the balance of my time. Chairman Garrett. The gentlelady yields back. Thank you very much. We now turn to the vice chairman of the subcommittee, Mr. Hurt, for 2 minutes. Mr. Hurt. Thank you, Mr. Chairman. And thank you for holding today's hearing to conduct oversight over the SEC's Division of Trading and Markets. While the SEC's Division of Trading and Markets has a number of consequential initiatives on its agenda, including the review of our equity market structure, I am particularly interested in hearing about issues related to the self- regulatory organizations. I am encouraged by SEC Chair White's recent comments that the Commission's review of equity market structure will include an examination of the nature of our self-regulatory model. However, some, including SEC Commissioner Gallagher, suggested that over time SROs have changed dramatically from self-regulatory to quasi-governmental and now operate more like an additional branch of government. Congress delegated specific responsibilities to these entities, and they should not be immune from our scrutiny. It is important for this subcommittee to look closely at the current structure of the SROs, their role in our financial regulatory system, whether their operations are sufficiently transparent and accountable, and finally, if changes are necessary to ensure that they meet the standards and responsibilities imposed by Congress. I am pleased to see several of the SROs implementing more robust processes for economic analysis in their rulemaking. It is incumbent upon the SEC and Congress to ensure that these cost-benefit standards are rigorously applied. Congress and the SEC should also promote similar policies for the remaining SROs, instead of a reliance on ad hoc measures. I look forward to working with my colleagues on this subcommittee to critically examine the SROs in our framework of self-regulation in financial markets today. I want to thank Mr. Luparello for appearing before our subcommittee. I look forward to your testimony. And thank you, Mr. Chairman. I yield back the balance of my time. Chairman Garrett. I thank the gentleman. And the gentleman yields back. We will go to Mr. Lynch now for 2 minutes. Mr. Lynch. Thank you, Mr. Chairman. And thank you, Ranking Member Maloney. And welcome, Director Luparello. Mr. Luparello, you are at the helm of the Securities and Exchange Commission's Division of Trading and Markets at a time of great importance. Currently, our capital markets face many challenges, including, most importantly, I think, high-frequency trading, a subset of algorithmic trading, and you have mentioned that extensively in your written remarks. The rise of algorithmic trading, whereby computer algorithms make trading decisions, creates both new opportunities and challenges for U.S. investors and regulators. As highlighted in Michael Lewis' book, ``Flash Boys,'' advancements in the speed of information are allowing high- frequency traders to front-run trades and exploit market fragmentation for profit without providing socially useful intermediation between investment capital and the companies who can put that capital to use. Now, I am not sure if using the term ``rigged'' is proper, that our markets are rigged, but I do know that there are two firms: Virtu Financial, which traded heavily in the market for 5 years without a losing day, which is incredible; and Tradebot, which traded for over 4 years without a losing day in the market. So maybe ``rigged'' isn't the proper term, but let's just say the current structure of the market favors high-frequency traders over average investors. And maybe that is why we are seeing a lot of investors walk away from the market, because they believe it is rigged. I, along with many of my colleagues in Congress, am particularly concerned about abuses in the markets caused by this practice. Both the Senate Banking Committee and the Senate Permanent Subcommittee on Investigations recently held hearings to examine disruptions in the market caused by high-frequency trading. And I think this committee could do the same. In a recent speech, SEC Chair Mary Jo White addressed the public's growing concern about high-frequency trading and proposed recommendations for new rules. I would like to hear your thoughts today about how that might be accomplished. Thank you for the time, Mr. Chairman, and your indulgence. I yield back. Chairman Garrett. The gentleman yields back. Mr. Foster is recognized for 3 minutes. Mr. Foster. Thank you, Chairman Garrett. I appreciate your holding this hearing. Mr. Luparello, I appreciate your appearing before this committee to discuss the complex and important issues around market structure. I believe it is easy to make the case that technology has largely benefited retail investors who have seen spreads between bid and ask prices narrow to historically low levels. Ironically, one of the main challenges in market structure is protecting the interests of large institutional investors who are sophisticated participants and are normally thought of as being fully capable of taking care of themselves. One analogy that I like to use when thinking about high- frequency trading and dark pools is the example of Disney World. Forty years ago, Disney Corporation bought up large blocks of swampland in central Florida using anonymous shell corporations and paying the current market price. Was that fair? If Disney had attempted this in a State where the prices and beneficial owners behind real estate transactions were immediately made public, then land speculators would have jumped in, buying up parcels of land nearby with the intent of selling them back to Disney at a profit. Would that have been fair? The point I am trying to illustrate is that while dark pools sound bad to the public because of the implication of opacity, forcing every transaction into the open would create winners and losers. I agree with Chair White that our equities markets are not rigged. But it is clear that, with 11 exchanges and 40 alternative trading systems, the market is overly fractured and there is a lack of transparency in many respects. This competition helps keep trading fees low for investors, but it also incentivizes routing two exchanges that pay the most for their orders. It is also clear that many of the current market regulations were developed in a world before the equity markets were dominated by computer algorithms. And, yet, it is absolutely clear that not enough information is provided to market participants to know about how their trades are routed and executed. Additional measures should be taken to ensure that alternative trading systems disclose harmonized digestible information about how they operate and whether or not they are really offering price improvements from the lit market. So as you embark on a comprehensive review of our equity market structure, including issues like order times and consolidated data feeds, I urge you to use a data-driven approach to bring about more transparency. Market forces and transparencies are often the best disinfectant. Thank you. I yield back. Chairman Garrett. Thank you. And the gentleman yields back. We will now turn to our witness. Mr. Stephen Luparello is the Director of the Division of Trading and Markets at the U.S. Securities and Exchange Commission. Mr. Luparello, we can now turn to you, finally, and hear your testimony. There are two things I always say: one is to make sure you bring the microphone close enough to you because we can't hear otherwise; and, of course, your entire written testimony will be made a part of the record. You are now recognized for 5 minutes, Mr. Luparello, and thank you for being with us. STATEMENT OF THE HONORABLE STEPHEN LUPARELLO, DIRECTOR, DIVISION OF TRADING AND MARKETS, U.S. SECURITIES AND EXCHANGE COMMISSION Mr. Luparello. Chairman Garrett, Ranking Member Maloney, and members of the subcommittee, thank you for inviting me to testify on behalf of the U.S. Securities and Exchange Commission regarding the Division of Trading and Markets' activities and responsibilities. The mission of the Division is to support the Commission's mandate by fostering investor protection and establishing and maintaining standards for fair, orderly, and efficient markets. To this end, the Division is responsible for the rules that apply to many of the major participants in the U.S. securities markets. We also oversee the rulemaking activities of the exchanges, clearing agencies, and FINRA in their capacity as self-regulatory organizations; monitor risks at large broker- dealers and clearing agencies; and assist the Commission with major international regulatory coordination efforts. Under the Dodd-Frank and JOBS Acts, the Division has primary responsibility for more than 30 separate mandatory rulemaking initiatives and studies under the two statutes, as well as the ongoing oversight and the implementation they require. These new responsibilities include the creation of a regulatory structure for securities-based swaps, the regulation and monitoring of clearing agencies designated as systemically important, the prohibition of proprietary trading by insured depository institutions and their affiliates as part of the Volcker Rule, and the development of rules for intermediaries engaged in crowdfunding. Although the Division's day-to-day and long-term focus cover a wider set of initiatives and mandates, I want to highlight a few of the key areas of responsibility and summarize our current efforts in each. First, the Division is playing a lead role in the comprehensive review of equity market structure recently described by Chair White to ensure that the U.S. equities markets remain the strongest in the world. This initiative includes a review of the evolution of market practices over the last decade and the role of Commission rules, including Regulation NMS, in that evolution and the need for any adjustments to that structure. Chair