[Senate Hearing 114-450]
[From the U.S. Government Publishing Office]
S. Hrg. 114-450
OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
ON
EXAMINING THE WORK AND AGENDA OF THE U.S. SECURITIES EXCHANGE
COMMISSION
__________
JUNE 14, 2016
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
MIKE CRAPO, Idaho SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
DAVID VITTER, Louisiana CHARLES E. SCHUMER, New York
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
MARK KIRK, Illinois JON TESTER, Montana
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina JEFF MERKLEY, Oregon
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
JERRY MORAN, Kansas
William D. Duhnke III, Staff Director and Counsel
Mark Powden, Democratic Staff Director
Dana Wade, Deputy Staff Director
Jelena McWilliams, Chief Counsel
Elad Roisman, Securities Counsel
Shelby Begany, Professional Staff Member
Laura Swanson, Democratic Deputy Staff Director
Graham Steele, Democratic Chief Counsel
Elisha Tuku, Democratic Senior Counsel
Dawn Ratliff, Chief Clerk
Troy Cornell, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, JUNE 14, 2016
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
WITNESS
Mary Jo White, Chair, Securities and Exchange Commission......... 4
Prepared statement........................................... 38
Responses to written questions of:
Chairman Shelby.......................................... 68
Senator Brown............................................ 78
Senator Crapo............................................ 83
Senator Kirk............................................. 84
Senator Heller........................................... 86
Senator Scott............................................ 89
Senator Sasse............................................ 91
Senator Rounds........................................... 96
Senator Warner........................................... 98
Senator Merkley.......................................... 103
(iii)
OVERSIGHT OF THE U.S. SECURITIES AND EXCHANGE COMMISSION
----------
TUESDAY, JUNE 14, 2016
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9 a.m., in room SD-538, Dirksen Senate
Office Building, Hon. Richard C. Shelby, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The Committee will come to order.
This morning we will receive testimony from Securities and
Exchange Commission Chair Mary Jo White. Oversight of the
Commission is an important part of this Committee's
jurisdiction.
The SEC is an independent agency tasked with protecting
investors; maintaining fair, orderly, and efficient markets;
and facilitating capital formation.
The SEC is responsible for ensuring transparency so that
investors have adequate information to make investment
decisions and to mitigate conflicts of interest, fraud, and
manipulation.
This regulatory paradigm is one reason why our capital
markets have long been the envy of the world and the lifeblood
of our economy. Excessive and unnecessary regulation, however,
may endanger America's status as the world's preferred
financial center.
First and foremost, I believe the SEC should focus on its
core mission. This has become more difficult as the Commission
has come under increased pressure to expand its mission and
cater to special interests.
Examples of such efforts include attempts to force the SEC
to mandate disclosure on climate change and political
contributions. These efforts are not new, and the SEC has
withstood political pressure in the past. It is my expectation
that it will continue to do so in the future.
Chair White, as you pointed out in a 2013 speech, and I
will quote you, `` . . . we make our decisions based on an
impartial assessment of the law and the facts and what we
believe will further our mission--and never in response to
political pressure, lobbying, or even public clamor.''
The SEC must, I believe, continue to adhere to those
principles and uphold its fundamental mission. It should also
periodically review the appropriateness of its existing rules.
For example, while the Commission has undertaken work to
review equity market structure, it has not engaged in a
comprehensive review of its rules, even in light of the so-
called Flash Crash, which happened over 6 years ago.
I also hope that the SEC will continue to take very
seriously the importance of strong economic analysis when
promulgating rules.
As we have seen, agencies that fail to undertake such an
analysis in their rulemakings are vulnerable to legal
challenges, as well they should be.
An agency with thousands of employees like the SEC should
be able to analyze in detail the impact of its rules on the
markets, investors, financial products, and the broader
economy.
This is especially true today, given the cumulative impact
and unintended consequences of the myriad new rules stemming
from the financial crisis.
If the cost of a rule outweighs its benefit, then the rule
should be eliminated. If a rule passes cost/benefit muster, it
should then be implemented by the appropriate agency.
The SEC has the primary expertise in capital markets and
should be the lead agency in regulating them. Specifically, I
am concerned that attempts by other Federal agencies to erode,
Madam Chair, the SEC's jurisdiction could undermine the
integrity and functioning of these markets.
Recent examples of this include the Department of Labor's
fiduciary duty rule, the FSOC's continued focus on asset
managers, and the Federal Reserve's targeting of broker-dealers
under the guise of reining in what it calls ``shadow banking.''
The SEC has eight decades of specific expertise in these
matters. This should outweigh the desires of other regulators
to expand their powers at the expense of investors and the
markets.
Chair White, I look forward to hearing your thoughts on
these issues and the future agenda of the SEC.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman, and welcome, Madam
Chair. Good to see you again.
Over 3 years ago, you were confirmed as Chair of the SEC
and assumed the task of guiding the Commission's significant
rulemaking agenda under the Wall Street Reform Act and the JOBS
Act. At that time the destruction of $13 trillion in household
wealth from the financial crisis was still fresh in our minds.
The SEC and other financial regulators had completed many of
the Wall Street reform rulemakings and were evaluating how to
finish the implementation of the rest.
When you last appeared before this Committee in September
2014, you said the staff was proceeding on the outstanding
rules, we could expect to see additional rules shortly.
Although several rules have been proposed and some finalized,
many are still incomplete. In particular, the Commission has
not finished the derivatives rules under Title VII of the Wall
Street Reform Act, and the path to their completion seems
unclear. These rules are important because Title VII is a key
part of reform to the financial markets.
By increasing transparency, by enhancing oversight, by
moving to more resilient and stable trading platforms, Congress
wanted to make sure that future crises could be detected sooner
and would do less damage. This is not entirely on your
shoulders, on the SEC's shoulders, but there are certain
markets, such as credit default swaps, that depend on SEC.
Until the rules are completed, the SEC and other regulators
will not have the benefit of a framework that provides
transparency and access to market data.
Another Wall Street Reform Act rule that remains
outstanding would prohibit incentive compensation that could
lead to excessive risk taking or significant losses at
financial firms. We know what happened during the financial
crisis in that regard.
The multiagency rule was proposed in 2011 and reproposed
last month. Six years after Wall Street reform became law, this
rules still is not finished.
The final rule would provide the market and the public with
some assurance that senior executives at financial institutions
will not be rewarded for taking inappropriate risks that could
harm the markets, could harm their employees, or could harm the
economy. I urge you and other regulators to finish that rule as
quickly as possible.
During your confirmation hearing, you stated that you would
make strengthening enforcement a high priority throughout your
tenure. You said then, and I agree, that ``investors and market
participants need to know that the playing field of our markets
is level and that wrongdoers, individual and institutional, of
whatever position or size, will be aggressively and
successfully called to account by the SEC.'' Yet time and
again, we see repeat offenders enter into settlement after
settlement that seem to have no effect on stopping the problem
in the first place.
As the cop on the beat, the question is: At what point is
the SEC going to stop handing out warnings and start giving
tickets?
This is evidence in the waiver process. SEC has routinely
granted waivers to banks following a variety of violations that
could have resulted in the loss of certain privileges under
security laws. Unfortunately, granting those waivers eliminates
the significant consequences that could promote better overall
compliance at those institutions.
Finally, I would like to return to an issue that has been
discussed many times in this Committee. Democrats in the Senate
have repeatedly asked you to begin work on a corporate
political spending disclosure rule. This is not a plea from a
special interest, as some on the other side of the aisle might
say. This is good Government policy. When you were last here,
you acknowledged the ``intense interest of investors and
others'' on this issue, but you pointed to the low priority of
mandatory rulemaking. I realize this year's appropriations bill
limits the SEC's work on that rule, but it should not prevent
you from doing anything at all.
I sincerely hope you begin work on a corporate political
spending disclosure rule. The interest in it has only become
more intense. I am interested in hearing your update, Madam
Chair.
Thank you.
Chairman Shelby. Madam Chair, your written testimony in its
entirety will be made part of the hearing record. You have been
here many times. You proceed as you wish.
STATEMENT OF MARY JO WHITE, CHAIR, SECURITIES AND EXCHANGE
COMMISSION
Ms. White. Thank you, Mr. Chairman, Ranking Member Brown,
and other Members of the Committee. Let me, before I start,
just express--I am sure I speak for everyone--that my thoughts
and prayers are with the victims of the Orlando shootings and
their families.
Thank you for inviting me to testify today on the current
work and initiatives of the SEC, which are, as the Chairman
indicated, summarized in some detail in my written testimony.
As you know, the SEC is a critical agency that is charged
with protecting millions of investors and safeguarding the most
vibrant markets in the world. And the Commission has been very
busy since I last testified before the Committee in 2014. The
last 3 years have each been marked by a vigorous enforcement
and examination program, empowered with new tools and methods
to protect investors and hold wrongdoers accountable. In fiscal
year 2015 alone, the Commission brought over 800 enforcement
actions, an unprecedented number; secured over $4 billion in
orders directing the payment of penalties and disgorgement, an
all-time high; performed approximately 2,000 exams, a 4-year
high; and, even more importantly, continued to develop cutting-
edge cases and smarter, more efficient exams.
The strength of our enforcement program can also be seen in
the kinds, complexity, and importance of the cases we bring
that span the securities industry, include numerous first-of-
their-kind actions, and focus heightened attention on market
gatekeepers like ATSs, exchanges, accountants, and lawyers.
Significantly, approximately two-thirds of our substantive
actions in fiscal year 2015 also involved charges against
individuals, and we continue to obtain admissions in certain
cases, which we have now done in over 50 instances since we
changed our settlement protocol.
The Commission over the last 3 years has also pursued very
consequential rules and other initiatives to protect investors,
strengthen markets, and open new avenues for capital raising.
Since I last testified, we, for example, advanced major rules
addressing key equity market structure issues--including
controls on the technology used by key market participants, the
transparency of alternative trading systems, and the
consolidated audit trail--while moving forward with a broader
assessment of other fundamental changes. We issued a series of
proposals to address the increasingly complex portfolios and
operations of mutual funds and exchange-traded funds. We
adopted new rules for crowdfunding and smaller securities
offerings under Regulation A, while also proposing additional
avenues for small businesses to raise capital. We finalized
major components of the regulatory regime for security-based
swaps, and we continued to execute a comprehensive review of
the effectiveness of our disclosure regime.
This work marks the latest phase of extraordinary
regulatory efforts by the agency both before and after I became
Chair, enlisting all of our policy divisions and offices.
Beyond our discretionary initiatives, the Commission has now
adopted final rules for 66 of the mandatory rulemakings of the
Dodd-Frank Act, the majority of them since I became Chair. And,
Senator Brown, Title VII is a major priority for 2016, which I
am sure we will get into. We have also now completed all of the
rulemakings directed by the JOBS Act, and we have made
significant progress on the rulemakings required of us late
last year under the FAST Act.
While our work in enforcement and rulemaking are perhaps
the most prominent examples of the agency's achievements, the
imperatives of our mission are also carried forward each day by
the dedicated staff of our divisions and offices.
The Division of Corporation Finance reviews the annual and
periodic reports of thousands of issuers each year, helping to
ensure that investors receive full and fair disclosure about
the public companies in which they invest.
Last year, the Division of Trading and Markets reviewed
more than 2,100 filings from exchanges and other self-
regulatory organizations to preserve a fair and orderly
marketplace for all investors.
The Division of Investment Management reviewed filings last
year covering more than 12,500 mutual funds and other
investment companies, where many individuals, as you know,
invest their hard-earned money to save for retirement, college,
and other important goals.
Our economists in the Division of Economic and Risk
Analysis produced more than 30 incisive papers and publications
in 2015, including two major analyses to help inform our work
on asset management.
This afternoon, I will actually have the privilege to
participate in our annual awards ceremony at the Commission
where we recognize some of the tremendous work of some of our
staff.
The Commission today is a stronger and more effective
agency, and I am honored to lead the agency during this time.
Nevertheless, significant challenges remain if we are to
address the growing size and complexity of the securities
markets. It is critical that the SEC has the resources required
to discharge our responsibilities, the new ones and the many
others we have long held, in the face of a growing and ever
more sophisticated financial services industry.
I deeply appreciate that we must be prudent stewards of the
funds we are appropriated, and we strive to demonstrate how
seriously we take that obligation by the work that we do. At
the same time, our resources are insufficient, and the cuts and
limitations to the SEC's budget that the House bill proposes
would seriously imperil the progress we have made and diminish
our ability to fulfill our mission.
While more remains to be done and achieved, I am very proud
of the agency's impressive accomplishments across the range of
its responsibilities. For that I want to again thank, first and
foremost, the exceptional staff of the SEC as well as my fellow
Commissioners, present and past. And I want to thank the
Chairman, the Ranking Member, and this Committee as a whole for
your support. Your continued support will allow us to better
protect investors and facilitate capital formation, more
effectively oversee the markets and entities we regulate, and
build on the significant work we are doing.
Thank you very much. I am happy to take your questions.
Chairman Shelby. Thank you.
Madam Chairman, I understand that the Commission can vote
to delegate certain of its authorities to the SEC staff,
including enforcement proceedings. Once the Commission has
voted to delegate, how are you and your fellow Commissioners at
the Securities and Exchange Commission made aware of the
staff's use of that authority? And if the Chair is recused on a
specific matter, who is accountable for the staff's use of the
delegated authority?
Ms. White. The Exchange Act actually is explicit on this,
Mr. Chairman, that the Commission as a commission has the
authority to delegate many of its day-to-day functions. It does
not have the power, for example, to delegate rulemaking to the
staff or----
Chairman Shelby. That is set out statutorily?
Ms. White. Yes, it is statutorily done.
Chairman Shelby. OK.
Ms. White. There are hundreds and hundreds of day-to-day
things that we must do at the Commission, so it is very
important that the staff have delegated authority to act.
As safeguards, however, on that delegated authority, the
Commission can review any of those actions. The staff itself
can decide to refer something to the Commission even though it
may have delegated authority from the Commission to decide. And
the review of the Commission can be precipitated by any one
Commissioner's desire to do so.
Chairman Shelby. Once the Commission votes to delegate its
authority to the staff, it is my understanding that such
delegation remains in place under future Commissions, and new
Commissioners do not have a chance to approve existing
delegations of authority. Is that correct?
Ms. White. Yes, it is, Mr. Chairman. I think essentially
the way it works is that if one wanted to review or change a
delegation, it would be up to the Chairman to put that on the
agenda, whoever the Chairman is.
Chairman Shelby. Madam Chair, would you support an SEC
review of existing delegations, including an analysis of their
appropriateness? In other words, you look back--you do
oversight, I hope, in your agency, like we do here. Is it not
important to look back and see what----
Ms. White. Since I have been there, it is certainly
something that I have discussed with various of my fellow
Commissioners, and we all have the list of delegations that
exist. I have urged my fellow Commissioners, if they have an
issue with any particular delegation, to bring that to my
attention, and we will certainly look at it.