White has directed the Division to take a number of specific actions related to high-frequency trading, market transparency, and order handling, and has recommended that the Commission create a Market Structure Advisory Committee to review specific initiatives and rule proposals. Beyond this, the Division is working with FINRA and the exchanges to advance several initiatives, including efforts to minimize consolidated data latency and enhanced transparency and the extent to which such latency exists, clarify how exchanges themselves use data feeds for regulatory and routing purposes, and review order types offered by the exchanges to clarify their operation. Another important part of the review is developing recommendations to improve the market for smaller issuers, as a core guiding principle of our review is the recognition that, when considering market structure, one size certainly does not fit all. To this end, the Commission is continuing its evaluation of decimalization rules, including its consideration of a tick- size pilot that would widen the quoting and trading increment for certain smaller company securities and exploring other competitive market structure alternatives for smaller cap issuers. In addition, last year, at Chair White's request, each of the exchanges, FINRA, and the clearing agencies prepared action plans to strengthen critical market infrastructure. These entities currently are working to implement these plans, including through several important measures that should be completed in the very near future. Additionally, in March 2013, the Commission proposed Reg SCI to improve the Commission's oversight of market infrastructure. As proposed, the rule would require exchanges, clearing agencies, and other critical market participants to have in place policies and procedures reasonably designed to help ensure that their systems are robust, secure, and compliant. Beyond the many important market initiatives, the Division is working to fulfill the Dodd-Frank Act Title VII mandate to establish a new regulatory regime for security-based swaps, which historically have traded over-the-counter. These rules are intended to achieve a number of goals, including facilitating the centralized clearing of swaps with the intent of reducing counterparty risk, increasing transparency for regulators and market participants, and addressing capital and margin requirements for security-based swap dealers and major security-based swap participants. To date, the Commission has proposed all of the rules required by Title VII, adopted a number of final rules and interpretations, and provided a road map for the further implementation of its Title VII rulemaking, and has taken other actions to provide legal certainty to market participants during the implementation process. Just yesterday, the Commission adopted rules regarding the application of Title VII to cross-border activity. Division staff continues to work to develop recommendations for final rules required by Title VII and has been actively engaged in discussions with domestic and foreign regulators regarding the direction and coordination of international derivatives regulation. The Division is also continuing its efforts to establish rules pursuant to Title VIII of the Dodd-Frank Act, which requires the Commission to increase regulation of financial market utilities and financial institutions engaged in payment clearing and settlement activities that are designated as systemically important. Finally, the Division and other SEC staff are considering how to recommend the Commission use its authority under the Dodd-Frank Act to adopt rules establishing a uniform fiduciary standard for conduct for broker-dealers and investment advisors when providing personalized investment advice about securities to retail customers. To more fully inform the Commission's decision on this issue, Chair White has directed the Division to work with its colleagues in DERA and the Division of Investment Management to evaluate potential options in light of the information available for the Commission's consideration. Thank you again for inviting me to discuss the Division's activities and responsibilities, and I look forward to answering your questions. [The prepared statement of Mr. Luparello can be found on page 36 of the appendix.] Chairman Garrett. Thank you very much. We appreciate your testimony. I now recognize myself for 5 minutes for questions. I am going to begin with the same question that I asked Chair White: Director, are the markets rigged? Mr. Luparello. That is an easy question to start with. No. The markets are not rigged. There are clearly things about the markets that require further attention and perhaps some regulatory response or enhanced transparency, and the Commission and the Division are focused on that. But fundamentally, the markets are fair for investors. Chairman Garrett. So when the issue of investor confidence is raised, should investors have confidence in the markets? Mr. Luparello. I think it is fair to worry about investor confidence, even if you think the markets are not rigged. The extent to which there is a perception that it is rigged is maybe--it is not as important as whether the markets are actually rigged, but it is obviously a very important thing for the Commission. So one of the things we have to do in our policymaking is do things that reassure participants in the market that the markets are fundamentally fair to them. Chairman Garrett. Okay. This may be a segue; I don't know. Chair White, just recently, in her speech the other day, touched on some of the proposals that you--one of the proposals was the creation of a market advisory committee. And I presume such an advisory committee is supposed to serve as a resource, if you will, of information from stakeholders and the like. And I assume that the purpose of it is to provide that information as you go forward--you and the entire SEC goes forward with the other recommendations that she and you are considering. Is that correct? Mr. Luparello. That is correct. Chairman Garrett. And she didn't really elaborate. She just spoke one or two sentences in her speech. So is this advisory committee being put together by her or is this being put together by the entire Commission? How does that work? Maybe you could flesh it out, if you will, a little bit. Mr. Luparello. I will flesh it out to the extent I can. Chairman Garrett. Okay. Mr. Luparello. The committee will be a committee that will be consistent with the obligations of the Federal Advisory Committee Act. Chairman Garrett. Okay. Mr. Luparello. At this point, the staff is presenting a recommendation to the entire Commission, which will include the mandate, the charter, and the proposed participants. Chairman Garrett. Okay. Mr. Luparello. And, to that point, the entire Commission will have an opportunity to vote on the-- Chairman Garrett. So, where do the people come from? Who makes the recommendations to serve on this? Is that from Chair White or is it from the whole Commission? Mr. Luparello. The recommendations in the first instance will be made by staff-- Chairman Garrett. By staff. Mr. Luparello. --on Trading and Markets and others. But, obviously, the Commission will have input into that. Chairman Garrett. The Commission. Mr. Luparello. Yes. Chairman Garrett. Okay. A whole slew of issues are being run through here today. Other people have raised, and we have talked about in this committee previously, Reg 611, also known as the trade-through rule, as an area some people say needs extensive, thorough review, and other people push away and say not. One of the people who says that it does need further review is Andy Kessler, in a recent Wall Street Journal piece--I remember reading that the other day--and across the Chamber, Senator John McCain. In his opening statement at the Permanent Subcommittee on Investigation hearing on market structure, he also said it does. What is your take on this? Is this an area that is going to be one of the primary focuses of the SEC for review? Mr. Luparello. The Chair, in her speech, laid out what I think you can basically categorize as short-term initiatives and longer-term initiatives. Chairman Garrett. Okay. Mr. Luparello. Clearly, the study of Reg NMS, broadly, but specifically the issue of the trade-through rule is one that is very much on our agenda. Unlike the shorter-term issues, I think the staff tends to think that there is more study and more discussion that needs to go on. There are obviously some benefits that have come with Reg 611 in terms of competition. Obviously, there is also a substantial amount of fragmentation that has come with it. That is a very difficult issue to balance. Chairman Garrett. Yes. Mr. Luparello. It is very much on our agenda, but at this point I don't think we have reached a conclusion. Chairman Garrett. Okay. So one other question. I have 50 seconds here to go. There is an issue about dealing with best execution and whether you are enforcing and modernizing that whole system. Right? And also tied to that is the issue of disclosure requirements on that. So there is an issue there as far--as you do that, whether that has a conflict of interest as far as the broker is concerned. So, in 26 seconds: first, address that; and second, if you are going to be addressing those couple of issues there and that point, the other issue is: Are you getting into the weeds too much on these specific issues before you do a more holistic analysis of the overall market structure before getting down into trying to fix those pieces of it? Mr. Luparello. You touched on it perfectly, which is that so many of these issues are fundamentally interrelated. Chairman Garrett. Right. Mr. Luparello. And to try to look at them in a stovepipe means you are probably going to have as many unintended consequences as intended consequences. Chairman Garrett. Exactly. Mr. Luparello. There is a very important sort of overarching analysis of how much best execution drives a variety of things, whether it is the need for the trade-through rule or further disclosure on payment for order flow or things like maker-taker pricing. All of those issues, I think we will look at together. Again, I think it is important for confidence and, because of a variety of smaller fixes, that we move quickly on the shorter-term initiatives. But we will, on the longer-term initiatives, look at all these things together and not attempt to sort of pick them apart in ways that are artificial. Chairman Garrett. Good luck. I appreciate that. The gentlelady from New York is now recognized for 5 minutes. Mrs. Maloney. Thank you very much. The chairman started with his first question to Chair White. I am going to begin with mine. I asked, ``Are the markets rigged?'' And Chair White said, ``Absolutely not.'' And I said, ``Some of my constituents think they are.'' So, that goes to the confidence issue. And they think they are because of books that have been written alleging it, statements by people alleging it, and basically, that some people have access to information before other people and that gives them an unfair advantage. I truly do believe that confidence is an important part of markets, and if people don't have confidence that it's fair and that they have a fair shot, the same shot that anyone else has, it will hurt our markets. So I am wondering, what could we do to address this concern that some people have? I am sure your office is getting the--my office is getting it. You have to be getting these allegations. Mr. Luparello. We do. And we obviously take them very seriously. And we are borderline inundated on it. But that is our job. I think the answer to that is going to be different for different segments of the marketplace. Clearly, at the retail end, there is a lot that is good and works well for the market. By all available metrics, retail investors are doing better now than they have ever done in the past. That is mostly driven, obviously, by technology. But there are certain things that lead to confidence concerns. One of those is stories around the different access to information. We are working with the exchanges and the SIPs to make sure that everything is being done to deal with the issue of SIP data latency, for example. And we are doing things around order types-- Mrs. Maloney. Dealing with--pardon me--what? Entry? Mr. Luparello. I'm sorry. Data latency. Mrs. Maloney. Data latency. I see. Mr. Luparello. So doing a variety of things that reinforce fundamental fairness of the market is going to be our first step. Institutions have different issues and concerns around whether the market works well for them, and part of that is around some level of transparency of what happens in dark pools. And we are going to pursue an initiative that deals with greater transparency of routing of institutional orders. That exists on the retail side. It is also worth looking at this time whether that rule, which has been in place for 10 or 12 years, could use some modernization. But there are a variety of things we can do to bring transparency to the market and attempt to communicate well to retail investors about the fundamental fairness in the market. Mrs. Maloney. In Chair White's speech earlier this month, she said she was directing the staff to develop an ``anti- disruptive trading rule.'' And the purpose of this rule, according to her statement that day, is to limit the use of ``aggressive destabilizing trading strategies in vulnerable market conditions.'' Can you walk us through what you would consider to be an ``aggressive short-term trading strategy?'' Mr. Luparello. I can at a high level. The specifics of that rule are still a topic of conversation and in development. But, as is generally thought, there are three types of strategies that together form what people think of as high- frequency trading, and there is a lot of gray area around those margins. So, I don't like to get too invested in it. Mrs. Maloney. What is an aggressive short-term trading strategy that she is talking about? Mr. Luparello. One of the strategies is when a trader, based on a signal, aggressively takes liquidity on the same side of the market at multiple times and it is--as compared to a market-making strategy, where you are more passive and providing liquidity on both sides. This is a strategy that sees weakness on either the bid side or the offer side and takes liquidity in sequence. What the Chair was talking about was developing a rule where, whether or not that's illegal now--and I think, in most cases, we would all agree that it is not illegal--whether there are times when the market is vulnerable and subject to volatility that you restrict a subset of traders from executing strategies like that during short periods of time. That writ large is what the anti-disruptive trading rule would look like. Mrs. Maloney. How would you distinguish between an aggressive trading strategy and the more legitimate trading strategies that major institutional investors and retailers follow? Do you differentiate based on the type of investor or based on the market conditions? How do you differentiate? Mr. Luparello. Those are very important details. In our early thinking, I think it is based on a strategy in a very short period of time that is liquidity taking on one side of the market when the market itself is somewhat fragile, all those terms still to be defined. Mrs. Maloney. My time has expired. Chairman Garrett. Thank you. Good question. The vice chairman of the subcommittee, the gentleman from Virginia, Mr. Hurt, is recognized for 5 minutes. Mr. Hurt. Thank you, Mr. Chairman. And, again, I thank Mr. Luparello for appearing today. As we undertake a review of the equity market structure in this country, I wanted to talk a little bit about the self- regulatory organizations generally. Obviously, they play an important role, a rulemaking role. I am a member of the Virginia State Bar and, as an attorney, as a member of a State regulatory organization charged with the creation of rules as well as the enforcement of those rules, I certainly understand the virtues of SROs generally. But I want to talk to you about your view on the evolution of SROs. Are they making good rules? Are they going through rigorous analysis to reach those rules? And what about transparency and accountability? Clearly, those are issues that I think promote the-- certainly the response--promote the things that the SEC should be worried about: transparency; capital formation; and investor protection. And so, they play a critical role there. Can you talk a little bit about that evolution and where they are now and where you could see room for improvement? Mr. Luparello. Absolutely. And when talking about SROs, clearly there are--the exchanges are also self-regulatory organizations. It is a very important issue, one that we are looking at more long-term. Your question is, I think, more specifically pointed at the broader rulemaking SROs, specifically FINRA and the Municipal Securities Rulemaking Board (MSRB). I think all of those points are extraordinarily important both in terms of the ability to have input into the rulemaking process as well as ensuring a level of confidence about that rulemaking process. Both FINRA and the MSRB, on significant rulemakings over the past few years, have added layers of opportunities for comment. So, as a general matter, when they are doing rules, first they subject them to their own internal notice and comment process. And then, after that, if there are major tweaks, they sometimes repeat that process and then eventually come to the Commission, where it goes through a separate notice-and-comment process. So we are comfortable with that level. One of the things is there is no specific obligation on the SROs to have that internal notice-and-comment process. I think they tend to think it improves the quality of their product and so are committed to it. But that is one of the things that I think we would like to stay vigilant on and make sure they stay committed to that. They have also--and this is a fairly recent development-- embraced more careful, more specific cost-benefit analysis in their rulemaking. I think that is something that, backsliding, I think we would think would be a very bad idea. I think, having spent a decent amount of time at FINRA, I always feel the need a little bit to defend the quality of the rulemaking process. And that early round of communications through notice and comment, as well as going through the committee process, often had a very, very strong cost-benefit component. And so, I would like to think that most of the rulemaking, even without an explicit cost-benefit obligation, had gone through some fairly careful cost-benefit analysis. That said, making that routinized and making that obligatory is, I think, a fundamentally good idea. When we at the Commission get rule filings from MSRB and FINRA, the two most important things were, obviously, we want to make sure it is good public policy, but we also want to make sure it is consistent with their statutory obligations and it does pass cost-benefit muster. Mr. Hurt. Talk a little about the role of the SEC. Do you think the SEC conducts robust oversight over these agencies? And is there room for improvement there? Mr. Luparello. The oversight of the SROs is the responsibility of our Office of Compliance Inspections and Examinations (OCIE). So I am a little bit more comfortable talking about being the overseen as opposed to the overseer. But there are substantial resources that are committed to overseeing the SROs. One of the things that came out of the Dodd-Frank Act was an obligation on the Commission to have a more routine oversight structure with the securities associations, of which FINRA is the only one I know that exists and is robust. And, look, especially FINRA has a very