Chairman Shelby. You have often stated, Madam Chair, that
the Securities and Exchange Commission is an independent
agency. That is the way we want it to be. It was set up that
way. And while one can expect some split votes because of the
way the Commission is set up, there have been many party-line
3-2 and 2-1 votes under your chairmanship. By comparison,
according to the press, former Chairman Richard Breeden never
had a 3-2 vote, and former Chairman Levitt rarely would take a
matter to a vote unless he knew he had a 5-0 vote.
Are there any areas that you can work on cooperatively with
the other two Commissioners to reach a unanimous decision? And
if so, could you give us some examples?
Ms. White. I think we certainly strive for consensus----
Chairman Shelby. We know everything is not unanimous.
Ms. White. Everything is definitely not unanimous. I think
somebody gave me a figure the other day that about 65 to 70
percent of our votes are actually unanimous. But, obviously,
that is still a percentage that have not been unanimous. I
think I have discussed with you, Mr. Chairman, and I think
Senator Brown and probably some of the other Members of the
Committee as well, that one thing that I have found as Chair,
even though we strive for that consensus--unanimity, indeed--on
all of our rulemakings, so many of our mandated rulemakings
have been under the Dodd-Frank Act, and the controversies
surrounding the act at the time it was adopted have continued
into the implementation of those rules. So we have ended up
with an extra challenge reaching consensus because of that.
Chairman Shelby. Madam Chair, in 2013, you posed for
comment a study on assessment management by the Office of
Financial Research that was requested by FSOC. This allowed the
public a meaningful opportunity to provide feedback on the
study and highlighted significant flaws.
Given the benefit of public comments on that study, will
you commit to posting other FSOC-requested studies affecting
SEC-regulated entities? And if not, why not?
Ms. White. Well, I think certainly at the SEC, and I think
at other agencies as well, the benefit of the notice and
comment process and even just a comment process if you are not
in an APA rulemaking, is enormous. So I think getting that
feedback is important. The report that you referenced, Mr.
Chairman, was actually the report of OFR. They publicized it.
But we did open a comment window because we thought it was
important to gather public input in one place. If we were in
another situation like that and OFR or FSOC itself did not post
its studies to make it easier for the public to comment,
certainly we would seriously consider that again.
Chairman Shelby. My last question is in the area of
repeated violations. There have been concerns raised by the
public as well as Members of this Committee about repeated
violations by SEC-registered entities. Two years ago, a former
SEC Commissioner stated with respect to the most egregious and
repeated violations of our securities laws and regulations, and
I will quote, ``We need to ask ourselves a fundamental
question: Should the violating entity retain the privilege of
participating in our capital markets?''
My question to you is this: In your opinion, when is it
appropriate for the SEC to exercise its ability to deregister
an entity? And if you could give us an example, that would
help.
Ms. White. I think it is an enormously important power that
we have and should wield in appropriate circumstances to police
the markets----
Chairman Shelby. It goes to the integrity of the market.
Ms. White. Absolutely right. Absolutely right. I think you
have to look very carefully at what the violations have been
over what period of time, and who was involved in them. You
want an aggressive enforcement program to bring cases when they
are there to bring. I am certainly quite open in the interest
of strong protection of our markets that there comes a point
where one of our regulated entities should no longer be
registered, and I would not hesitate to bring a proceeding to
revoke the license.
Chairman Shelby. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Some of my colleagues--there seems to be a sort of
collective amnesia on this panel in some cases and in this body
about what happened with the financial crisis since some of my
colleagues as a result, particularly in the House but some
here, continue to push for the repeal of the Wall Street Reform
Act, insisting it has created more problems in the financial
system than it has prevented. A couple of questions to start
with.
Are you concerned by efforts to repeal Wall Street reform?
Do you think it has been effective in improving our financial
stability?
Ms. White. I think the reforms under the Dodd-Frank Act
have been enormously important in strengthening our financial
system. Collectively, I think our financial system is much
stronger and resilient now, certainly in part because of the
actions undertaken by Dodd-Frank. So I certainly would not want
to see those reforms repealed.
Senator Brown. OK. Thank you. Despite the improvements to
date that you have mentioned and that are self-evident with a
stronger, more stable financial system, this reform, of course,
is still a work in progress. In my opening statement, I
mentioned the derivatives rules that are still outstanding. I
am not just concerned that it is taking the SEC so long to
finish its rules, but also that SEC is far behind other
agencies implementing rules in similar issue areas. Let me give
two examples.
The CFTC covers a much larger portion of the derivatives
market and has made significantly more progress than has SEC,
even accounting for a few hiccups along the way, with far fewer
resources than you have.
Second, the Department of Labor was able to propose and
repropose and finalize its fiduciary rule while the SEC only
produced a study called for by the Wall Street Reform Act.
In neither of those cases was the process perfect, of
course, nor is our final rules perfect, but both agencies were
able to adapt along the way and move forward. Why is the SEC
slower than those agencies? What is not working?
Ms. White. I think considering what the SEC was given
between the Dodd-Frank Act and the JOBS Act, plus obviously all
of our various ``discretionary responsibilities,'' which are
vast, we have undertaken in the last few years a historic level
of regulatory activity of great complexity. And I think I have
said this before about Dodd-Frank and the JOBS Act in
particular, and I have said it from the day I arrived, I am
deeply committed to getting the congressional mandates under
both of those statutes, and now the FAST Act, done as promptly
as I can, but they need to be done well, and they need to last,
and they need to be adaptable to how our markets change.
I think with respect to the other issue you mentioned--the
Department of Labor fiduciary duty rule--that is an authority
that Dodd-Frank gave the Commission to decide whether to
exercise or not. It is not a statutory mandate.
Now, I have said myself, speaking for myself, about a year
ago after extensive study that I think there should be a
uniform fiduciary duty rule coming from the SEC under Section
913 of the Dodd-Frank Act. That is speaking for myself. The
staff has proceeded to develop outlines of recommendations, but
it is up to the Commission as a whole to decide whether to
advance that rule and then what its parameters should be.
In terms of Title VII and the derivatives markets, you are
right, our share of that market is a little less than 5
percent, but it is an important part of those markets. Again,
before I arrived--and this is not meant by way of criticism at
all; I see how it made sense--what the SEC decided to do with
its Title VII rulemakings is essentially publish a policy
statement that set forth a sequence of when the SEC would adopt
proposals first and then finalize those rules before they
become effective. So we have been following that road map.
I think there could not be a higher priority among all of
the Commissioners, the three of us there now and the other two
that left us last year, than completing those Title VII
rulemakings. And I think in terms of this regulatory year, that
is a very high priority certainly to finalize. We have
finalized a number of those rules since I was last here, but in
terms of the reporting and the registration and regulatory
mechanisms for dealers, I am hoping we are done with those by
the end of this year.
Senator Brown. Thank you. We know from during the financial
crisis how important it is that regulators work together.
Industry is good at shifting its business model to find gaps,
to find areas of weakness in the regulatory structure. Congress
for whatever reasons chose not to combine any of the financial
agencies 6 years ago, obviously did FSOC, but beyond that not
really combining these agencies, and it makes your cooperation
with other agencies all that much more important.
Let me ask one other question. Democratic Members, Madam
Chair, of this Committee and others have taken a close look at
the policies and the practices and the decisions surrounding
the waiver applications the SEC receives from financial
institutions. I thank you and your staff for the information
you have provided to us, to the Banking staff so far. I hope we
can count on you and your team for additional assistance when
needed as they make more requests.
Ms. White. Absolutely. I think it is an enormously
important area. As you know, Senator, it is an area that I
focused on right at the outset of my tenure as Chair. We have
made a number of changes to enhance the robustness of the
process and the transparency of the process. Obviously, we
continue to look at that for whether there are other
enhancements that would make sense, particularly in the area of
when we do not grant the waivers because we want to make
certain that the public knows that there are many cases,
including those involving financial institutions, where the
waivers are not granted. But because of the nature of our
process, that is not as transparent for reasons that are
historical and good. You want to encourage people to come in
and talk to the staff about whether they qualify or they do
not, and often what they submit is nonpublic information. But I
continue to look at that aspect of our process. I have
certainly, since I became Chair, directed the staff to keep
track of those instances that do come in and are not granted,
assuming they are not anonymous, and, obviously, a number of
people just will not apply for waivers because they know under
our guidelines that they would be denied or would not be
granted a waiver because of what the guidelines specify.
Senator Brown. Thank you. We have particular concern about
the lack of transparency in those waivers that are granted. The
public sees an institution violates the law, asks for a waiver;
the SEC issues a short notice approving the waiver. What do you
do to--how can you assure us that the public and this Committee
and everybody in our society will be able to understand more
what has happened in how you bring more transparency when these
waivers are granted?
Ms. White. Well, again, on those that are granted, which I
think are the ones you are addressing now, not those that are
not granted, they are publicized on our Web site. They also are
subject--in the case of the so-called WKSI waivers and the bad-
actor waivers and some of the other waivers as well to the
public criteria that the staff or the Commission considers when
reviewing those requests. And then what is published on our Web
site really does march right through what those criteria are
and the facts under each one.
Again, if there is some enhancement that would make sense,
I am certainly open to considering it.
Senator Brown. OK. We will come to you about that. Thank
you.
Chairman Shelby. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman.
Chair White, modernizing our market structure is a
complicated but necessary task, and I appreciate all the work
that has been done by the SEC as well as by the market
participants, investors, and academics on this issue.
Senator Warner and I held a subcommittee hearing on this
topic in March, and one of the takeaways was that while there
has been a lot of positive input and work done in this area,
there is concern about the pace of reform efforts and what will
be accomplished.
What are the top market structure objectives that you want
to achieve this year? And how will this strengthen our markets
and benefit investors?
Ms. White. It is an enormously important area and, as you
know, a very high priority for me personally, both in terms of
some specific short-term reforms as well as a comprehensive
review, soup-to-nuts, of the entire regulatory regime. We are
building on, fortunately, I think the strongest, most reliable
markets in the world, but that does not mean that they cannot
be enhanced and optimized. So I have been pleased with the
staff's work--but I always want things to be done sooner. That
is my personality, among other things, and we certainly are
concentrating a lot of resources on it. I have also been
pleased to date with the work of the EMSAC--the Equity Market
Structure Advisory Committee--that we formed early in 2015.
They are tackling the core issues. As you know, Senator, the
committee has received a recommendation from one of its
subcommittees about the possibility of doing a maker-taker
pilot. That is obviously one of the core issues. We are
expecting a telephonic meeting where the subcommittee is
expected to make a specific recommendation on July 8th, so I
look forward to that. I think that is a very important area.
A lot of things have actually already been done in the
market structure arena. One is obviously in the area of
resiliency of the markets. Shortly after I testified here in
2014, we adopted Regulation SCI, which is the Systems
Compliance and Integrity rulemaking that is aimed right at the
critical market infrastructures and enhancing their resiliency
and responses to incidents when they occur. That rule is now,
in the last few months, subject to examination for compliance
which is enormously important. That rulemaking is already done.
I expect in this year rather imminently that we will also
propose a rule to provide greater transparency of order routing
for institutional orders as well as enhancing the existing
disclosures that are made on the retail side. Again, that is
very important information to our markets to ensure fairness,
to see what your agents are doing as they execute your order.
So those are examples.
Senator Crapo. You referenced the telephonic meeting on
July 8th. That is a report from EMSAC that you were referencing
there?
Ms. White. Yes. That will be a further discussion by the
full committee of their subcommittee's recommendation on the
maker-taker pilot. We are also taking up some other issues at
that meeting.
Senator Crapo. So following that meeting, do you expect
that the Commission would be in a position to take the next
action and move forward? Or when do you expect that this could
get to a commission decision?
Ms. White. Well, the next step is indeed for the staff of
the Commission and the Commission to take in the recommendation
from the committee, but it will be up to the staff and the
Commission as to what to do and what the parameters should be.
I do think it is important to do this in a well-designed pilot
because it really does touch on a very important issue where we
need the data.
Senator Crapo. Do you have any feel for about when the
Commission----
Ms. White. I cannot give you a specific time, but it is a
this-year priority to move that along as soon as we get the
recommendation.
Senator Crapo. All right. Thank you.
Ms. White. And when I say ``move it along,'' I mean
consider it at the staff and Commission level.
Senator Crapo. Thank you. I also want to thank you for your
past efforts to improve the transparency of the Financial
Stability Oversight Council process by seeking public comment
on the report by the Office of Financial Research on the asset
management industry. There have been several hearings on the
Financial Stability Oversight Council that focused on ways to
improve transparency, accountability, and communications.
In the Subcommittee hearing that Senator Warner and I held
last year, the witnesses agreed that FSOC needed to provide
actionable guidance to designated systemically important
financial institutions on how they could derisk and ultimately
shed their designation label, what has been referred to as an
``off ramp.''
Do you agree that it would be appropriate to take
additional steps to increase transparency, accountability, and
communications in the FSOC process?
Ms. White. I think that is something that we have to be
committed to doing as we go forward. That is not something that
may be completed at any point in time, and I do think FSOC is
committed to looking for ways to enhance the transparency of
its process. The so-called off-ramp process is an existing
process under the FSOC rules and guidance. It is an annual
process. But I also take your point about greater transparency
regarding what the factors are that may be involved in that.
Senator Crapo. Thank you.
Chairman Shelby. Senator Merkley.
Senator Merkley. Thank you, Mr. Chairman.
One of the most egregious things in the lead-up to the
meltdown were firms that put together securities and then they
sold them, saying, ``These are the best things since sliced
bread,'' but while they were privately taking bets so
securities would fail because of the details that they knew
about the securities they had packaged. Carl Levin championed
an end to this type of egregious conflict of interest at
Section 621. Here we are now 6 years later, and we do not even
have a draft rule. Why not?
Ms. White. I agree it is an enormously important rule, and
I obviously know well the range of transactions that you are
talking about that it was intended to address.
As I know you know, Senator Merkley, there was a proposal
issued in September of 2011, which is still outstanding, where
we got tremendous comments. This was actually before the SEC
had adopted its economic guidance. So, for some of the comments
that we got, one was that we must really do very intense, good
economic analysis. We also got comments that it was not tough
enough, or it was too tough or it swept in too much or did not
sweep in enough.
It has proved to be much more complicated than certainly
our experts in the agency envisioned. I think we asked in that
proposal 100 questions, and that is a very large number--for
example, who is covered, what is covered, and all sorts of
various interpretation issues, including with respect to what
the exceptions should be.
We had a recent comment come up as late as December 2015 as
to whether certain Fannie-Freddie guarantees would be covered
because of the concern that those securitizations could not
continue, at least under the parameters of the proposal. So it
is one where the staff is working very hard to get a reproposal
done as soon as it can, but it has proven to be very, very
difficult to draw the right lines.
Senator Merkley. This is one of the most direct examples of
unacceptable Wall Street behavior where Congress took a very
clear stand. Wall Street desperately wants this to never
happen. The SEC has gone year after year after year failing to
get it done under the argument it is just too complex, it is
just too difficult. I do not think anybody in America buys that
this type of conflict of interest is too difficult. The
instructions have gone to the SEC. The SEC has failed the
public on this issue and allowed this type of conflict of
interest practice to continue, and I think it is absolutely
unacceptable. And I would have said the same to your former
Chair back in 2013, but here we are 3 years later, and now the
responsibility rests with you.
Let me turn now to the issue of political spending being
disclosed by corporations. A million public comments have been
received supporting disclosure because the owners of the
company, the stockholders, feel like if the company is spending
their money on political activity, they have a right to know.
And under the concept of money is speech, if you do not get to
know how your own money is being spent, it is really stolen
speech. And that is bad enough, but it is certainly material to
what investors understand about the future prospects for that
company. What are they advocating for? What are they lobbying
for? Who are they lobbying for? Who has which philosophies or
which positions?
And so both from the viewpoint of individuals getting to
know how their own money is being spent on political speech and
from the view of a material issue related to the future
performance of the company, it is imperative that there be
disclosure.
There was such a plan on the agenda when you took the
chairmanship, but in October of 2013, you took it off the
agenda. Not even to hold the conversations, to prepare the way
on this, this is an issue of freedom of speech. It is an issue
of knowing how your own money is being spent. It is an issue
material to the future of the company, and you took it off the
agenda. Why would you do such a thing?
Ms. White. Well, let me say first that I do deeply respect
and understand the very deep interest in this issue on all
sides, and I think it is also important to note that if the
spending is material in the context of a particular company as
we sit here today, that would need to be disclosed under the
Federal securities laws. And we also have through our
shareholder proposal rule, Rule 14a-8, avenues for shareholders
to raise this issue with their particular companies, and they
make great use of that avenue. The average approval rate for
such proposals last year was about 26 percent. In some
companies over the years using that avenue, there have been a
few majority votes by those shareholders, and those companies
have generally gone ahead and made those disclosures
voluntarily. Certainly in large companies the number of them
that voluntarily disclose political contributions has grown. I
think more than half of the S&P 500 now provides that
disclosure voluntarily, which I think is a good thing.
In terms of the Reg Flex issue, which is what I think you
are raising, I think there is some misunderstanding about what
was on the SEC agenda and perhaps even, what I did in reviewing
the Reg Flex Agenda as I found it. What has not been on the Reg
Flex Agenda at the SEC before I arrived or after I arrived is
to go forward with such a rule. What was on the Reg Flex
Agenda, put on there in late 2012 and was there when I arrived,
was an item reflecting that the Division of Corporation Finance
would research and consider whether to recommend a rule
proposal on this subject. My predecessor wrote to Congress in
March 23 in response to a congressional investigation on this
issue that neither she nor the Commission nor the staff had
reached any conclusion about that--whether to recommend a
proposed rule--and that no one was actually working on a rule
proposal at that time.
Shortly after I arrived, the first Reg Flex Agenda was due,
and so I basically carried forward for the most part what was
on the previous agenda, including that item. In the fall, when
I had been there a little longer, I had a chance for the staff
to do a deep dive of all the items on the Reg Flex Agenda, many
that had been there, by the way, for many years and were
aspirational. And the Reg Flex Agenda instruction requires you
to put on that agenda the items that you reasonably believe you
can complete in the next 12 months.
And so as you know, I have prioritized since I arrived here
completing the congressional mandates under the Dodd-Frank Act
and the JOBS Act as well as, as we went forward, certain
mission-critical initiatives like equity market----
Senator Merkley. I am way over my time, and so in courtesy
to my colleagues, I will just stop you there because we cannot
get a full history. But it was listed at the proposed rule
stage in April 2013 and was taken off in 2013. You have the
sole power on the Commission to establish the agenda. This is
an issue that goes to the core of who we are as a country that
people cannot spend your money on political speech without
telling you how the hell they are spending it or that you as an
owner have a full right to know how your funds are being spent.
I think for you to unilaterally remove it from the rulemaking
agenda was an egregious affront to these core issues of our
Republic. It came after pressure, political pressure. I think
it is unacceptable. I think you should put it back on the
agenda.
Ms. White. That item and about 20 other items that were on
the previous agenda were removed for the reasons that I said,
and it was never on there to advance a proposed rule.
Chairman Shelby. Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
Good morning, Chair White. You have stated in the past that
you believe there should be uniformity between the fiduciary
rules issued by the Department of Labor and the SEC. The
Committee on Homeland Security and Governmental Affairs
recently released a staff report regarding the DOL's fiduciary
rule. The report found, among other things, that there was
extensive disagreement between staff at the SEC and the DOL
over the fiduciary rule.
The report found that, in addition to the DOL refusing to
conduct a quantitative analysis of the costs and benefits of
alternative approaches to the rule, as recommended by the SEC
and required by the Executive order, the staff economists from
both agencies also had disagreements over the rule. In fact,
the report found that the disagreements reached the point of
the Labor Department staff writing, and I quote, ``We have now
gone far beyond the point where your input was helpful for me.
If you have nothing new to bring up, please stop emailing me
about this topic.''
Chair White, how do you believe the SEC can structure a
uniform fiduciary rule when it appears there are inherent
disagreements between the two agencies over the fundamental
goals of the rule?
Ms. White. I think what I have said in the past is I
believe that there should be a uniform fiduciary duty rule for
broker-dealers and investment advisers when they are giving
securities advice to at least retail investors. That is really
under our rules. The Department of Labor and the SEC are
separate agencies, and so our rules are not identical,
including before the DOL rule was adopted in certain areas
where our registrants may overlap with theirs.
In terms of the Department of Labor/SEC staff interactions
on their rule proposal, I think the comment you mentioned is
from 2012, actually, on the prior proposal, so I was not here
then. But I will say that the SEC staff did give substantial
technical assistance to the DOL staff on the current, now final
but then proposed, rule, including technical assistance on our
own rules and what they provided, but also the possible,
impacts on the availability of reasonably priced advice by
brokers and what the impact would be on the broker model
itself.
The nature of those exercises--and we have done it with
other agencies, too, on other rules where we have that
technical assistance to provide--was not really to reach
agreement but to make sure that we were giving our best
technical assistance and input to the Department of Labor,
which then obviously made the decision as to what the proposal
should be, and put it out for notice and comment. I think the
notice and comment was focused on some of those same issues.
Senator Rounds. Would it be fair to say that, based upon
the rule which is in effect right now coming out of DOL, would
it be fair--and I do not want to put words in your mouth, but
would it be fair to suggest that there would be concerns yet as
to the availability of investment advice being made available
to the smaller investors and perhaps a limiting of some of that
advice right now based upon the traditional ways that we
provide investment services to some of your smaller investors
in the United States today?
Ms. White. Again, I am very focused on that issue myself in
connection with our work on a uniform fiduciary duty rule under
Section 913. Certainly the Labor Department was focused on it,
as reflected in their notice and comment period. I think
certain changes were made in response to that concern and
possible impact. But I think to some degree--and this would be
true of our rules, too--you need to see what happens as the
rules are implemented. Certainly we are available to provide
whatever help and assistance we can to our registrants if they
run into a conflict with our rules. Nobody has come to us yet
for that, though.
Senator Rounds. My concern is that sometimes as we try to
protect individuals, we actually limit the availability to them
of opportunities to invest. And I want to go into one other
area here, and that is, one of the SEC's goals is to facilitate
capital formation. One recent trend along these lines is the
increase in the issuance of private shares which can have
significantly less disclosure requirements relative to public
share offerings. Private offerings can only be sold to
qualified high-net-worth investors.
In 2014, more than $2 trillion was raised privately.
Private stock issuances under the SEC's Regulation D accounted
for more than $1.3 trillion of this amount. In comparison,
registered public offerings amounted to approximately $1.35
trillion in 2014.
Are you concerned by the fact that issuances of private
stock have now outstripped public shares sold to all retail
investors in terms of new issuance? I mean, doesn't this kind
of point to a trend here of kind of the guys who can afford
the--the guys who are capable of investing large amounts of
money are basically providing a lot of the new public
issuances, they are receiving it, and the smaller retail folks
seem to be not in that position? Isn't there something going on
here that maybe is not moving in the right direction?
Ms. White. I think what we have an obligation to do--and we
do is monitor both the private and the public markets very
closely and continuously. As you know, we have a tripartite
mission, which is to protect investors, assure the fair and
efficient functioning of the markets, and to facilitate capital
formation. I do not see those three pieces to be in conflict,
but they certainly need to be taken into consideration in terms
of everything we do.
I think the point you are also making is on who should be
within the definition of ``accredited investor,'' which
obviously drives a lot of what happens on the private side of
the markets. Clearly, from, our inception, that concept is
meant to protect investors who may not be able to protect
themselves. That obviously hits the core of our investor
protection mission, which we feel obviously very strongly
about.
In terms of the public markets, one thing I do think we
have responsibility for and we certainly, are looking at this
constantly is whether there is something about our rules for
the public markets that is unnecessarily driving away, public
offerings. So we look very closely at that. Obviously, we have
had with the JOBS Act the IPO on ramp, which makes it somewhat
easier to do that. Again, we are still focused on investor
protection, but I think that whole range of issues deserves and
is getting very close attention from the SEC.
We recently published, as you may know, the staff's
accredited investor study with a series of recommendations on
that, and that also touched on some of the issues you are
mentioning.
Senator Rounds. Madam Chair, thank you.
Mr. Chairman, thank you for the time.
Chairman Shelby. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Chair White, I would like to bring you to the plight of the
3.5 million United States citizens on the island of Puerto
Rico. This is a situation where Puerto Rico finds itself paying
33 cents of every dollar that it has toward its debts. The
Government has been forced to make excruciating decisions to
shut down schools, scale back essential services. Hospitals
with no access to power are closing the doors. The island is
losing at least one doctor each day, and we have one of the
most significant migrations out of the island to the mainland
in quite some time, which underlines the critical importance of
a congressional solution that will allow the Government to
restructure its debts and protect the people.
But beyond those reasonable and necessary solutions that
should come from the Congress, the people of Puerto Rico
deserve to know whether illegal activity by advisers to Puerto
Rico and its municipal entities controlled and contributed to
the current debt crisis. Dodd-Frank explicitly mandated that
the SEC and the Municipal Securities Rulemaking Board protect
municipal entities, and yet, despite the widely acknowledged
problems on the island, neither the SEC nor the MSRB has held
one hearing, Commission meeting initiative, or given any
particular attention to Puerto Rico's debt crisis, at least not
to my knowledge.
So what I want to know is whether municipal advisers,
underwriters, and broker-dealers--all of whom are subject to
the SEC and MSRB regulations--that operated in Puerto Rico have
done so free of conflicts of interest, whether they packaged
and sold bonds worthy of the savings of hardworking investors,
and, most importantly, whether they have acted in the best
interests of the Puerto Rican Government and people. How will
the SEC pursue this element of their crisis?
Ms. White. I could not agree more about the state of that
crisis and that what our Government--collectively in my view--
needs to do to address that in a positive way. But in terms of
the SEC's jurisdiction there, we have actually very closely
attended to investments in various funds with bonds that may be
at risk in terms of investor protection. We put out guidance on
some of that from our Division of Investment Management.
We also have brought two public enforcement actions that
have dealt with brokers who have misled investors about the
riskiness of those bonds. And while I cannot----
Senator Menendez. In Puerto Rico?
Ms. White. Yes. Yes, both of them--one I think in this year
and one in 2014. I can give your staff the details of those.
And, again, I cannot comment on specifics of anything ongoing
that we are looking at now, but I think I can say that we are
very focused on the issues that you raise in some of the other
work we are doing.
Senator Menendez. So you know, several colleagues of this
Committee and others have joined me in a letter to you and to
the Commission urging you to be not just the cop on the street
in Wall Street but also in San Juan, and to make sure that
those who may have contributed to this crisis are fully
prosecuted, because at the end of the day, if that can take
place there, it can take place anywhere. And sending a strong
message that it is not acceptable is critical. So I look
forward to your continuing work in that regard, and I would
like to be advised of what is happening when it is available to
be public.
Second, I would like to go back to the question of
corporate political spending. I continue to believe that
transparency and disclosure to shareholders is of the utmost
importance, both as a matter of corporate governance and
investor protection. And it is not just me; 1.2 million
Americans have implored the SEC to act by virtue of their
commentary during the rulemaking.
So it has been nearly 6 months since I, along with 96
Members of Congress, wrote to you asserting that the SEC
retains the authority to take critical steps to prepare for a
possible rule on the issue of corporate political spending. And
as we indicated in the letter, we expected and continue to
expect the agency to move forward with plans to prepare for a
rulemaking.
Now, I know that the 2016 Omnibus Act is seen by the
Commission as preventing them from taking the type of action,
but that action specifically talks about issuing, implementing,
or finalizing a rule. It does not speak to preparing a rule for
that moment, because I can assure you that that provision will
die. That provision will die. And we need not wait for it to
die when 1.2 million Americans have said to you, probably an
unprecedented number, that they want to see a rule in this
regard.
So I hope that--and I would like to get from you a sense of
whether or not--I mean, we have pending nominees to the SEC. I
did not care for the way either of them answered me on this
question. I would like to know, Are you going to at least
prepare and respond to those 1.2 million Americans and nearly
100 Members of Congress who believe that you should move
forward in this regard?
Ms. White. Senator, again--and you may have heard some of
my answers to Senator Merkley's questions--I deeply respect the
strong views of those that you have mentioned. There are very
strong views on both sides of this issue, and I have also
mentioned how the disclosure is developing, both voluntarily
and through our shareholder proposal process. But the issue of
the SEC doing a rulemaking to mandate political disclosures by
all public companies is not on our Reg Flex Agenda. So with or
without the appropriations language the priorities that we are
pursuing, and pursuing as hard and as fast and as well as we
can, are really the ones that I have outlined since my early
days here, which are the mandated congressional rulemakings and
certain of the mission-critical initiatives. I have talked
about asset management and equity structure.
So I think that is the status now, and I say that with a
full appreciation of the deeply held views on this, on all
sides, including by 2,000-plus unique comment letters that we
have gotten on the petition that you reference.
Senator Menendez. I will just close, Chairman: 1.2 million
Americans, I think very rarely has the SEC seen that extent of
commentary, tells you the incredible importance that people
believe in the nature of limited corporate spending at a time
in our national politics that determines decisions in every
asset of our life. And so I think that should be a far greater
level of consideration by the SEC than it presently is.
Thank you, Mr. Chairman.
Chairman Shelby. Madam Chair, before I recognize our next
Senator, we have over 300 million people in this country, so
1.6 million would be about a third of 1 percent and self-
generated. I hope you as Chairman of the SEC or any agency
would not react to generated mail from Republicans or Democrats
but would do what is best for the country and also under your
jurisdiction. It is my understanding that this is under the
basic jurisdiction of the Federal Election Commission, for what
it is worth.
Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman.
Chair White, welcome back. You observed a few moments ago
that one of the responsibilities of the SEC is to facilitate
capital formation. There is legislation that I think would be
very constructive to that end. It was introduced in the House
by Congressman Mulvaney, and what it would do is streamline
some of the regulations affecting business development
companies, BDCs, and included in that is a modest increase in
the leverage they would be permitted to use from a 1:1 ratio to
a 1:2 ratio.