broad mandate, a very complicated program, and increasing the touch points and paying attention to it is something that you have to do basically all the time because there are just so many different moving parts. But I know both the Commission, again through the OCIE Staff, as well as the folks at FINRA, are very committed to that ongoing relationship. Mr. Hurt. I see my time is about to expire, so I will yield back the balance of it. Thank you, sir. Chairman Garrett. The gentleman yields back 7 seconds. And I now recognize the gentlelady from California. Ms. Waters. Thank you very much, Mr. Chairman, and Ranking Member Maloney. I appreciate the opportunity to join with you today on the issues that you have identified dealing with the SEC. I have an issue that is very important to me that I have been trying to advance. I have a bill, H.R. 1627, the Investment Adviser Examination Improvement Act, which would authorize the SEC to levy user fees to cover the costs of an increase in the frequency of examinations of investment advisers. The Investment Advisory Committee of the Commission has endorsed this legislation, which is one of the recommendations that SEC staff originally provided in the study required in Section 914 of Dodd-Frank. From your perspective, do user fees represent a scaleable and workable way for the Commission to improve investor protection? Mr. Luparello. I think, at a high level, the Chair and the Commission, as well as the staff, remain very concerned about the coverage of investment advisors from an examination standpoint, especially as compared to broker-dealers, and those statistics are well-known. We continue to be supportive of any solution that allows for a greater coverage of investment investors that is, frankly, consistent with the statute. Ms. Waters. Section 911 of the Dodd-Frank Act provides that each time the Investor Advisory Committee submits a finding or recommendation to the Commission, the SEC shall promptly issue a public statement assessing the finding or recommendation of the committee and disclosing the action, if any, it intends to take with respect to the recommendation. Does the Commission plan on responding to this recommendation from the Investor Advisory Commission? Mr. Luparello. Congresswoman, I am afraid that is an area of the Commission's responsibility, specifically the Division of Investment Management, that is outside my scope, and I can't speak to it. I'm sorry. I can find out the answer, though. Ms. Waters. All right. Let me just wrap this up, Mr. Chairman, by saying that the examinations are done for the investor advisors once every 12 years. That is all they can expect to have to respond to in terms of an examination, which means only 8 percent of the exams are being done. And so, this is a very important issue, and I am hopeful that everything possible can be done to continue to advance it. And if user fees probably are the only way that we can get the resources to do the examinations, of course, I am hoping that everyone will support the idea of user fees. Mr. Luparello. I couldn't agree more with your observation. Ms. Waters. Thank you. I yield back the balance of my time. Chairman Garrett. Thank you. The gentleman from Texas is recognized for 5 minutes. Mr. Neugebauer. Thank you, Mr. Chairman. And thank you for having this important hearing. Mr. Luparello, in a recent speech Commissioner Gallagher had an interesting observation. He stated that when people ask him how the SEC should respond to Michael Lewis' ``Flash Boys,'' which focuses, as you know, on striking, tells about the high-frequency trading in equities, his response is, we still need to respond to Lewis' 1989 classic, ``Liar's Poker,'' which is a vivid description of the bond market structure issues that are still present today. I agree with him. That scenario is one we haven't really looked at in the past. And when I look at the allocation of resources at the SEC, you have hundreds of staffers in your division that are devoted to oversight of the equity and options market. And I believe there are six employees in the Office of Municipal Securities and, amazingly, no staffers focused on the corporate bond market. Given that debt financing is nearly $15 trillion of the market, why has the SEC allocated such a small amount of its resources to those markets? Mr. Luparello. Overall, I entirely share your concern and support Commissioner Gallagher's observation. Let me just correct you every so slightly. While Trading and Markets does not have a subsection that is solely focused on the fixed-income market, specifically, the corporate fixed-income market, there are a number of people for whom that is their responsibility. But overall, I couldn't agree more. Obviously, we have a lot of work to do on equity market structure. We also have a lot of work to do creating a market structure for over-the- counter derivatives. But fixed-income, especially given how investing appetites are going to change going forward, is only going to become more and more of a retail market and more and more worthy of our interest and investigation. The Chair did give a speech within the past few days where she outlined at least some preliminary thoughts on how to address market structure in the fixed-income space. That work is going to come out of my division, and it is something we take very seriously. Mr. Neugebauer. I think I have heard people say that there is probably less efficiency in the bond markets than in the equity markets. Would you agree with that statement? Mr. Luparello. Yes, 100 percent. Mr. Neugebauer. Yes. So somebody is paying for inefficiency? Mr. Luparello. Part of that inefficiency comes with the fact that it is just fundamentally a less liquid market. But there is certainly some transparency that we would like to explore bringing to that market. Mr. Neugebauer. Turning to the Volcker Rule, in, I think, October of 2011 and January of 2012, the agencies received nearly 18,000 comments voicing opinions on a rule and, at the prodding of the White House and the Treasury Department, the rule was completed at the end of last year. Now, a lot of us felt like the initial rule that was put out was pretty vague, which prompted a lot of questions about it. And then, when the rule came back out, a lot of us were hoping that it would be re-proposed and be opened back up for comment, but that was not the case. And so, I think the industry felt like they were left with a lot of unanswered questions, and there continues to be, as I'm am sure you are aware, a growing number of concerns about the enforcement and how the rule is going to be interpreted. So tell me kind of, what the game plan is here. You have the Volcker Rule working group. But how are people going to have the opportunity to respond to those in a timely manner? And have you worked out who makes the final decision where you have a multi-agency Commission here looking over that process? Mr. Luparello. Obviously, coordination is important. And the working group, which has representatives from the five regulatory agencies, meets constantly and is committed to consistency. One would hope that commitment to consistency doesn't come with a cost of being slow in terms of getting guidance out, and my observation in my short time there is that has not been the case. So, as I said, the agencies are committed to doing these things completely consistently. We have started putting out responses to frequently asked questions. Three additional ones went up within the past couple of weeks. I think there are six now. Our view obviously is that is a living document that we will continue to try to populate to the greatest extent possible. Also, in our examination programs we are reaching out and having those conversations to try to get additional questions from entities that will be covered by the Volcker Rule so we can give them as much guidance as we possibly can. The extension of the conformance date also gives us a little bit more of a window to get that done. Mr. Neugebauer. So are these interpretations--are they being made public so that everybody gets a look at them? Mr. Luparello. Absolutely. Mr. Neugebauer. And what about the minutes of the working group and how they are making those decisions and how they are coming to those conclusions? Any transparency there? Mr. Luparello. Complete transparency on the FAQs that are on our Web site and the Web sites of the other four agencies. I am afraid I don't know the answer to your question. Chairman Garrett. The gentleman's time has expired. We will give a little leeway to the gentleman from Massachusetts, Mr. Lynch. Mr. Lynch. Thank you, Mr. Chairman. Mr. Luparello, I want to go back to the speech that Chair Mary Jo White gave back at Sandler O'Neill on June 5, 2014. She mentioned that the SEC is assessing the extent to which specific elements of the high-frequency trading environment may be working against investors rather than for them. This was about a month ago. Have we made any progress on that? Mr. Luparello. The Enforcement Division obviously has a number of-- Mr. Lynch. Could you pull that microphone closer? My hearing is not good. Mr. Luparello. Neither is mine. So I apologize. And I could hear you perfectly. I apologize for the microphone being too far away. Obviously, if the Commission's staff in the Enforcement Division believes that there are market participants who are violating existing rules, that is subject to very careful investigation and enforcement. There have been a small number of cases, but I think, to be perfectly frank, the vast majority of high-frequency trading activity exists inside what is currently considered legal trading. The Chair brought forward a number of initiatives, all of which are in development, including the one we had spoken about just briefly on the anti-disruptive trading rule being one that is very much directed at the conduct you are looking at. That is something