If this were adopted, it seems to me, BDCs would be better
able to provide loans that they do provide to small- and
medium-sized companies, which, by the way, are finding it more
difficult to access bank loans given the regulations of Dodd-
Frank. It would also allow better returns for investors,
potentially, with some added risk that would be fully disclosed
to those investors. And it has demonstrated extremely broad
bipartisan support in the House. I think his bill passed the
House Financial Services Committee 53-4, and it was included in
legislation that passed the House floor overwhelmingly.
We have not taken this up yet, but my understanding, Chair
White, is that you have some concerns about the leverage
component in this, and I am wondering if you could briefly,
because I have got limited time, tell me why you are concerned
about increasing the leverage of BDCs.
Ms. White. Yes. First, let me just say that I think BDCs
have been very good vehicles for growth. They were designed to
be that for developing companies that might not otherwise be
financed. I think the original statute was passed in 1980.
The current reality is that retail investors hold the
majority of those shares, so that always raises our investor
protection antennae. We have worked over the years--the staff
has to try to facilitate BDCs' operations because they have a
patchwork quilt of regulations because of their exemptions from
some of the Investment Company Act provisions.
I have written about this. I think when I first got here in
October of 2013, there were some changes made in the bill,
which I think improved it. I appreciate those. I also wrote a
letter late last year to Chairman Hensarling and Ranking Member
Waters. I still have investor protection concerns, or I would
not have written the letter----
Senator Toomey. What is----
Ms. White. One is leverage.
Senator Toomey. What is the concern about the leverage?
Ms. White. One is leverage.
Senator Toomey. What about the leverage?
Ms. White. It doubles the leverage, which means that your
upside and downside potential are multiplied or are multiple,
and it is a higher level of leverage than any sort of its
counterpart kinds of funds have----
Senator Toomey. So----
Ms. White. Second, I think it allows more investment in
financial institutions than was originally conceived and allows
investments in registered investment advisers, so----
Senator Toomey. Right, so let me--I have got very limited
time here. So it is true that it increases the risk profile, it
increases the exposure. But so does investing in a bank. A bank
is a highly leveraged entity. Retail investors are allowed to
buy securities on margin. Do you support allowing retail
investors to continue to buy securities on margin?
Ms. White. I am certainly not opposed to that, but I think
there are more issues with respect to this bill and risks with
respect to this bill than just that.
Senator Toomey. Well, but that is what----
Ms. White. That is one of them.
Senator Toomey. ----leverage is about, right?
Ms. White. That is one of them.
Senator Toomey. OK. I thought leverage was the main
concern. I would simply observe that there are many, many
opportunities for an investor to take on leverage if an
investor sees fit to do so. Buying options, for instance, can
create the equivalent of enormous leverage, much, much more
than this very limited increase that would be, after all,
managed by a professionally managed company. So I would really
urge you to consider that among the various ways a retail
investor can achieve leverage, this would be a very modest--it
is heavily regulated. It is run by professionals. And the
upside benefit I think is very significant.
Let me touch on another item here. I think the SEC has a
proposed rule that would govern the use of derivatives by
registered investment companies, and, of course, derivatives
are used for a variety of reasons to achieve fund objectives.
They are all disclosed. It is articulated. If the SEC were
merely consolidating previous guidance letters, then I rather
doubt we would have seen the volume of comments that have
resulted. In fact, I think there are some things new. One that
I am concerned about is that the exposure that is used to cap
the amount of derivatives is based simply on the aggregate
notional amount of those derivatives when, in fact, notional
amounts are a terrible proxy for risk. They do not measure risk
at all. So why are we using the notional amount to determine
the limit on these investment companies' derivative holdings?
Ms. White. That is one among several important issues that
we teed up in the rule proposal, and one, as you point out, we
have gotten a lot of comments on, which the staff is very
thoroughly going through as they consider what their
recommendation will be for the final rule. That is probably one
of the most frequently commented on aspects of it--not all
comments are critical, mind you, but a number are for the
reasons you state.
Senator Toomey. So is it your intention that there will be
some modification here and that there will be a measure other
than simply the really meaningless notional principal amount?
Ms. White. Again, I cannot get ahead of the process, but I
can say that we are very focused on that issue, and the nature
of our notice and comment process is that we very seriously
consider all of the comments and try to basically propose a
final rule that is optimal and better than our proposals.
Senator Toomey. OK. Thank you, Mr. Chairman. Thank you.
Chairman Shelby. Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman. Good morning.
Thank you so much for being here.
In 1982, the SEC adopted Rule 10b-18 to provide a safe
harbor from market manipulation liability on certain stock
buybacks. Buybacks could have been considered market
manipulation back then. Recently, in my home State of Indiana,
2,100 workers were let go by a highly profitable company in
order to get $3-an-hour jobs to Mexico. The CEO said returning
cash to shareholders continues to be a top priority. We are
targeting $22 billion of total shareholder returns through
share repurchases and dividends through 2017. Of that $22
billion, $16 billion will come in the form of stock buybacks--
$16 billion in stock buybacks, while firing 2,100 workers in
Indiana in order to get $3-an-hour jobs in Mexico to help fund
the stock buyback.
I will also note that the savings they get from this are
less than one-half of 1 percent of the amount of the stock
buyback.
So my question is: You know, in 1982, this could have been
considered market manipulation. What does the SEC think of
actions like this now?
Ms. White. Well, the safe harbor rule that you mention does
not immunize companies from liability for market manipulation
if it occurs. It is basically designed to impose some rules to
at least try to prevent market manipulation. For example, if
the buyback is done on the basis of material nonpublic
information a fraud action can be brought. The safe harbor does
not deal with that at all. I am acutely aware of the whole set
of issues with buybacks. They have gotten a lot of attention in
a lot of situations, and so we are focused on it.
But the SEC does not----
Senator Donnelly. Well, let me ask you this----
Ms. White. ----dictate how--OK.
Senator Donnelly. Should the SEC play a larger oversight
role in overseeing stock buybacks as this has been funded by
firing American workers?
Ms. White. I take your point completely. I do not think the
SEC has the authority to tell a company how to spend its money.
What we do have, though, are disclosure rules with respect to
buybacks that provide transparency to investors and the public
of companies that buy back at least shares registered with the
SEC under Section 12(g), and we are addressing that issue in
our disclosure effectiveness review and our recent SK----
Senator Donnelly. Let me ask you this----
Ms. White. ----constantly to see whether we should----
Senator Donnelly. ----do you think this----
Ms. White. ----and make that disclosure more----
Senator Donnelly. Do you think this was the conduct
envisioned when the rule was changed back in the 1980s?
Ms. White. I am not sure about the conduct that you are
describing. Obviously, the way you are describing it--and I am
not doubting it at all--it is a horrible set of events and had
obviously very significant and unfortunate negative
consequences. But, again, I think what we have designed with
our rulemakings--and we are looking at it again to see if we
cannot do more--is to avoid market manipulation, which is
within our jurisdiction.
Senator Donnelly. Well, in the SEC's eyes, who is the
corporate responsibility to? Is it to just the shareholders? Or
do they owe a duty to the entire corporate enterprise,
including workers? You know, what is the corporation's
responsibility in the eyes of the SEC? Who is it to?
Ms. White. The fiduciary duty of the board, for example,
and the officers is to their shareholders. But by my saying
that, I do not want to imply that I think there are not duties
and responsibilities----
Senator Donnelly. Well, does the SEC assume that they have
any responsibility to their workers, or can they just fire them
willy-nilly?
Ms. White. That is not a subject that is within the
jurisdiction of the SEC unless it is something that has an
impact on what is within our authority.
Senator Donnelly. When you look at this, I think a big part
of this is corporate short-termism, if you want to--you know, I
do not know that that is a very technical term, but it is the
reality of life. I met with these workers this morning. They
were making $13 an hour. Their CEO made 11. The CEO before him
took over $150 million out on his last day. And they are making
13 bucks an hour on a very, very, very profitable plant, and
they are fired so their jobs could go to $3 an hour in Mexico
to help fund a stock buyback. Do you inherently see something
wrong with this business model? Is the American dream that we
all fight for? Is this what the SEC expects on conduct from the
corporations that you regulate?
Ms. White. What we expect from the corporations we
regulate--and certainly as citizens expect from those we do not
regulate--is fairness to not only their shareholders and the
fiduciary duty they owe to shareholders, which is within our
direct bailiwick, but also to their employees as well. There
are studies out there on the buybacks and the benefits and the
detriments that go both ways depending upon the context of the
particular company when they are buying back, what they are
doing with their funds, what they have to do with their funds
and so forth. But I take your point.
Senator Donnelly. Thank you, Mr. Chairman.
Senator Cotton. Thank you. Thank you, Mr. Chair.
I want to talk a little bit about FINRA and its structure.
FINRA is defined as a self-regulatory organization. Is that
correct?
Ms. White. Yes.
Senator Cotton. Does FINRA operate with a mandate from the
Federal Government?
Ms. White. FINRA is, as you point out, a self-regulatory
organization that is a membership organization, but it is
certainly an organization that is primarily responsible for the
surveillance and regulation of broker-dealers.
Senator Cotton. Does it use tools that are similar to or
typical of those of an independent Government regulatory
agency?
Ms. White. Certainly on its exam and enforcement side. They
have tools we do not have, frankly, because it is a membership
organization. There are things they can do that we cannot do
under our own authorities, but they certainly use surveillance
tools, they use enforcement, and they use exams, which are
similar.
Senator Cotton. And they make rules that will govern the
conduct of their members?
Ms. White. They certainly make rules. Many of them are
subject to SEC approval, but yes.
Senator Cotton. Are there any other private organizations
that are similarly structured and oriented within the
securities law space?
Ms. White. Not at the present time.
Senator Cotton. What sort of input, to your knowledge, do
FINRA members have into FINRA's regulatory policy agenda?
Ms. White. I do not know the specifics of that. Obviously,
they have a board structure, and they are a membership
organization.
Senator Cotton. What authority does the SEC have over the
FINRA Board?
Ms. White. We certainly oversee FINRA. We inspect FINRA,
our exam staff does, on various issues, and some of their
programs. We have some authority over their rules as well. Some
of their rules.
Senator Cotton. Do you have the power to appoint board
members?
Ms. White. No.
Senator Cotton. To remove board members?
Ms. White. No.
Senator Cotton. So FINRA exercises investigative and
prosecutorial functions related to SEC rules, Federal
securities laws, and its own rules?
Ms. White. Yes. Generally speaking, yes. There are some
exceptions to that, but yes.
Senator Cotton. Are those functions executive power, in
your opinion?
Ms. White. They are not. I know this is an issue that
people talk about all the time, but they are not a Government
entity. But the answers I gave are accurate, I believe, in
terms of their powers.
Senator Cotton. To your knowledge, does FINRA employ paid
lobbyists?
Ms. White. I do not know.
Senator Cotton. OK. Thank you.
I would like to turn to a separate topic--``shareholder
activism,'' as it is sometimes called. On a number of
occasions, you have commented on the role that economically
motivated investors play in the capital markets. In a speech
last year in New Orleans, you noted that, ``An intense debate
is taking place in the business, legal, and academic
communities as to whether activism by hedge funds and others is
a positive or negative force for U.S. companies and the
economy.'' In that speech you also said that the SEC's role in
any given contest between shareholders and boards of public
companies ``is not to determine whether activist campaigns are
beneficial or detrimental but, rather, to ensure that
shareholders are provided with the information they need and
that all play by the rules.''
So putting aside the question of any particular dispute,
any particular company, any particular investor, do you believe
that, on balance, engaged shareholders provide critical market-
drive checks and balances to provide greater corporate
productivity and management accountability?
Ms. White. That is a very broad question. I certainly think
they can.
Senator Cotton. OK. You have also spoken favorably in the
past about the role of cost/benefit analysis at the Commission.
Given your views on the importance of a data-driven approach to
developing public policy, are you concerned about some appeals
to emotion that we see from some involved in the debate about
so-called activist investing, which is sometimes also portrayed
as short-term investing?
Ms. White. The SEC is an independent agency and has always
been. I am an independent head of that agency, and so I think
it is very important for us to keep our eye on the ball and
make decisions based on the merits, which I think we do.
Senator Cotton. So in this space, you are committed to
developing rigorous econometric data on the marketplace impact
of potential disclosure rules changes or any other limitations
on marketplace participants where rules changes would be
proposed and adopted?
Ms. White. Certainly any of our rules are subject to that
economic analysis.
Senator Cotton. OK. Thank you for that. Thank you for your
appearance today.
Chairman Shelby. Senator Tester.
Senator Tester. Thank you, Mr. Chairman. And thank you for
being here, Mary Jo. I appreciate the work that you do.
I want to talk a little bit--because I appreciate you
taking the blame for a lot of stuff, but I want to talk to you
about the Commission right now. How many members are active on
your Commission? How many members do you have on the
Commission?
Ms. White. We have three.
Senator Tester. OK. And it is my understanding--and correct
me if I am wrong--it has been that way for about the last 8
months, right?
Ms. White. Do you want me to give you the hours and the
minutes? The last 6 months.
Senator Tester. Six months. And is it true that since you
have only got three, any one of those three can say if they do
not like a potential vote that might be coming up, just stay
away, and then you do not have a quorum and you cannot work?
Ms. White. Well, as a Commission of three, we have to have
all three Commissioners to do a rulemaking.
Senator Tester. Yes, so any one of them can walk away from
the table and you are sunk, right? That is pretty good power.
Ms. White. They could, but I think we are very focused, all
three of us, on getting the work done, too.
Senator Tester. Well, that is good. What about your
staffing? How are you staffed up? Do you have adequate staff?
Ms. White. I think the SEC is a significantly
underresourced agency for our responsibilities.
Senator Tester. Would that change if you became a self-
funded agency?
Ms. White. It would.
Senator Tester. Could you give me sort of--I mean, have you
run any--are you 20 percent down, 30 percent down on staffing
measures?
Ms. White. I have certainly talked mainly in the context of
our ability to cover on the examination side investment
advisers, which are obviously enormously important to
investors, particularly retail investors. I have also talked
about how we are so outspent on the IT side by those we
regulate that in those areas we have done some analyses. But,
again, I respect the appropriations process, the congressional
oversight process, and try to make the best case I can for more
and adequate resources.
Senator Tester. Well, I think that--and, look, I mean,
there has been ten people speak ahead of me, and some of them
have been very critical. Some on my side of the aisle have been
very critical about you not doing some of the work that is
assigned. And I can be critical, too. And, by the way, I am.
But the fact is that you have got to play the hand that is
dealt to you, and the hand that is dealt to you is a pretty
weak hand right now, in my opinion. Would you agree that if you
were fully staffed up and you had five Commissioners you would
be much more effective and would get more work done?
Ms. White. I think the answer to that is yes. Certainly
being staffed up would accomplish that.
Senator Tester. So we had a fiduciary rule that several
have talked about, Senator Rounds and others, that got put out
by the DOL, and I was critical because I thought this was a job
you should have done, and I think if you had been fully up, you
would have got it done. But, unfortunately, it did not happen.
Are there any plans to get that fiduciary rule happening from
the SEC's standpoint?
Ms. White. I am certainly committed to getting it done
because I think it is of enormous importance. But I have also
made clear how difficult and long a road that is under Section
913 of the Dodd-Frank Act and that I am one vote.
Senator Tester. Yes, and so fair point. And it has been
documented there were some differences between the SEC and the
DOL when that rule was put out. And I do not hear you saying it
is going to be done before this Administration is out the door.
Ms. White. Well, I am committed to moving it as fast and as
well as I can, but I cannot give you that commitment now.
Senator Tester. In all practicality----
Ms. White. It is a longer route than that.
Senator Tester. OK. So we have got the DOL rule. So the
question occurred to me: Do you have to enforce the DOL rule?
Ms. White. We do not.
Senator Tester. So who enforces it on investment advisers
and broker-dealers?
Ms. White. Enforcing their rules is their responsibility.
Senator Tester. So the DOL will enforce the rules on
investment advisers and broker-dealers.
Ms. White. They would enforce their own rules with respect
to whoever is subject to them.
Senator Tester. Traditionally, wasn't that a job for the
SEC?
Ms. White. Not as to their rules, no.
Senator Tester. No, but as far as investment advisers and
broker-dealers go?
Ms. White. And still is. Except not with respect to their
rules, but with respect to our rules.
Senator Tester. So tell me how this is going to work. I
mean, practically, how is it going to work?
Ms. White. Well, I think it is independent agencies,
independent rules. We have had before this rule rules by DOL
and rules by the SEC that overlap, so to speak, and we have
managed our way through that pretty well. We clearly will watch
this as it goes forward. And if issues arise we will certainly
be available, and I am sure DOL will be available, to
coordinate if a conflict should develop.
Senator Tester. OK.
Ms. White. And if and when--I hope we go forward with our
own rulemaking--obviously, we will coordinate with them about
any new issues that might arise with respect to that.
Senator Tester. I appreciate it.
Mr. Chairman, I will put a few more questions in the
record, but thank you very much.
Ms. White. Thank you.
Chairman Shelby. Senator Moran.
Senator Moran. Mr. Chairman, thank you. Chairwoman, thank
you very much for your presence today. We have had a
conversation in the appropriations process I want to continue
to ask you about. It deals with the regulation of the National
Marketing System. The question I have is whether the NMS plan
governance model should be reformed to reflect evolution of our
markets and add additional participants as voting members. My
question is: Does the SEC currently have legal authority to
approve the addition of additional market experts as voting
participants in the governance of NMS plans?
Ms. White. Subject to our overall SRO rule process, we
could do that. One thing I should mention is we actually have
recommendations coming from the subcommittee of the Equity
Market Structure Advisory Committee on this very subject, but
we are typically in the position of approving a rule filing.
But we can also issue orders to solicit rule filings, if I
could say it that way.
Senator Moran. So maybe there is more to this story than me
just asking you whether you have the authority. Is there
something in the works? Can you bring me up to speed on this
topic?
Ms. White. It is certainly a topic that the Commission is
focused on, the staff is focused on, and so is our Equity
Market Structure Advisory Committee, and, in particular, I
think it is called our Trading Venues Subcommittee. And that is
one of the topics, indeed, that they discussed at their last
meeting with the full committee, I think at the end of April,
and is or may be the subject of recommendations.
Senator Moran. Do you have attorney personal thoughts on
this topic? Or are you just waiting for those recommendations?
Ms. White. I am very well aware of the issues, and I know
some accommodations have been made, which other advisory
participants, have not found sufficient or satisfactory. And so
it is an issue I am focused on. It is an issue I continue to
consider whether and what changes, if so, should be made.
Senator Moran. OK. I want to follow up a bit on the Senator
from Arkansas' conversation about FINRA oversight. I noticed
that FINRA appointed a new CEO yesterday who is a former
employee of the SEC. I guess my question is: How do you satisfy
the need for congressional oversight of FINRA? Is it just a
matter of we have oversight over the SEC and the SEC has
oversight over FINRA? Or is there a greater opportunity--we
have no appropriations process there, no confirmation process.
Occasionally, FINRA representation is before Congress in a
setting like this, but beyond that, it seems to me that FINRA's
role is growing more engaged in regulatory activities and
Congress has little oversight in that regard.
Ms. White. You certainly, as you indicate, have oversight
authority over the SEC, who has oversight authority and exam
authority over FINRA, and it is an important one, I think. And,
clearly, FINRA is a very important component of our investor
protection and market safeguarding.
Since I have come to the SEC as Chair, we have enhanced our
oversight of FINRA and continue to do so. I think I heard Rick
Ketchum, the outgoing president and CEO, indicate that he
understands the interest by Congress, given their activities
and the importance of their activities, in learning about them.
I do not know if ``oversight'' is quite the right word for the
reasons that you indicate. And, by the way, I think Rick
Ketchum and Robert Cook, who is his successor, are just
tremendous public servants, and we work very well with them.
Obviously, we oversee them, but I have found them both to be
extraordinarily knowledgeable--I know Rick better than I know
Robert, but I know them both--about the markets, very committed
to investment protection. So I think that is always a
safeguard.
Senator Moran. I think you are telling me that my assurance
is that you are watching over FINRA, and we need to watch--I
know you would not say this, but we need to watch over the SEC.
Maybe you would say that.
[Laughter.]
Ms. White. It will happen anyway, right? I think that that
is correct. I guess the other part of my answer was that I am
aware of the need, and we have moved in that direction to
enhance our oversight of FINRA at the SEC.
Senator Moran. You may use your position to encourage FINRA
to be cooperative with Congress, open and available to us. That
would be useful.
Ms. White. Yes. I agree.
Senator Moran. Thank you, Mr. Chairman.
Chairman Shelby. Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
Thank you for being here, Chair White. As you know, the
SEC's mission is to protect investors and our capital markets,
and requiring companies to disclose information is a critical
part of that mission. Publicly traded companies may not like
disclosing potentially embarrassing or damaging information,
but the SEC's job is to look out for investors, not for big
companies.
Now, there is a lot you could be doing to protect
investors. There are still 20 mandatory Dodd-Frank rules from
2010 that the SEC has not completed, and there are more than a
million people, including countless investors and former SEC
commissioners, pushing the agency to require publicly traded
companies to disclose their political contributions. But
instead of moving forward on issues intended to help investors,
you have actually headed in the opposite direction.
Since your first year in office, you have dedicated
significant SEC time and resources to a project you invented
and called the Disclosure Effectiveness Initiative. According
to the 2013 speech you gave, your big idea behind this project
is that the SEC might be requiring companies to disclose too
much information, causing investors to suffer from something
you call information overload.
Now, I am all for eliminating redundant disclosures or
improving the ways that information is presented but, honestly,
I have never heard of the concept of information overload in
the context of investing in stocks. I have never heard of the
idea that investors actually want less information than they
are getting.
So I have a pretty simple question. The SEC is an investor
protection agency, so when you launched your project, what
evidence did you have that information overload was a real
problem that investors wanted you to solve?
Ms. White. It is an issue, Senator Warren, that the
Commission has been looking at for, really, decades, among
others. But the purpose of disclosure effectiveness--and by the
way, it was not invented by me--it was basically in response to
a congressional mandate to do a report that reviewed our entire
Regulation S-K concept.
Senator Warren. I am sorry; when was this report that you
are talking about?
Ms. White. It was, filed with Congress at the end of 2013.
Senator Warren. So are you--now, wait. Are you talking
about the JOBS Act report?
Ms. White. Yes.
Senator Warren. Because that one, I actually looked at
that.
Ms. White. Yes.
Senator Warren. And what was asked of you was that the SEC
review one subset of disclosures to see if that subset should
be modified as they apply to one subset of companies, so-called
emerging growth companies. Your project has gone way----
Ms. White. Right.
Senator Warren. ----beyond the boundaries identified in
that law.
Ms. White. Emerging growth companies are a very broad
swath, as you know, of the markets.
Senator Warren. I understand, but that is not what your
project is.
Ms. White. But my point is we have been, for decades at the
SEC, undergoing disclosure effectiveness review. And I
absolutely agree that there is nothing more----
Senator Warren. That is not my question.
Ms. White. ----there is nothing more important----
Senator Warren. My question is----
Ms. White. ----there is nothing more important than our
disclosure powers.
Senator Warren. ----when you launched your initiative
called the Information Overload, this is what you identified.
And I just want to know what evidence you have that this is a
real problem, that investors have come to you and said: We are
worried about getting too much information. Just what evidence
did you----
Ms. White. First of all, the review is not limited to
duplicative or overloaded information. It is really----
Senator Warren. You mean the review in the 2012 JOBS Act?
Ms. White. No, no, our review. It is meant to make
disclosure more meaningful to investors. And we have also
gotten comments, recently, from all kinds of constituents,
including our Investor Advisory Committee, about identifying,
and really not objecting to removing, things that are
repetitive, duplicative, or not useful. And the purpose of this
review is to make disclosure more meaningful for investors.
Senator Warren. I did not--I started this by saying I do
not have a problem with getting rid of duplication. I do not
have a problem with making it more effective. The question I
asked you about is whether or not this so-called information
overload is a real problem identified by investors that have
come to you.
Let us be honest about this. I cannot find, and you have
not produced, a single investor who as complained to the SEC
about receiving too much information. Investors do not want
less information about the companies where they put their
money. In fact, I think that is ridiculous. The SEC's own
Investor Advisory Committee, which includes everyone from hedge
funds to pension funds to retail investors, say recently that
the current amount of disclosure--and here was their word--is
appropriate.
So who wants less information to be disclosed? It is pretty
clear. The National Chamber of Commerce, which represents the
giant companies that have to do the disclosing. The Chamber has
produced a fact-free report, whining about this nonexistent
information overload problem, in 2014, shortly after you
launched your initiative.
You know, information overload is a problem that was
invented to justify a project aimed at making life easier for
big companies and harder for investors. In fact, Keith Higgins,
the SEC's head of the Corporation Finance Division and the lead
on this project, kind of let the cat out of the bag in 2014
when he said in a speech the aim of this project was ``to
reduce the burden on companies, consistent with our mission of
investor protection, wherever we can.''
Now, I recognize that Congressional Republicans slipped
language into the must-pass highway bill at the end of last
year that asks the SEC to review disclosures with an eye toward
eliminating ones that are unnecessary. Of course, that does not
justify the SEC dedicating resources to this project for 2
years before that. But nevertheless, given the views of your
own Investor Advisory Committee that the current disclosures
are appropriate, do you agree that the supposed information
overload problem does not exist?
Ms. White. Well, if you go back to even Thurgood Marshall
years ago, in defining materiality under the Federal Securities
laws, the concern was expressed that too much information could
cloud and crowd out the meaningful. I think you are describing
our disclosure effectiveness review in a way that is much
narrower than its intent.
Senator Warren. That is the extent of your evidence?
Ms. White. And I think one of the most important things
about the disclosure effectiveness review is that we are
listening to everyone. We are also talking about adding
information in this review that is needed to be added, for
example on foreign taxes and other things. But it is also the
manner in which the information is being provided to investors
that is a huge priority of this review.
Senator Warren. We are over our time so let me just stop
you there. I have said now three times, I think, in just this
brief exchange, I am fine with cutting out duplication; I am
fine with making the information clearer, and as should be
clear; I am fine with providing more information. What I am
trying to identify is something that you specifically have
targeted and talked about.
I am frustrated that, at your direction, the SEC has
voluntarily spent 2 years trying to address a problem that you
have no evidence exists. Instead of making up work to help
giant corporations, the SEC should do its job, starting with
the 20 required rules under Dodd-Frank that still are not fixed
6 years after the law was passed. Your job is to look out for
investors, but you have put the interests of the Chamber of
Commerce and their big business members at the top of your
priority list.
Chairman Shelby. Your time is up.
Senator Warren. A year ago I called your leadership at the
SEC ``extremely disappointing.'' Today I am more disappointed
than ever.
Thank you, Mr. Chairman.
Ms. White. And I am disappointed in your disappointment and
could not disagree more with your characterization of what we
are trying to do to improve our disclosure regime for investors
to make it better. And we----
Senator Warren. When you bring me evidence of this so-
called information overload that you have initiated, then we
can have more conversation about how disappointing this
leadership has been.
Ms. White. I would suggest you read the Regulation S-K
concept release for the range of issues we are addressing,
including that.
Senator Warren. I would like to see some evidence that
there really is a problem here.
Chairman Shelby. Senator Warner.
Senator Warner. Thank you, Mr. Chairman.
Chair White, it is good to see you again. I want to move to
another area of concern that I have. I have seen evidence
recently--I am sure you probably have as well. RBC put together
a chart of--its complexity is a little overwhelming--that there
were 839 different fee structures-- I am getting to the maker-
taker issue--with 2,700 different iterations in terms of
incentives and rebates within our market structure right now,
that quite honestly give the impression that the system is
rigged to direct trading through to those firms and entities
that are going to give you the biggest rebate or fee structure.
It seems to me that there is an extraordinary amount of
conflict of interest here in the whole question of brokers and
their clients. When we look at this--and we have got,
obviously, the complexity of our markets and trying to make
sure--I agree with Senator Warren that we have got to get
information out in a clear and transparent way. But, boy, you
talk about an area that is opaque. You know, how are we going
to get through this?
Now, you have talked about this back in 2014, the negative
outcomes of some of these--this structure. You know, I strongly
believe we need to move quickly on the maker-taker pilot. I
would encourage you that when we take a look at this maker-
taker pilot, that we have all venues included, both those lit
and unlit.
When we think about--again, if you look at that RBC chart
and then you add the dark pools behind it, enormous challenges,
and that we do not--you know, I know that the Trade Act
component issue added a whole series of complexity to the tick
size project. And my hope is that we will not see those same
kind of great to have but potentially items that dramatically
slow down the ability for us to bring more transparency to our
markets, and particularly in terms of this area where there
appears to be an enormous amount of conflict of interest. So
could you speak to that?
Ms. White. First I will say--and I think I said it at the
Committee meeting as well--I do think we should promptly
proceed with a well-designed pilot. The discussion, of the----
Senator Warner. How promptly do you think--I mean,
considering we saw the tick size and----
Ms. White. Right.
Senator Warner. ----we have gone through this a number of
times and I know it has been delayed again.
Ms. White. For the tick size pilot, as you know, we ended
up having to order the SRO's to submit a plan that would work.
And I think it is enormously important. It will launch in
October of this year, but obviously it took a while to do that.
I do think you have got to be careful that you are getting
the information that you need to have from these pilots. I
think you may not, Senator Warner, have been in the room when I
mentioned before that we are expecting a recommendation at a
July 8th telephonic meeting from the subcommittee that is in
charge of this subject matter at the subcommittee level to the
full committee on July 8th. And frankly, I urged that to happen
sooner than their next scheduled meeting so that we could move
this along.
It obviously is up to the Commission, and the staff to
recommend to the Commission what those parameters should be.