that is a very high priority for the Division to come up with a recommendation to the Commission in the very near future, but we have not presented that to the Commission yet. Mr. Lynch. All right. Thank you. Let me ask you--she also raised the issue of eliminating the exception right now from FINRA registration for dealers that trade in off-exchange venues. Are we making any progress on that? Mr. Luparello. That is actually--that is half of two pieces, the other of which is to clarify that certain market participants that trade at a certain level need to register as broker-dealers. Then, having clarified that obligation to register as broker-dealers, if they participate in the over-the-counter markets, which clearly most high-frequency traders do because that is where dark pool volume gets reported, they would need to register as FINRA members. Those proposals are in development. Again, I think we are hoping to get them to the Commission soon. Mr. Lynch. She also talked about the volume of trading being done in dark pools versus on lit exchanges and mentioned that there might be some way to put a little bit more light on some of these dark pools. Are there any concrete steps in that direction? Mr. Luparello. Specifically, those proposals would call for enhanced transparency in terms of the business operations of ATSs. It is not so much changing the mix of lit quotes versus dark quotes, but basically the business operations, how they execute orders, how their fees work-- Mr. Lynch. A lot of dark pools are not ATSs, though. Mr. Luparello. No. They are ATSs. Mr. Lynch. Are you doing anything in that regard? Mr. Luparello. Yes. I'm sorry. They are ATSs. So it would basically be looking back at our ATS rulemaking of 10 or 12 years ago and modernizing it, enhancing the level of disclosure about the business operations of ATSs, including, importantly, the mix of participants in the ATSs and then making that information publicly available. Again, I feel like I am repeating myself, but that one is also in development. Mr. Lynch. No. I understand. And it sort of leads to--the last question I have is, in her speech the Chair actually brought up a couple of enforcement cases where broker conflicts--because of the maker- taker fee structure, where some brokers were getting enhanced fees if they sent their trades in a certain direction. There was a conflict there with the general duty to place the best trade for an investor. She had a couple of fraud enforcement actions that she mentioned. What are we doing in that area to try to manage those conflicts for the brokers? Mr. Luparello. Maker-taker is a very important issue. It is a very complex issue, one that we have been studying for a while, and will continue to study. I will say, however, that if a broker is routing his customer orders based only on the desire to obtain rebates or avoid fees without making sure that he is meeting his overarching obligation of best execution, I think that would clearly violate our existing rule set. Mr. Lynch. Thank you. I have exhausted my time. I yield back. Chairman Garrett. Thank you. The gentleman's time has expired. Mr. Ross is recognized for 5 minutes. Mr. Ross. Thank you, Mr. Chairman. Mr. Luparello, in reviewing your opening statement, you talk about providing technical assistance to the Department of Labor with regard to their definition of ``fiduciary'' and specifically as to the practical application of making sure investors have proper guidance with regard to ERISA. I have some grave concerns over that. First of all, it gives rise to a new cause of action. As a lawyer, that is great. As a litigator, it is even better. But I think that it directly and adversely impacts the investors. Because I think, once you put that standard in there and you have an exodus of broker-dealers from the market, you still have a demand for that advice, and I think you create a more volatile investment market because of it. And my concerns are: What technical assistance are you providing? And do you feel that there should be a fiduciary definition with regard to investments with ERISA for broker- dealers? Mr. Luparello. The Chair has asked the staff of Trading and Markets, as well as the staff of Investment Management, to come up with some proposals on that very issue, the standard of care, whether you can continue to have separate standards of care for different distribution venues or whether you need a single standard of care and whether that single standard of care is-- Mr. Ross. And I think that is appropriate. I think there also should be a cost-benefit analysis because I think you are going to see, again, an exodus in the market of the broker-dealers. And, I think there are standards of care. There are standards of care just by way of common law. There is misfeasance, malfeasance, and negligence. And there are errors and omissions policies out there that cover that for some of these professional broker-dealers. So I am just very concerned that moving in this direction is going to do more harm to the investment market of those who want to engage in it than it will do as a benefit. Mr. Luparello. I completely agree. And in developing our recommendations, cost clearly is an issue. We also worry about investor choice. As for the guidance, the technical assistance we are giving the Department of Labor, that is mostly in terms of providing them our understanding of how the market operates. Obviously, their decision-making process is one over which we don't have any control. Mr. Ross. Thank you. Turning to the Volcker Rule again, the Volcker Rule will take place about the same time as the Basel III capital requirements are going to be imposed--what may very well be-- when they may very well be imposed. My concern--and I want to know if it is a concern of yours--is whether there is going to be an impact on interest rates for corporate borrowers because of Basel III and the Volcker Rule. Mr. Luparello. Obviously, we are concerned about and carefully look at liquidity in the marketplace. Even if we didn't, the Chair has asked us to provide information on a quarterly basis, I believe, of-- Mr. Ross. Because that could impact our markets pretty significantly. It might be-- Mr. Luparello. Absolutely. We have-- Mr. Ross. --a little bit more regulation than we might need there. With regard to the Volcker Rule and the exemption for municipal and State debt as well as sovereign debt, because these types of investments, these types of debt, if you will, may fluctuate in the market, do you think that there is more advantage to the larger banks to take riskier investments because they will be protected as being exempted from the Volcker Rule? Mr. Luparello. I will be honest with you, Congressman. It is not an area that I have spent enough time studying to provide an insightful point of view. Mr. Ross. But I guess Congress exempted certain debt of State and municipal debt, but then the regulatory environment added sovereign debt. And that has me concerned because I think that those are gambles that--I don't know how many people want to invest in the City of Detroit right now, but that is an exempted debt under the Volcker Rule. Let's see. Lastly, the United States remains the only developed country to implement a restriction on proprietary trading. Will U.S. corporations face higher borrowing costs and be placed at a competitive disadvantage with regard to their foreign counterparts? Mr. Luparello. Clearly, that is something we plan on studying and plan on continuing to communicate about with this subcommittee. Mr. Ross. I appreciate your insight on that. And I will yield back the balance of my time. Chairman Garrett. Thank you. The gentleman yields back the remainder of his time. Mr. Perlmutter is recognized for 5 minutes. Mr. Perlmutter. I thank the kinder and gentler chairman for my 5 minutes. Mr. Luparello, thank you for being here today. I just have kind of a series of questions about different kinds of rules that are out there. In the lead-up to the crash of 2008, there were a couple of rules that were not in place that I think ultimately were then put back into place, and I would like to know what their status is. What is the status of naked short sales and the uptick rule? Do those exist or exist in some form or another? Mr. Luparello. I will look for my staff folks over my shoulder to tap me on the shoulder if I am wrong. But I understand that the--to the best of my recollection, the short sale rule exists, but it exists only during certain times of market stress. So, the short-sale tick-test rule exists only in narrow instances. Mr. Perlmutter. In sort of times of-- Mr. Luparello. Right. Mr. Perlmutter. --where the market is diving, in effect? Mr. Luparello. When the market is already directionally going--when it is already directionally going down. Mr. Perlmutter. Okay. Thanks. Talk to me about--and explain to the committee, if you would, because--this exchange-traded funds and leveraged exchange-traded funds and how those might have an effect on the overall market if things were to go sour. Mr. Luparello. I think we talk about market structure for equities and we talk about market structure for fixed income and derivatives. But exchange-traded funds is an enormously important part of the market. It is something that my staff spends a lot of time on, as well as the Division of Investment Management, studying whether there are aspects of that from a market structure standpoint that we need to look at. There is also obviously-- Mr. Perlmutter. So what is an exchange-traded fund? Mr. Luparello. It is any number of products that either represent a basket of securities or some other reference asset that you can trade intraday. It is basically like a mutual fund except that there is pricing during the day. There is not always perfect transparency around the components of it. And so, the arbitrage between the components and the ETF are very, very