But it is one that I think is more complicated than it seems. I
do not think the system is rigged, but I think it has developed
in a way that we have really got to figure out how to deal
with. And I am particularly concerned about the conflicts of
interest inherent in it.
Senator Warner. Once again----
Ms. White. Yes.
Senator Warner. ----you sort through this bespoke Byzantine
process, and how any investor, small or large for that matter,
really knows where their trades are being directed based upon
the level of fees and rebates. You know, we need more market
confidence, and I really think moving aggressively on this----
Ms. White. I think our transparency proposals are an
important part of that too, but----
Senator Warner. Right.
Let me, the last few seconds here, go back. Senator Moran
raised some of the question around market governance. And as
more and more of these large exchanges do these--the SIPs, the
securities exchange processors, and are making decisions to
make huge capital investments in technology, sometimes that
technology which may give them that fractional second advantage
over others. And as I have said before, you know, I do not want
to appear as a Luddite, but I do believe at some point speed
and the god of liquidity being the answer is not always the
completely correct answer.
But as we sort through this, and with all the various
exchanges, you know, can you expand on what you said to Senator
Moran in terms of governance? How do we make sure that, in
terms of market governance, we have got all the right parties
at the table sorting through these--sorting through these
issues?
Ms. White. I am not sure we are talking about the NMS
governance, which we were addressing, but frankly my whole idea
for the Equity Market Structure Advisory Committee was to try
to bring in expertises across the range of constituents, and
also to make sure we had a panel at every one of those meetings
that had everybody else there that had a different point of
view and an expertise. And I have been very pleased with it so
far. It is also something that focuses and I think moves along
more promptly the Commission's comprehensive review of these
market structure issues, and it really needs to be there.
In terms of the speed issue, certainly you can get to
diminishing returns. I think you had that conversation with
Steve Luparello at your subcommittee hearing. I do not think
you roll back technology. We have had tremendous benefits,
obviously to retail investors and institutional investors in
our markets from the technological advances.
Sometimes people talk about high-frequency traders as if
they are one thing, and they are not. They are not monolithic.
They have different strategies. And so, one of the proposals
that the staff is working on is an antitrading disruption rule,
which deals with, when markets are particularly vulnerable,
liquidity being taken away by virtue of speed, to avoid that.
So the issues, again, are complicated, but I am largely
agreeing with you.
Senator Warner. And my time expired.
I just want to say, Mr. Chairman, that, you know, as we
look at complexities in the equities market, as we have seen
complexities in the bond market, you know, even in the
Treasurys markets, obviously the options markets--and my fear
sometimes that some of these bespoke products and the incentive
systems--you know, I worry that the complexity has gotten so
great and the effect it has on the overall market ecosystem,
that it is bleeding from one market into another.
And I appreciate, Chair White, your comments, but would
love to come back and revisit with that.
Chairman Shelby. Thank you.
Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman.
Welcome back, Chairman White, my fellow New Yorker. And as
you know, I have a great deal of respect for you, but I am
going to go back to the issue I care so much about.
I just want to--the money--I am now involved in a lot of
our races, our campaigns. The money that is pouring in is
unprecedented and it is undisclosed. And it is a few
organizations. One is the Koch brother organization, one is the
Karl Rove organization, one is the Chamber of Commerce itself--
pouring in, poisoning our politics, and we do not know where
that money comes from. The shareholders do not know where that
money comes from.
I will have to tell you, it is more important than anything
else to me before the SEC. All the things between shareholder
and corporate governance pale before what is happening in
America. And you want to know why people are so discontent? In
part, it is because a few powerful people can send cascades of
money into our system. The ads they put on TV have nothing to
do with the issues they care about.
And you, frankly, are aiding and abetting at the SEC
because we cannot do everything. And we know that our House
Republicans--Mitch McConnell is insisting that this stay. They
gain from this. And it is short-term gain because, in part,
people become so discontent with the powers that be that they
not only go against the--all establishment, they go against the
Republican establishment. Witness the last election, the last
primary.
And I just do not get it. I just do not get why
corporations that give money should not tell their
shareholders. These are major decisions. They have effects on
the corporations. If Exxon--and I am just picking one. I have
no idea what they do undisclosed, but if they put a ton of
money of undisclosed into the Chamber of Commerce to fight
global warming--let us just assume that--their shareholders
have a right to know they may be making a bad decision.
I think you are hurting America. You are hurting America.
And I know you can stay in your narrow little box and say,
well, the rules of the SEC are limited, and this and that.
First, a lot of people do not agree with that--most people.
Second, the public. I mean, I know Senator Shelby said 1.2
million petitions is a small amount compared to the population
of America. That is true, but how many other issues have you
gotten 1.2 million petitioners calling you? And I wish you
would change your mind. I am just so disappointed, so
disappointed, because every one of our commissioners should be
a citizen. They have to do things within the law. This is
within the law and you have made the decision not to go
forward.
So let me just ask you this. This is a relevant question.
Senator Menendez touched on this issue, but I want to come back
to it. John Coates analyzed that the SEC, by this--we were--the
Republican leadership insisted that this provision be put in
the bill. It shows you--the provision that says--you know, that
says that Congress cannot touch what you do. But it was not
that explicit. And as I understand it, it only explicitly
prohibited the SEC from finalizing, issuing, or implementing
such a rule during this appropriated period.
So do you disagree with Coates' analysis? And second, if
you do not disagree with his interpretation, will you add this
issue to the SEC's agenda?
Ms. White. I have not studied his interpretation of it. Let
me just say that I respect you enormously, and your views----
Senator Schumer. It is a mutual respect we have.
Ms. White. ----enormously. And I also deeply respect the
views on all sides of this issue. I explained earlier what the
SEC was looking at when I came in, and so forth. I will not
repeat that or what I have prioritized for the benefit of
investors and our markets since I have been there, although I
certainly made a commitment to advance the mandated rulemakings
and other mission-critical issues.
But having said that, I have also talked about the avenues
for shareholders to bring this issue to their companies, which
is in our rules, the Rule 14a-8 shareholder proposal route. The
average approval rate for those petitions last year was about
26 percent. I also certainly applaud those companies that are
voluntarily providing the information, which they, by the way,
are doing in greater numbers, like----
Senator Schumer. What else can you do to encourage
companies to do it voluntarily? I understand the worst ones are
not going to do it. The big violators are not going to do it.
Ms. White. There is a report that came out in October of
2015 basically showing that over half of the S&P 500 now makes
disclosures of their political spending. And I think 80-plus
percent have policies and procedures governing their spending.
So that information is certainly voluntarily being provided.
Obviously our rules could never reach the Koch brothers because
it is not a public company at all.
Senator Schumer. That is good.
Ms. White. So it is not as if the SEC our rules--is the
solution to campaign finance reform. I understand you are not
suggesting they are, and I take your point. But essentially,
the subject of doing a rulemaking has actually not been on the
SEC's agenda before me or after me.
Senator Schumer. No, but what I am asking you is----
Ms. White. Yes.
Senator Schumer. ----since you are not prohibited from
starting the process, would you be willing to start the
process?
Ms. White. Well, again, the subject is not on our Reg Flex
Agenda now.
Senator Schumer. I know.
Ms. White. It is not one of the priorities that we are
advancing. So do I get to that before I get to what could we do
or what could not we do under the appropriations language?
Obviously the appropriations language is there with its
prohibitions.
Our Corporation Finance staff did look at this, actually
before the item was put on the Reg Flex Agenda in late 2012,
just to research and consider whether to recommend a proposed
rule, not to advance a proposed rule. And they did a lot----
Senator Schumer. I just----
Ms. White. ----a lot of work on that.
Senator Schumer. My time is expired----
Ms. White. OK.
Senator Schumer. ----but I am explicitly asking you a
question, which is, are you willing to start the process? That
is still allowed by--even with the legislation that we passed.
Ms. White. I have not researched the legal issue, but the
answer is that it is not a subject that is on our current Reg
Flex Agenda----
Senator Schumer. OK. I would----
Ms. White. ----because of my priorities and the priorities
of the Commission.
Senator Schumer. I know my colleague is here. I would just
say to you, your priorities are out of line with what corporate
America needs and America needs. And I hope when you go to bed
late at night you will think about that, because our country is
basically being steered in an awful direction by a narrow few
wealthy people. At the very least there ought to be disclosure.
Chairman Shelby. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
And thank you, Chair White, for appearing. As you know, I
have been working on a number of provisions within the Homeland
Security and Governmental Affairs Committee regarding
supervision of independent agency rulemaking, obviously still
concerned that we have been unable to effectuate the
implementation of a longstanding executive order in legislation
and have met, as you know, with great resistance from all the
independent agencies.
That is not going to be the basis of my question, but I
wanted just to remind you that when we met, you offered to sit
down and actually have a conversation about this, because I
think there is a growing amount of concern in the regulated
community that there is not the kinds of safeguards that other
rulemaking have. And so I want to just remind you that I have
not forgotten about that.
But I want to ask you about SEC rulemaking and small
business. As you know, Senator Heller and I introduced a
bipartisan bill that would create an Office of Small Business
within the--a small business advocate within the SEC. I am
wondering if you have had a chance to review that legislation
and if you have an opinion.
Ms. White. Well, first let me say that I think we have
really prioritized the interests of, perspectives, if I can say
that, and special needs of small businesses since pretty much
the day I arrived at the Commission, and we have taken a number
of steps.
We were mentioning the tick size pilot before. We actually
have, in our Division of Corporation Finance, an Office of
Small Business Policy, which responds to a thousand-plus,
sometimes nearly 2,000 requests for questions like how do I
navigate the rules, how do I do this, how do I do that? They
look at all of our rules from the perspective of how is this
going to impact small businesses? So I think it is a very
highly functioning unit.
I am an advocate for small business so, conceptually, I am
all in favor of any advocate for small business because they
are so important to our economy. I worry about--and I know our
staff has given some technical assistance on this--but I worry,
if the bill is adopted, that we might fragment or dilute the
efforts that we have within the SEC.
Senator Heitkamp. Chair White, I would submit that a lot of
small business feel like they are being left behind and their
capitalization is restricted in ways that they do not
understand. And it is so critically important that they feel
like they are part of the economic fabric as well. And so I
think creating an advocacy so there is somebody there, and not
just kind of the good will of the Chair and the good will of
the rest of the Commission, to basically be that voice that is
heard on small business concerns. So----
Ms. White. I certainly understand the priority on it, if I
can say it that way. I think that is why we have the office we
have, but I also understand the priority that you are putting
on it in this way, as well.
Senator Heitkamp. And I do not know if you have had a
chance to answer questions about the Department of Labor
fiduciary rule yet.
Ms. White. Here and there I have, yes.
[Laughter.]
Senator Heitkamp. Yeah, I bet you have, so I will just kind
of read the testimony there rather than reiterate what has been
said.
The SEC is credited--has been credited for developing and
adopting a March 2012 Current Guidance on Economic Analysis, an
SEC rulemaking which emphasizes the importance of rigorous
economic analysis and rulemaking, including relevant cost
benefits. It is generally recognized that accurately estimating
the benefits of regulation is more difficult than determining
the costs, whether or not they can be quantified or monetized.
What lessons learned, if any, can you provide on SEC's
efforts to justify regulations, especially when these
limitations exist?
Ms. White. Well, we obviously adopted and implemented our
Economic Guidance. I think it was March of 2012. We take the
cost-benefit economic analysis of our rules and pre-our rules
quite seriously. And I think it is working very well. We have
actually received compliments on the thoroughness of it and the
pointedness of it, if I can say it that way.
So I think it is enormously important to do. And I will not
say much about it but you alluded to the bills that are pending
to add more review and other factors. What I worry about there
is the compromise of independence and adding burdens that, at
least at the SEC, I think we are discharging what you want us
to.
Senator Heitkamp. Chair White, I am running out of time,
but I just want to reiterate that, you know, we can all have
good intentions but sometimes we need a cop on the beat who is
going to be reviewing the work.
And so that is really what we are asking for in that
legislation. And we will continue to talk about what makes the
independent agencies comfortable as we move forward, but I have
not given up on my challenge of making sure that there is some
oversight that assists this body in terms of oversight on
independent agency regulations.
So, thank you so much for appearing and thank you for your
work. I think if you have not been thanked already, as you know
I am greatly appreciative that you have stepped up and taken
the chair.
Ms. White. Thank you very much. Thank you.
Chairman Shelby. Senator Brown.
Senator Brown. I have one last question. Thank you, Mr.
Chairman.
First, one real brief comment. I join Schumer--Senator
Schumer's plea with you to move on that. I think it is--I think
there is a huge majority of the country, people paying
attention, that want you to do that, and so many Members of
this Committee too.
Along with other members of both houses, I sent you a
letter in March asking you to consider rulemaking pursuant to a
petition that would provide enhanced disclosure of the
diversity of board nominees. In your response, you indicated
you had asked your staff to look at the nature of the
disclosure companies are providing. Could you give this
Committee an update on what you are doing?
Ms. White. Yes. And this is an example of an existing rule
that we have that investors have basically indicated is not
providing them useful enough information on diversity. There is
no definition of diversity, et cetera. So those concerns
resonate with me and I have had the Division of Corporation
Finance work on what the disclosures have been in the past,
what they are now, and how we might enhance that rule. They
have not completed that process, but they are well into it, and
I expect them to make a recommendation to me fairly soon.
Senator Brown. Please keep me appraised of those findings.
Ms. White. Absolutely.
Senator Brown. Thank you.
Thank you, Mr. Chairman.
Chairman Shelby. We appreciate your appearance today here,
and we look forward to some more. Thank you.
Ms. White. Thank you very much. Thank you.
Chairman Shelby. The meeting is adjourned.
[Whereupon, at 10:57 a.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF MARY JO WHITE
Chair, Securities and Exchange Commission
June 14, 2016
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN SHELBY
FROM MARY JO WHITE
Q.1. With respect to delegations of authority:
Are all delegations of authority made public? If so, please
provide a complete list of all delegations or a Web address
where that information can be obtained.
How many delegations of authority are currently in place?
Once the Commission has voted to delegate its authority to
staff, how are you and your fellow Commissioners made aware of
the staff's use of that authority?
If the Chair is recused on a specific matter, who is
accountable for the staff's use of delegated authority?
Are there any formal or informal delegations of authority
to staff not directly named in the delegation of authority, and
if so, how many? Please provide a specific list of any such
formal and informal delegation.
Would you support an SEC review of existing delegations,
including an analysis of their appropriateness?
How many SEC staff have the ability by means of delegated
authority to issue subpoenas?
A.1. In light of the breadth of the Commission's extensive
responsibilities, section 4A(a) of the Securities Exchange Act
of 1934 (Exchange Act) authorizes the Commission ``to delegate,
by published order or rule, any of its functions to a division
of the Commission, an individual Commissioner, an
administrative law judge, or an employee or employee board,
including functions with respect to hearing, determining,
ordering, certifying, reporting, or otherwise acting as to any
work, business, or matter.'' The section prohibits the
delegation of the function of general rulemaking or the making
of any rule pursuant to section 19(c) of the Exchange Act.