important. Mr. Perlmutter. So in the SEC's sort of overview of these funds and the trading of these funds, what are you seeing today? Because I have seen kind of an increase in articles about potential problems, one part of the market saying, ``No. There is no problem here,'' others saying, ``Well, we had better watch this.'' Mr. Luparello. I think, from a market structure standpoint, it is certainly worthy of further attention. I think we are also always worried about whether some of these products are complex and being sold to investors who don't actually understand the complexity and that they create separate sales practice issues. That is another part of it to which we need to pay very close attention. Mr. Perlmutter. Can you tell us what the--a couple of years ago, Mr. McHenry sponsored a bill on crowdfunding for small purchasers, small investors. And there are fears about--part of your job, obviously, is being a policeman, making sure that people aren't taken advantage of, there isn't fraud in the marketplace. So, you have been tasked with some rulemaking on crowdfunding. What is the status of that? Mr. Luparello. The proposed rules were published in October of last year, I believe, and we received a number of very thoughtful comments. The staff is working on it. There are issuer obligations that are embedded in the rulemaking that are the responsibility of the Division of Corporation Finance. The intermediary obligations, whether that is broker-dealer obligations or funding portal obligations, are our responsibility. We are working through it to the best of our ability and hope to get a recommendation to the Commission very soon. Mr. Perlmutter. All right. Thank you, Mr. Chairman. I yield back. Chairman Garrett. Thank you. Mrs. Wagner is recognized for 5 minutes. Mrs. Wagner. Thank you, Mr. Chairman. And I thank Director Luparello for being here. I want to continue the discussion on the fiduciary standard of conduct and, in your own words, consider whether and, if so--I underscore ``if so''--you will adopt rules establishing a uniform standard. To me, the most critical issue raised by the potential fiduciary rulemaking is whether the new rules will, in fact, hurt low- and moderate- and middle-income individuals' access and affordable financial advice. And I appreciated your statement to Congressman Ross about the concerns of cost and choice in that investor market. Dodd-Frank required the SEC, I know, to study whether to subject broker-dealers to a fiduciary standard. However, the SEC's 2011 study ``failed to identify whether retail investors are systemically being harmed or disadvantaged under one regulatory regime as compared to the other.'' This was, of course, according to Commissioners Paredes and Casey. Without investor harm, Director Luparello, is there any basis to conclude that a uniform standard would, in fact, enhance investor protection? Mr. Luparello. I think clearly, one needs to identify a benefit to stand up against the cost. The Commission before my time, but in the recent past, put out a request for further information around a variety of these issues. It is something that we continue to study very carefully. But I think it is a fair question that you need to identify a real benefit before you start to analyze the costs and benefits of these things. Obviously, there are certain aspects of the fiduciary standard which provide enhanced investor protection. But again, cost and choice are things that have to be balanced against that. Mrs. Wagner. And I appreciate that. Following up on that 2011 study, Chair White, I know, told the committee in 2013 that she would do that request for information to better inform the rulemaking. What were the results of that request for information? Mr. Luparello. I think, to a certain extent, the level of information that flowed in was less than the staff thought it was going to be. And so, one of the questions we have is: If we are going to come up with recommendations, will there be a need for a new round of information-gathering? Mrs. Wagner. And that was my understanding, that there really was not much feedback there. And I continue to be concerned about, again, this being a solution in search of a problem. Has any of the information helped inform your thoughts on how--thoughts on this potential rulemaking? And how that would be played out? Mr. Luparello. Clearly, all input we get is important input. But it is all part of a multifaceted analysis that includes multiple divisions of the Commission. So, again, any input we can get is going to be helpful input. What the final recommendation is and how much that input is going to drive that is still something that is being-- Mrs. Wagner. I know that the SEC found in 2008 that investors were somewhat confused about whether they were dealing with broker-dealers or investment advisers. However, they did not identify any specific harm. Is the only solution to impose a fiduciary standard of care on broker-dealers or could any issues be fixed by, let's say, amending existing FINRA rules? Mr. Luparello. One of the questions is whether there are enhancements to existing rules for broker-dealers and--as well as recognition of some of the existing rules on broker-dealers that deal specifically with conflicts. That is always an option that I think has to be considered. Mrs. Wagner. Good. One source of confusion for investors might be the variety of titles that brokers and investment advisors use. Would a simple way to fix the problem be to clarify which titles they can use, sir? Mr. Luparello. I don't know if that would entirely solve investor confusion. I can say that years ago, I was involved in a project where there were a variety of titles that were being used, especially around advice to senior citizens, that were, basically, fundamentally baseless. And so FINRA has in the past attempted, as well as other regulators, to crack down on the misleading use of titles. Whether you get to specificity around the words that can be used and that solves investor confusion is certainly worthy of additional consideration-- Mrs. Wagner. In my limited time, Chair White recently said the rulemaking was a high priority and she wanted to make a decision this year. So, she asked the staff for options. What other options have the staff suggested to the Commission? Mr. Luparello. The development of those options is still in process, but I think you have touched on what the variety of choices could be. Mrs. Wagner. And will you be able to report back to us some of those options at some point in time, sir? Mr. Luparello. I believe I need to report to my Chair, first. But, yes, absolutely. Mrs. Wagner. Wonderful. Thank you. I appreciate it. I yield back, Mr. Chairman. Chairman Garrett. The gentlelady yields back. Mr. Scott is now recognized. Mr. Scott. Thank you very much, Mr. Chairman. Mr. Luparello, when Securities and Exchange Commission Chair White appeared before our committee, I expressed some concerns about what is referred to as the lack of order competition and I asked her what her plans are to deal with market structure. And I want to make a note that I am somewhat encouraged by the recent announcements of the items that you intend to take action on before the end of the year. However, it appears that much of this is low-hanging fruit and does not directly address my concerns that I addressed to her about order competition. So let me ask you: What is your plan to address some of the bigger market structure issues such as the increased level of dark trading that even the SEC has recognized as having a negative impact on price discovery? Mr. Luparello. I think your characterization of the Chair's plan is fair and, frankly, what she would articulate as well, that there are a variety of initiatives that the staff is ready to move on quickly and that there are others that deserve, frankly, a little bit more study, a little bit more interaction-- Mr. Scott. What would be some of those you want to move on quickly? Mr. Luparello. The ones we would want to move on quickly are an anti-disruptive trading rule, the registration of all high-frequency traders as broker-dealers, the requirement that those that trade over the counter become FINRA members, enhanced disclosures on the business operations of ATSs and enhanced disclosures on the routing of institutional orders. The issue you touch on is an extraordinarily important one--right?--that there is an extraordinary amount of fragmentation in the marketplace these days, some of which leads to positive competition and lower costs, but some of it clearly can lead to degraded opportunities for lit quoting and for order interaction. That is a very important balance and one that we desire to get-- Mr. Scott. But are you all assessing point by point the negative impacts on price discovery? Mr. Luparello. Absolutely. So as we study NMS--and, again, I don't want to refer to it as a long-term study--what--our next plan is to put out a series of White Papers, work very closely with a variety of participants, including our Market Structure Advisory Committee, once it is stood up and operational, to look at these issues. I tend to like to think of that one in the context of the trade-through rule, that a lot of these things come with the fragmentation of those venues. And so we will look at--we are very much going to look at that. That is one of our most important longer-term issues. Mr. Scott. Okay. Let me share very quickly, this is a rather startling observation. But today, only 63 percent of trades are conducted in what is referred to as lit markets, where we can see them. Now, that means 37 percent are in dark pools. It means that investors are not seeing the true depth of the liquidity behind the stocks. So while high-frequency traders will, what you refer to, ping the market by sending out a bid to see if there is a response from the dark pools, this is not possible for all investors. How does this affect an investor's ability to even price a stock? And is this a significant advantage for some participants over others? Mr. Luparello. It is certainly worthy of study. And I completely agree with the importance of those statistics. That said, it is probably worth noting that, of that 37 percent, a significant portion are actually retail investors getting good-quality executions very quickly done. That doesn't at all touch on the issue of whether we have quote degradation that we need to worry about. But one of the things we need to do as we study is to make sure that some of the better features of the markets, including how retail investors experience both high-quality and rapid executions, doesn't get degraded or, frankly, if it does get degraded, it is a decision we are making with our eyes wide open. So, yes, it is, I think, just sort of troubling on its face that such a large percentage of activity happens off of lit markets and there are more headwinds than there are encouragements to quote in lit markets. But, to a certain extent, that has come to the benefit of certain retail investor-type trades. It is a very complex issue, one that we plan on studying very carefully. Mr. Scott. Thank you very much. The lack of order competition is a very, very serious issue. Mr. Luparello. I could not agree more. Mr. Scott. Thank you, Mr. Chairman. I yield back. Chairman Garrett. Thank you. The gentleman yields back. The remaining gentleman on our side, Mr. Mulvaney, is now recognized. Mr. Mulvaney. Thank you, Mr. Chairman. Mr. Luparello, let's talk a little bit about litigation and liability, which I used to know something about in a previous life. One of the things that Dodd-Frank did--I think it was Section 921(a)--is give the SEC the ability, but not the obligation, to limit the use of arbitration in securities litigation. I used to do a little of that. I have been on the plaintiffs' side of that, and I have been on the defendants' side of that. And while it was certainly different than going through the court system--the ordinary court system, I have to tell you that I liked parts of it. It was a lot quicker. It was a lot easier. And for both sides, it was usually a lot cheaper. I recognize the fact, again, that it was different than going through ordinary litigation. There were certain tools that were not available to me, for example, as a plaintiffs' lawyer, that would be in the courts. But, conversely, it was a trade-off there of having it be easier, quicker, to do. So, I guess, now that you have this ability to limit--or to possibly limit the use of arbitration, I have to ask you: What's wrong with arbitration? What is the SEC's stance on arbitration within financial securities litigation? Mr. Luparello. I can't help but sort of flash back a little bit to my extended tenure at FINRA, where we ran the dispute resolution forum and worked very hard to make sure that it worked as efficiently as possible, but felt a certain need to defend the arbitration program as a viable alternative. Obviously, the statute provides the Commission the authority, but not the obligation, to act. As a general matter, in its oversight capacity, the Commission spends a substantial amount of time with FINRA making sure that forum is run as carefully and fairly and transparently as it possibly can be. Obviously, there have been a lot of enhancements made to that forum, I think very much to the benefit, over the past few years. The Commission hasn't particularly--hasn't taken a position on Section 921 at this point, to the best of my knowledge. And while I am relatively new and have had a variety of conversations with the Chair, that is one that I still haven't had. Mr. Mulvaney. And just to clarify one thing--because I understand a little bit of the history of how it ended up in Dodd-Frank--is it the opinion of the SEC that arbitration contributed to the financial crisis? Mr. Luparello. Not to my knowledge. Mr. Mulvaney. Okay. Thank you very much. Let's talk about a different, but somewhat related, topic, which is the liability of exchanges. My understanding is that exchanges, when they perform their regulatory functions, have certain immunities from liability; when they perform their commercial functions, they don't. I think this has become relevant in the last couple of weeks and months as NASDAQ has sought to assert its immunity vis-a-vis the Facebook IPO and that what we might be seeing, is an attempt by certain exchanges to sort of blur the lines, to make that which is commercial appear regulatory in order to avail oneself of immunity from liability. Has the SEC looked at this issue? I don't think you have expressed any opinions on it yet. Do you expect to do so in the near future? Mr. Luparello. SRO immunity is a creature of case law and, like any good litigator, one tries to expand that protection based on the facts. The SRO status of exchanges--and you described the issue perfectly--is the difference between the commercial and the regulatory, and it is certainly on our agenda to do. I think, when we think about the SRO status of exchanges, we are thinking about two different issues, one of which is the competitive playing field between exchanges and other venues that do things that look an awful lot like exchanges. But part of it is analyzing the SRO obligations and protections that go with being an SRO that the exchanges currently enjoy. So that is an issue we are going to continue to look at. Specifically on the Facebook litigation, to my knowledge, I don't know that we have been asked to opine and I don't know that we-- Mr. Mulvaney. I am not asking you to opine--I used that only as an example. So I guess my last question is this: Can we expect the SEC to provide some guidance in the near future and say, ``This is regulatory and this is commercial?'' Mr. Luparello. Perhaps in the context of studying the SRO issue more broadly, which is one of our longer-term initiatives, that will be something that we opine on. At this point, I think giving specific guidance is probably not in the near--is not going to happen in the near future. Mr. Mulvaney. Thank you, Mr. Luparello. I yield back. Chairman Garrett. Thank you. The gentleman yields back. Mr. Foster is recognized for 5 minutes. Mr. Foster. Thank you, Mr. Chairman. One example of the current system for not incentivizing maybe the best behavior is the proliferation of order types that are designed to capture rebates from the exchanges. Reg NMS put in place a uniform, one-size-fits-all, 30-mils fee cap for all stocks. And this rebate model has arguably increased liquidity for active named stocks, but some would say that it actually made those stocks more costly for institutional investors. It also has perhaps pushed transactions to off-exchange venues as investors try to avoid these fees. My question is: Is the Commission contemplating--or should it contemplate a pilot program to reduce the market fee access cap, perhaps alongside the tick-size pilot, particularly for very liquid stocks? And specifically, what would you think of tiered access fees based on the liquidity? Mr. Luparello. I think those are all--first of all, I completely agree with the observations. Maker-taker in certain areas of the market is definitely tied inextricably to the growth of complex order types. In the short term, we have asked the exchanges to go back and do an inventory of their order types, make sure they understand how all their order types work and how those order types--whether or not those order types are consistent with how they were described to us in the first instance. We have given them a deadline of November to come back with that study, which, given the complexity in the growth and order types, is a challenge. Maker-taker and the issue of potential broker conflicts married, of course, to the fact that does, I think, pretty clearly drive a substantial amount of volume from on exchange to off exchange is something that we are going to consider. I don't know at the end of the day that we will decide to go with a pilot, but I think certainly a pilot is one of the options. And, again, I think the way you articulated it that-- and sort of consistent with our notion of one size not fitting all, clearly maker-taker has a different impact at the more liquid end of the market than it does at the less liquid end of the market. So, I can't say we have reached any conclusions yet. There is a lot of work to do there. But I think the issues that you have articulated are ones that are both very much at top of the book for us, but also somewhat consistent with how we are thinking about it. Mr. Foster. Are there alternatives you are considering in addition to pilot programs? You could obviously just adopt something market-wide, but it seems like it mitigates the risk if it starts with a pilot program. Mr. Luparello. It is certainly too early to tell in terms of our thinking. And so I will just cite what others have cited, which I think are worthy of further analysis. Obviously, a maker-taker pilot with trade at the most liquid end of the market. The other thing is looking at perhaps quoting in subpennies versus quoting in pennies, which would have a natural compression aspect on maker-taker, as well as just considering the consequences of banning it outright. I think these are all things that we are going to think about over the next few months. Mr. Foster. Are you thinking of changes to the attribution rules? Basically, it is my understanding that when a trade is made public, the venue is not made public in most or maybe all instances, whereas other countries, in fact, do it differently, where the venue is also made public. This may allow third parties or the participants themselves a better view of whether you are actually getting the best deals on which venues. Mr. Luparello. I think that is especially true with dark pools. There still is a fair amount of opacity whether an over- the-counter