The following table provides links to the Commission's
delegations of authority that appear in the Code of Federal
Regulations:
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
In addition, the Commission has delegated to an individual
Commissioner, designated as the Commission's ``duty officer''
by the Chairman from time to time, all of the functions of the
Commission, other than general rulemaking or the making of any
rule pursuant to section 19(c) of the Exchange Act. 17 CFR
200.43.
To facilitate the performance of delegated functions,
section 4B of the Exchange Act authorizes the Chair to assign
personnel to perform functions that have been delegated by the
Commission to Commission personnel. Specifically, section 4B
provides that ``there are hereby transferred from the
Commission to the Chairman of the Commission the functions of
the Commission with respect to the assignment of Commission
personnel . . . to perform such functions as may have been
delegated by the Commission to the Commission personnel . . .
pursuant to section 4A of this title.'' Under this authority,
the Chair has assigned specified staff, under the direction of
the person with delegated authority, to perform certain of the
functions that have been delegated by the Commission.
Among the delegations of authority, the Commission has
delegated to the Director of the Division of Enforcement the
authority to designate officers empowered to issue subpoenas in
the course of investigations instituted by the Commission
pursuant to section 19(c) of the Securities Act of 1933,
section 21(b) of the Exchange Act, section 42(b) of the
Investment Company Act of 1940, and section 209(b) of the
Investment Advisers Act of 1940. The Commission has delegated
similar authority to the Director of the Division of Trading
and Markets and the General Counsel with respect to
investigations instituted pursuant to section 21 of the
Exchange Act. Pursuant to section 4B, the Chair has assigned
specified persons to perform these delegated functions under
the direction of the Director of the Division of Enforcement,
the Director of the Division of Trading and Markets, and the
General Counsel, as applicable.
The staff is accountable for any exercise of delegated
authority through the statutory power of any one Commissioner
to request a review of an action taken by delegated authority.
Specifically, section 4A(b) of the Exchange Act provides that
the Commission retains a discretionary right to review any
action taken by delegated authority, upon its own initiative or
upon the petition of a party to or intervenor in such action,
within such time and in such manner as the Commission by rule
shall prescribe. Under the Commission's rules, the Commission
may, on its own initiative, order review of any action made by
delegated authority at any time, except that where there are
one or more parties to the matter, such review shall not be
ordered more than 10 days after the action. 17 CFR 201.431(c).
The vote of one member of the Commission, conveyed to the
Secretary, is sufficient to bring a matter before the
Commission for review. In addition, a party to an action made
pursuant to delegated authority or a person aggrieved by an
action taken by delegated authority may seek Commission review
of the action by filing a written notice of intention to
petition for review. 17 CFR 201.430.
Given the breadth and scope of the Commission's vast
responsibilities, and the need for timely action and responses
to market developments, I believe that the framework and
subject of staff delegations have been appropriately drawn by
the Commission. But, as I have previously advised my fellow
Commissioners, I am receptive to reconsidering particular
delegations of authority that may no longer be appropriate, and
to considering whether there are new areas where additional
delegations may be appropriate.
Q.2. As a follow up to my question at the hearing, please
provide specific examples to the following question:
You have often stated that the SEC is an independent
agency. While one can expect some split votes because
of the way the Commission is set up, there have been
many party-line 3-2 and 2-1 votes under your
chairmanship. By comparison, according to the press,
former Chairman Breeden never had a 3-2 vote, and
former Chairman Levitt rarely would take a matter to a
vote unless he knew he had a 5-0 vote. Are there any
areas that you can work on cooperatively with the other
two Commissioners to reach a unanimous decision? Please
provide specific examples.
A.2. While I believe that it is generally preferable for
Commission decisions to be unanimous--and we strive for that--
each Commissioner brings his or her unique perspective to
matters that come before the agency, and I cannot predict, nor
should I dictate, how each member will vote on each matter that
comes before the Commission. And, as I indicated at the
hearing, a number of our nonunanimous votes during my tenure
have occurred on mandated rulemakings to implement certain of
the provisions of the Dodd-Frank Act, on which Commissioners
continue to have very different views. Nevertheless, during my
tenure at the SEC, the Commission has reached unanimous
decisions on the majority of matters that have come before it,
including on rulemakings.
Most recently, for example, the Commission voted
unanimously in August to approve final rules to enhance the
information reported by investment advisers and rule amendments
to provide authorities with access to data obtained by
security-based swap data repositories. The month before, at the
Commission's open meeting on July 13, 2016, the Commission
voted unanimously to approve all four rulemakings under
consideration, including:
final rules and guidance under Title VII of the
Dodd-Frank Act related to the reporting and
dissemination of security-based swap transaction data;
proposed rules that for the first time would
require broker-dealers to disclose specific data
regarding order handling information;
proposed amendments to update certain disclosure
provisions by eliminating redundant, overlapping,
outdated, or superseded requirements due to changes in
rules, accounting principles, and technology; and
amendments to the Commission's rules of practice
applicable to administrative proceedings.
This year, the Commission also has voted unanimously for,
among other things:
proposed rules for investment adviser business
continuity and transition plans;
final rules requiring security-based swap dealers
and major security-based swap participants to provide
trade acknowledgments and to verify those trade
acknowledgments in security-based swap transactions;
proposed rules to revise the property disclosure
requirements for mining registrants;
proposed rules to amend the definition of ``smaller
reporting company'' as used in our rules and
regulations;
proposed amendments to address the covered broker-
dealer provisions under Title II of the Dodd-Frank Act;
final rules governing certain security-based swap
transactions connected with a non-U.S. person's dealing
activity in the United States;
final rules for changes to Exchange Act
registration requirements to implement Title V and
Title VI of the JOBS Act;
a concept release on business and financial
disclosures required by Regulation S-K; and
interim final rules amending certain issuer
disclosure forms (Forms 10-K, S-1, and F-1) and
providing for a summary of Form 10-K, to implement
provisions of the Fixing America's Surface
Transportation (FAST) Act.
I also note that this is only a partial list--since I have
been Chair, there have been many other Commission matters,
including the vast majority of votes on initiating or settling
enforcement matters, on which the Commission has acted
unanimously.
Q.3. As a follow up to my question at the hearing, please
provide specific examples to the following question:
There have been concerns raised by the public as well
as Members of this Committee about repeated violations
by SEC registered entities. Two years ago, a former SEC
Commissioner stated that, with respect to the most
egregious and repeated violations of our securities
laws and regulations, ``we need to ask ourselves a
fundamental question: should the violating entity
retain the privilege of participating in our capital
markets?'' In your opinion, when is it appropriate for
the SEC to exercise its ability to deregister an
entity? Please provide a specific example of what you
would consider to be a valid cause for deregistration.
A.3. The SEC has broad authority under the Securities Exchange
Act of 1934 (Exchange Act) and Investment Advisers Act of 1940
(Advisers Act) to sanction regulated entities for a variety of
misconduct if it finds that the sanction is in the public
interest. If a regulated entity engages in misconduct, such as
willfully violating, or willfully aiding and abetting a
violation of, the securities laws, or is enjoined or convicted
of certain specified offenses, the Commission is authorized to
pursue a variety of sanctions against that entity. These
sanctions include suspending or revoking a regulated entity's
registration. See Section 15(b)(4) of the Exchange Act and
Section 203(e) of the Advisers Act. Revoking a registered
entity's registration is the most severe sanction available to
the Commission.
The Commission must justify any sanction it imposes by
finding that the sanction is necessary to protect the public
interest. In determining whether a sanction is in the public
interest--including revoking a registered entity's
registration--the Commission looks to a broad range of factors.
The factors are: (1) the egregiousness of the respondent's
actions; (2) whether the violations were isolated or recurrent;
(3) the degree of scienter; (4) the sincerity of the
respondent's assurances against future violations; (5) the
respondent's recognition of the wrongful nature of his or her
conduct; and (6) the likelihood that the respondent's
occupation will present opportunities for future violations.
See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff'd
on other grounds, 450 U.S. 91 (1981). The determination is a
flexible one and no single factor is controlling. A Commission
Order revoking an entity's registration is made in an
administrative proceeding in which the entity may contest the
allegations made against it and the proposed sanctions. The
Commission's determination to revoke an entity's registration
is appealable to the Federal appeals courts.
The Commission has revoked the registration of registered
entities in cases involving egregious misconduct, such as
recurring or systematic violations of the antifraud provisions.
For example, the Commission recently issued an opinion revoking
an investment adviser's registration and barring its principal
for recurring violations of the Advisers Act's antifraud
provisions. See In the Matter of Edgar R. Page and PageOne
Financial, Inc., Admin. Proc. File No. 3-13037, Advisers Act
Release No. 4400 (May 27, 2016), https://www.sec.gov/
litigation/opinions/2016/ia-4400.pdf. In determining that the
revocation of the investment adviser's registration was in the
public interest, the Commission noted the egregiousness and
recurring nature of the conduct and found that the firm
presented a significant risk of future misconduct. See id. at
15-17. \1\
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\1\ See also ``In the Matter of J.S. Oliver Capital Mgmt. L.P.,
and Ian O. Mausner, Admin.'' Proc. File No. 3-15446, Exchange Act
Release No. 78098 (June 17, 2016), https://www.sec.gov/litigation/
opinions/2016/33-10100.pdf (Commission revoked investment adviser's
registration and barred its principal where respondents repeatedly
violated the antifraud provisions by systematically fraudulently
allocating trades and failing to disclose material information to
investors).
Q.4. In a speech earlier this year you stated that the SEC is
``engaged with our fellow financial and consumer protection
regulators, including the Department of Treasury, the Federal
Reserve, the CFPB, OCC, FTC, and FDIC, to develop a broader
understanding of the online marketplace lending industry, and
regulatory initiatives that would enhance investor, consumer
and borrower protections.'' Please explain what role the SEC
has had in developing regulatory initiatives in the online
marketplace lending sphere and describe the SEC's future plans
---------------------------------------------------------------------------
in this area.
A.4. As in other subject areas, the Commission's role in the
area of online marketplace lending is the protection of
investors in connection with the offer and sale of securities.
Obtaining money from investors to fund borrower loans through
an online lending platform involves the offer and sale of
securities. The Commission does not oversee the lending
activities of online lenders and extensions of credit.
Commission staff has engaged in discussions with other
agencies and the Treasury Department to keep apprised of
developments in the marketplace and to enhance others'
understanding of how the Federal securities laws apply to these
activities. I support the continuation of the interagency staff
working group to help determine whether regulatory initiatives
would be appropriate.
Q.5. I have previously raised concerns about the accountability
and transparency of the Financial Stability Board (FSB). The
FSB is not a U.S. regulator, it is not accountable to Congress
or the American people, and yet it issues directives that U.S.
regulators often adopt in some form. As the Chair of the SEC,
you are a member of the FSB Plenary. Please provide a list of
all FSB Plenary meetings and any other FSB meeting that you
have been invited to attend or participate in, annotating which
ones you attended and/or participated in person, telephonically
or not at all. For the last category, please provide the names
and titles of SEC staff that participated or attended in your
place. If you are unable to attend an FSB meeting in person,
have you considered sending another Commissioner, and if not,
why not?
A.5. The FSB has a number of committees whose meetings I,
another Commissioner, or senior SEC staff attend. With the
exception of the first meeting after I joined the SEC held in
April 2013, I have personally participated in all of the
meetings of the FSB Steering Committee, which is the leadership
group within the FSB. Prior to my tenure as Chair, Chairman
Shapiro had Commissioner Elisse Walter attend such meetings, as
she did the April 2013 meeting. In another change from prior
practice, I or, at my request, another Commissioner has also
personally attended nearly all board meetings of IOSCO. With
respect to meetings of the other committees of the FSB,
including the Plenary, I have continued the existing practice
of having SEC senior staff attend.
Members of the SEC staff attend the FSB Plenary and
meetings of the standing committees in which the SEC
participates, which are: (i) the Standing Committee on
Supervisory and Regulatory Cooperation (SRC); (ii) the Standing
Committee on Assessment of Vulnerabilities (SCAV); and (iii)
the Standing Committee on Standards Implementation (SCSI).
Currently, meetings of the Plenary and the SRC are attended
by Paul Leder (Leder), Director of the Office of International
Affairs (OIA), and meetings of the SCAV, which the SEC joined
in 2015, are attended by Mark Flannery (Flannery), Director of
the Division of Economic and Risk Analysis (DERA). Meetings of
the SCSI are attended by Katherine Martin (Martin), Associate
Director in the Office of International Affairs.
Below is a list of the FSB Steering Committee, Plenary, and
standing committee meetings I, another Commissioner, or an SEC
staff member attended during my time as SEC Chair. Meetings
where attendance was by phone are noted by an asterisk.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Q.6. A recent news article stated that ``passive investing is
taking over the money-management world'' and as a result,
``mutual funds are facing extinction.'' Is the SEC studying
this issue, and if so, when do you expect the results of that
study? If not, what is the SEC doing to permit innovation and
competition to thrive in this space? Do you anticipate to have
any legislative recommendations for Congress to consider?
A.6. The Commission and its staff generally monitor trends
within the asset management industry, including those related
to mutual funds and exchange-traded funds (ETFs). Recent
industry data suggests an increasing trend towards passive
investing. While overall investor demand for mutual funds
declined in 2015, industry data indicates that demand for both
index-based mutual funds and index-based ETFs has increased.
\2\ The Commission staff generally does not believe that this
recent trend toward passive investing--which may or may not
continue over the long term--will eliminate the role in the
investment company marketplace for mutual funds and ETFs,
whether passively or actively managed, as each product line
presents its own relative set of advantages and disadvantages
to different investor groups.
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\2\ See generally, Lipperus U.S. Fund Flows, http://
www.lipperusfundflows.com; Morningstar Direct U.S. Asset Flows Update:
Data through Dec. 31, 2015, U.S. Mutual Funds and Exchange-Traded
Products (Jan. 15, 2016), http://corporate.morningstar.com/US/
documents/AssetFlows/AssetFlowsJan2016.pdf; and Investment Company
Institute, 2016 Investment Company Factbook 26-30 (2016), https://
www.ici.org/pdf/2016_factbook.pdf.
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The Commission's mission is to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital
formation. Consistent with its mission, the Commission
continues to evaluate and, as appropriate, approve requests for
exemptive relief for new and novel investment products,
including ETFs. The Commission evaluates all exemptive
application requests to operate such investment products under
the standards prescribed by the Investment Company Act of
1940--that is, such exemption must be necessary or appropriate
in the public interest and consistent with the protection of
investors and the purposes fairly intended by the policy and
provisions of the Investment Company Act. The Commission has
approved, over the years, a number of exemptive applications
under this statutory exemptive authority, including
applications submitted by sponsors to operate various types of
actively managed ETFs.