trade was a dark pool trade versus just an internalized trade of a broker-dealer. FINRA has made some steps going forward on that to enhance transparency. So you now have a requirement that transactions that are reported by a broker-dealer that sponsors an ATS clarifies whether it is a broker-dealer or whether it is the ATS. That is an important first step. They are also publishing transaction volume information. It is an important next step. But one of the interesting things about the over-the- counter market is there is sort of an assumption that the 30- something percent that makes up the over-the-counter market is entirely dark pools. The reality is, it is only about a third in dark pools. And so, we are going to have conversations with FINRA to continue to try to develop greater transparency in that space, just how much of the over-the-counter activity is happening inside of ATSs versus happening broker-broker versus happening internalized. And I think one of the next steps off of that is looking at whether attribution of location, hitting the tape as opposed to just hitting the regulatory tape, is something worth pursuing. Mr. Foster. Okay. And, quickly--I guess I have about 15 seconds--do retail investors today have relatively simple tools to get some idea of whether their trades are being executed well or not? They can see their fees actually, but what about the other part of it? Mr. Luparello. The information is made available to them through existing Rules 605 and 606, which are Commission rules. Just how usable they are for retail investors is a very good question. Obviously, they also get disclosures through their confirms. I suspect most investors, if they are trading with their broker, have ready access to what is the inside market at the time and they can evaluate how well they are doing with the inside market. That clearly doesn't tell the entirety of the story, but it does tell some of the story. We would also hope that broker-dealers in their responsibility to their customers both look out for their customers, but, also, communicate well the quality of those executions. Their ability on a trade-by-trade basis to say, ``Is this broker versus this broker going to give me a better deal?'' is a very complex analysis. Mr. Foster. Thank you. I yield back. Chairman Garrett. Thank you. And now, for the last word. Mr. Carney. That must be me, Mr. Chairman. Chairman Garrett. The gentleman is recognized. Mr. Carney. Thank you very much, Mr. Chairman. And thank you for having this hearing today. It is very interesting, if not a little bit complex and esoteric, for sure. I just have a few questions on some of the issues that I have been thinking about and working on over the past couple of years. Mr. Luparello, I appreciate you coming in today and having this conversation with us. You had some conversation a little bit about the tick-size pilot. I have been working with my colleague on the other side of the aisle, Mr. Duffy, for over a year on that, and we actually passed a bill out of this committee and on to the Floor as well. So, I was happy to see that the SEC is moving forward on that program. What do you expect to or hope to achieve out of the pilot and the framework that you have come up with? Mr. Luparello. I, too, am happy that it is out the door. Obviously, there are a couple of procedural-- Mr. Carney. By the way, I thought it was very well done. Not that I am an expert at all, but we were really just--our effort was to try to encourage the SEC to do something, and we were pleased with what you did. Mr. Luparello. I appreciate that. And in the short term, the issues we want to study most carefully. So there will be a substantial amount of data that the SROs need to push to us to help in our analysis. But, fundamentally, what we want to see is whether there is more depth at the quotes based on the wider tick size, whether there is greater market-maker participation and, therefore, greater market-maker support. Obviously, at the same time, we want to see whether the wider tick size causes--certainly, in some cases, it may actually raise investor costs, especially retail investor costs, a little bit. That is an issue we need to pay careful attention to and evaluate. I will say, while this is an important step forward and something that gives us a real vision into whether there are solutions for a segment of the market that work really well, I would like to think this is not the only thing we plan to do in the lower capitalization area. Mr. Carney. So talk about some of those other things that you think you would like to do. I think some of them were part of what you were just discussing. But what are some of those things? Mr. Luparello. A little bit. But one of our longer--as I have talked about the Chair's speech and the Chair's vision on market structure, there are the shorter-term steps, which are our concrete actions to take, and there are longer-term things to think about. And in that longer term is just specifically the market structure for lower-cap, lower-volume stocks. And I think--one of the ideas that has been thrown around, one that has garnered a lot of conversation, is things like venture exchanges. And I think we are very open to the idea of competitive solutions. That is based--and we will continue to work with a variety of market participants. Mr. Carney. Sounds good. I am glad to hear that. I know my colleague on the other side of the aisle, Mr. Duffy, would be as well. Moving on to cross-border swaps, another kind of esoteric area, but an area on which I have worked with the Chair of this committee to try to get harmonization, we have taken a lot of heat from our approach. You came out with a rule just yesterday, I think. Could you talk about that? And in particular, your piece of the market is small, security-based swaps, I guess. What kind of coordination went into it with the CFTC? Mr. Luparello. Careful coordination with both the CFTC and the other regulators. The vast majority of what we did yesterday is very consistent with the CFTC approach. There are clearly a couple of areas where we come up with a slightly different answer. Some of that is driven by our understanding of the workability of our markets. Some of it is driven by slight differences in the statute and potentially different authority questions. But literally all we did yesterday was clarify, given that the swaps market is fundamentally a cross-border market, some very substantial percentage of trades are between a U.S. person and a non-U.S. person--clarifying what transactions gave--would give rise to registration-- Mr. Carney. Would you agree that the objective is to get harmonization of regulations across market venues around the world? Mr. Luparello. Absolutely. And so, part of this is it is not just coordinating with the domestic regulators, but coordinating with the international regulators. Mr. Carney. What do you think is the biggest challenge there? What do we need to be concerned about? There was some reporting about--and I know the ranking member has expressed some concern about non-guaranteed entities or something. Could you comment on that briefly? Mr. Luparello. Yes. One of the big issues that we dealt with yesterday was the question of when you have a non-U.S. person that--you know, a subsidiary of a U.S. bank that is located in London, for example, and they do a transaction with another non-U.S. person. If that transaction is guaranteed by the U.S. bank. If there is an explicit recourse guarantee. It is really--the economic reality of that transaction is that the German hedge fund is actually doing business with the New York bank. So requiring that transaction to be counted for jurisdictional purposes made sense to us. When those guarantees become softer, there are some questions about whether we can reach what is essentially a transaction between one non-U.S. entity and another non-U.S. entity. And so part of this is--those are very difficult nuanced questions that do have the color of what our authority is over transactions that involve two non-U.S. persons, one of the difficult issues we try to navigate. Mr. Carney. My time is up. I would encourage you to keep working on that. It is, we believe, a very important issue. I work with the Chair on it and also encourage your cooperation and work with Department of Labor on fiduciary as well. Mr. Luparello. I appreciate it. Mr. Carney. Thank you. Chairman Garrett. I thank the gentleman. And I thank the Director. Before I let you go, Vice Chairman Hurt and I wrote a letter to Chair White several weeks back with regard to venture exchanges and the work that is being done there. Do you know when we will be receiving a response? Or do you want to just comment on that topic in general? Mr. Luparello. I will find out when the response is coming. And, as I said, I think we are open to a variety of potential solutions and look to flexibility at different segments of the market. Conversations I have had with market participants and experts before I started at the Commission around venture exchanges create many sort of, I think, interesting opportunities. Chairman Garrett. Opportunities. Yes. Mr. Luparello. As is always the case, there are occasionally authority questions that go along with that, which need to be navigated. But we continue to think that this is an idea worthy of further conversation. Chairman Garrett. Great. I appreciate your answer. That brings the hearing to a close. The Chair notes that some Members may have additional questions for this witness, 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 this witness and to place his 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. And with that, the hearing is adjourned. And thank you again. Mr. Luparello. Thank you, Mr. Chairman. [Whereupon, at 10:52 a.m., the hearing was adjourned.] A P P E N D I X June 26, 2014 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] [all]