I do not anticipate the Commission making legislative
recommendations regarding ETFs at this time.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM MARY JO WHITE
Q.1. At the June 14 hearing, you were asked about the
legislation introduced in the House of Representatives
regarding Business Development Companies (BDCs) and your
investor protection concerns with respect to the changes that
would increase the leverage used by BDCs. Specifically, you
were asked why you are particularly concerned by the increase
in leverage for BDCs when investors have access to other
investments with leverage, including securities purchased on
margin, listed options, or shares of banks that operate on a
leveraged basis.
For clarification, please describe any limitations on the
purchase of those investments, as well as any limitations on
similar instruments such as 3x leveraged exchange traded funds.
Please include in your discussion any regulatory requirements
or guidance, or stock exchange regulations, such as options or
margin account approval, or limitations on margining low-priced
or illiquid shares, that broker-dealers must comply with or
consider for clients who wish to trade those instruments.
In addition, you mentioned that BDC shares are
predominately held by retail investors. Based on the most
recent data available, please provide the portion of investors
in BDC shares and listed options that are ``retail'' investors.
Also, please provide data, to the extent available, of the
percentage of retail investors that have brokerage accounts
authorized to use margin. Finally, please discuss any investor
protection concerns that might exist in an initial offering of
BDC shares aimed at retail investors.
A.1. As entities regulated under the Investment Company Act of
1940 (1940 Act), BDCs, as well as other types of funds, such as
mutual funds, closed-end funds, and exchange-traded funds
(ETFs), are subject to statutory provisions and regulations
that are designed to protect investors. There are also various
regulatory requirements with which investment advisers and
broker-dealers must comply when making a recommendation in
connection with a securities transaction or investment strategy
involving securities, including those involving investments in
BDCs or ETFs and those using options or a margin account.
Investment Companies. The 1940 Act was enacted, in part, to
provide ``small investors'' with ``a regulated institution for
the investment of their savings.'' \1\ Many of the 1940 Act's
provisions correspond to abuses that contributed to the rapid
decline in the value of closed-end investment companies at the
end of the 1920s. Section 18 (which is applicable to BDCs), for
example, was intended to protect investors from abuses
associated with complex capital structures, including excessive
leverage. \2\
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\1\ See H.R. Rep. No. 76-2639, at 10 (1940). See also S. Rep. No.
76-1775, at 12 (1940). Because the Act was enacted, in part, to provide
``small investors'' with ``a regulated institution for the investment
of their savings,'' the 1940 Act includes far more extensive
substantive regulation--e.g., prohibitions on transactions between an
investment company and its affiliates--than the other Federal
securities laws.
\2\ The section balances the interests of fund shareholders and
the holders of senior securities--e.g., preferred stock or debt
securities issued by the fund. Section 1(b) of the 1940 Act states that
the national interest is adversely affected ``when investment companies
by excessive borrowing and the issuance of excessive amounts of senior
securities increase unduly the speculative character of their junior
securities [i.e., common stock].'' 15 U.S.C. 80a-1(b). Section 1(b)
further states that the Act is to be interpreted ``to mitigate and, so
far as is feasible, to eliminate the conditions enumerated in this
section which adversely affect the national public interest and the
interest of investors.'' Id.
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Congress created BDCs in 1980 as a specialized type of
closed-end investment company operated for the purpose of
providing capital for small, growing, and financially troubled
domestic operating companies. Congress recognized the need to
``avoid compromising needed protections for investors in the
name of reducing regulatory burdens.'' \3\ Under the 1940 Act,
the regulation of BDCs is the same as the regulation of
registered closed-end funds with modifications that generally
allow BDCs greater operating flexibility. \4\
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\3\ See H.R. Rep. No. 96-1341, at 22 (1980); S. Rep. No. 96-958,
at 5 (1980).
\4\ A BDC, for example, may issue more debt securities as a
percentage of total assets than other closed-end funds, may issue debt
in multiple classes, may issue long-term options and warrants, and is
subject to relaxed regulation of transactions with affiliates. See
Investment Company Act 61(a)(1), 61(a)(3), and 57(d), 15 U.S.C.
80a-60(a)(1), -60(a)(2), -(56)(d).
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From my perspective, increasing leverage for BDCs would
give rise to significant investor protection concerns. Section
18 of the 1940 Act requires open-end funds (including mutual
funds and ETFs) and closed-end funds to comply with 300 percent
asset coverage requirements. \5\ In comparison, BDCs must
comply with a 200 percent asset coverage requirement for senior
securities representing indebtedness (i.e., debt) and senior
securities that are stock (i.e., preferred stock). \6\
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\5\ Open-end funds are prohibited from issuing or selling any
``senior security'' other than borrowing from a bank and must maintain
300 percent asset coverage after any such borrowing. Investment Company
Act 18(f)(1), 15 U.S.C. 80a-18(f)(1). Section 5(a)(1) of the 1940 Act
defines ``open-end company'' as ``a management company which is
offering for sale or has outstanding any redeemable security of which
it is the issuer.'' 15 U.S.C. 80a-5(a)(1). Closed-end funds registered
under the 1940 Act are also required to have 300 percent asset coverage
for debt, but their ability to issue senior securities representing
indebtedness is not limited to bank borrowings, and they may issue
senior securities that are stock, subject to certain limitations and a
more liberal 200 percent asset coverage requirement, with both asset
coverage requirements being measured at the time of issuance. Unlike
open-end funds, BDCs and closed-end funds are required to maintain the
asset coverage at the time of issuance of senior securities and are
subject to limits on distributions to holders of the common stock and
repurchases of common stock if the asset coverage requirements are not
met. Investment Company Act 18(a)(1)(A), 15 U.S.C. 80a-18(a)(1)(A).
Section 5(a)(2) of the Investment Company Act defines ``closed-end
company'' as ``any management company other than an open-end company.''
15 U.S.C. 80a-5(a)(2).
\6\ See Investment Company Act 61(a)(1), 15 U.S.C. 80a-60(a)(1).
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For example, a BDC with assets worth $100 and no
liabilities can borrow $100 for $200 in total assets. If the
value of those assets subsequently falls 25 percent, then the
BDC holds assets worth $150 but still owes the lender $100.
Thus, the BDC's shareholders' equity dropped from $100 to $50.
Shareholders' equity declined by 50 percent although the value
of the BDC's assets declined only 25 percent, and the asset
coverage fell from 200 percent to 150 percent.
Reducing the required asset coverage, for example to 150
percent, would permit that same BDC to borrow $200, effectively
doubling its leverage, for $300 in total assets. If the value
of those assets subsequently falls 25 percent, then the BDC
holds assets worth $225 but owes the lender $200. Thus, the
BDC's shareholders' equity dropped from $100 to $25.
Shareholders' equity declined by 75 percent although the value
of the BDC's assets declined by 25 percent, and the asset
coverage fell from 150 percent to 112.5 percent.
Increasing BDC leverage increases the potential losses for
both holders of BDC common stock and BDC debt and preferred
stock. My concern is heightened because BDC common stock is
predominantly held by retail investors. Retail investors
account for nearly 70 percent of BDC common stock ownership.
\7\ In addition, retail investors account for an unknown
percentage of debt securities issued by BDCs. \8\
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\7\ This calculation is an average, weighted by total assets, of
72 active BDCs with securities registered under the Securities Act of
1933. Of this number, 21 are nontraded BDCs, and 51 are traded on
securities exchanges or over the counter. Commission staff calculated
this average internally using publicly available information on
institutional ownership. The institutional ownership percentage for
each BDC was subtracted from 100 percent to determine the retail
ownership percentage. A recent report on the BDC industry states that
the average institutional ownership of 46 exchange traded BDCs is 24.9
percent. This percentage is a simple average of the institutional
ownership percentage for each of the 46 BDCs and excludes ownership by
brokers and private bank/wealth management firms, as reported in
FactSet, a data service. See BDC Industry Investment Banking Weekly
Newsletter (Raymond James), July 15, 2016.
\8\ For example, since 2012, over a dozen BDCs have issued ``baby
bonds'' (i.e., fixed income securities issued in small denominations
and traded on a securities exchange) in $25 denominations. This
information is based on Commission staff review of Form N-2 filings by
BDCs with the Commission. BDCs register under the Securities Act of
1933 public offerings of their securities on Form N-2.
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Use of leverage in funds continues to be a significant
focus for the Commission and staff. In December 2015, the
Commission proposed a new rule regarding the use of derivatives
by mutual funds, ETFs, closed-end funds, and BDCs. \9\ SEC
staff is also focusing resources on examinations of ETFs'
compliance with applicable regulatory requirements, sales
strategies, trading practices, and disclosures, including
excessive portfolio concentration, primary and secondary market
trading risks, adequacy of risk disclosure, and suitability,
particularly in niche or leveraged/inverse ETFs. \10\
---------------------------------------------------------------------------
\9\ See ``Use of Derivatives by Registered Investment Companies
and Business Development Companies'', Investment Company Act Release
No. 31933, 80 FR 80883 (Dec. 28, 2015), https://www.sec.gov/rules/
proposed/2015/ic-31933.pdf.
\10\ See ``Office of Compliance Inspections and Examinations, SEC,
Examination Priorities for 2016'' (Jan. 11, 2016), https://www.sec.gov/
about/offices/ocie/national-examination-program-priorities-2016.pdf.
Leveraged ETFs are highly specialized investment vehicles that seek to
replicate the performance of an underlying index each day. For example,
a 3x ETF is designed to produce a daily return equal to three times the
return of a specified index. Thus, a 3x ETF can magnify the amount of
an investor's gain or loss. Leveraged ETFs are designed to achieve
their stated objectives on a daily basis; they are not designed for buy
and hold investors. See ``SEC Office of Investor Education and Advocacy
and Financial Industry Regulatory Authority, Investor Alert on
Leveraged and Inverse ETFs: Specialized Products With Extra Risks for
Buy-and-Hold Investors'' (Aug. 18, 2009), https://www.sec.gov/investor/
pubs/leveragedetfs-alert.htm.
---------------------------------------------------------------------------
Investment Advisers and Broker-Dealers. Investment advisers
and broker-dealers must comply with various regulatory
requirements when making a recommendation in connection with a
securities transaction or investment strategy involving
securities, including strategies utilizing derivatives and
leverage. For example, investment advisers must make a
reasonable determination that the investment advice provided is
suitable for the client based on the client's financial
situation and investment objectives. \11\ Similarly, a broker-
dealer recommending particular investments has an obligation to
only make suitable securities recommendations to their
customers, taking into account the particular circumstances and
investment goals of each investor. \12\ Heightened suitability
obligations, as well as enhanced account opening requirements,
apply to listed options. \13\ In addition, FINRA guidance
reminds members that leveraged ETFs typically are unsuitable
for retail investors who plan to hold them for longer than one
trading session, particularly in volatile markets, \14\ and
that members have certain obligations in connection with the
sale or recommendation of complex investment products,
including derivatives. \15\
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\11\ See ``Status of Investment Advisory Programs under the
Investment Company Act of 1940'', Investment Company Act Release No.
22579, 62 FR 15098 (Mar. 31, 1997), https://www.sec.gov/rules/final/ic-
22579.txt (citing ``Suitability of Investment Advice Provided by
Investment Advisers'', Investment Advisers Act Release No. 1406, 59 FR
13464 (Mar. 22, 1994)).
\12\ See, e.g., FINRA, ``Regulatory Notice 12-55: Suitability''
(Dec. 2012), http://www.finra.org/sites/default/files/NoticeDocument/
p197435.pdf (providing guidance on FINRA's suitability rule); FINRA,
``Regulatory Notice 11-25: Know Your Customer and Suitability'' (May
2011), http://www.finra.org/sites/default/files/NoticeDocument/
p123701.pdf (providing guidance on new FINRA Rule 2111). In addition,
there are enhanced suitability and disclosure obligations in connection
with penny stock transactions. See Exchange Act Section 15(h), 15
U.S.C. 78o(h) and Exchange Act Rules 3a51-1 and 15g-1 through 15g-100,
17 CFR 240.3a51-1, .15g-1 to 100. A small number of BDCs disclose
that because of their stock price, they are subject to the penny stock
rules.
\13\ A broker-dealer is also subject to FINRA Rule 2360(b)(16)
with respect to its suitability obligations and the opening of an
options account. More specifically, FINRA Rule 2360(b)(16) requires its
members to exercise due diligence to ascertain the essential facts
relative to a customer, his or her financial situation and investment
objectives when considering whether to open an account for that
customer to trade options. In addition, FINRA Rule 2360(b)(19) subjects
its members' recommendations to engage in options trading (including
whether to open an account and the subsequent recommendations for that
account) to heightened suitability obligations.
\14\ See FINRA, ``Regulatory Notice 09-31: Non-Traditional ETFS''
(June 2009), http://www.finra.org/sites/default/files/NoticeDocument/
p118952.pdf. See also FINRA, ``Regulatory Notice 12-03: Complex
Products'' (Jan. 2012), http://www.finra.org/sites/default/files/
NoticeDocument/p125397.pdf (providing guidance to firms about
heightened supervision of complex products, including, among others,
inverse or leveraged ETFs).
\15\ See FINRA, ``Regulatory Notice 12-03: Complex Products''
(Jan. 2012), http://www.finra.org/sites/default/files/NoticeDocument/
p125397.pdf. See also NASD, ``Notice to Members 03-71: Non-Conventional
Investments'' (Nov. 2003), https://www.finra.org/sites/default/files/
NoticeDocument/p003070.pdf (reminding members of their obligations when
selling ``nonconventional investments,'' such as asset-backed
securities, distressed debt and derivative products).
---------------------------------------------------------------------------
Securities margin accounts are also subject to a
comprehensive system of regulation. \16\ In general, any equity
security that is listed on a national securities exchange is
margin eligible. However, broker-dealers often have more
restrictive house-margin requirements where they may not extend
margin on certain securities such as low-priced equities. The
Commission staff does not maintain statistics on the number of
retail investors with margin accounts. We also understand that
not all retail investors who open margin accounts actually
purchase shares on margin (e.g., some investors may view such
accounts as overdraft protection).
---------------------------------------------------------------------------
\16\ See, e.g., Federal Reserve's Regulation T, 12 CFR 220.1 to
220.132; Exchange Act Rule 10b-16, 17 CFR 240.10b-16; FINRA Rules 2360
(Options); FINRA Rule 2264 (Margin Disclosure Statement); FINRA Rule
4210 (Margin Requirements). See also FINRA, ``Regulatory Notice 11-15:
Low-Priced Equity Securities'' (Apr. 2011), http://www.finra.org/sites/
default/files/NoticeDocument/p123431.pdf (reminding firms to consider
risks associated with low-priced equity securities when extending
credit in a strategy-based or portfolio margin account); FINRA,
``Regulatory Notice 09-53: Non-Traditional ETFS'' (Aug. 2009), http://
www.finra.org/sites/default/files/NoticeDocument/p119906.pdf (outlining
increased margin requirements for leveraged ETFs and associated
uncovered options).
Q.2. Please clarify your understanding of the jurisdiction of
the Department of Labor (DOL) with respect to retirement
accounts that are covered by the Employee Retirement Income
Security Act and its related rules and the SEC's jurisdiction
over broker-dealers or investment advisers that service those
accounts. To the extent it is relevant, please elaborate on the
comment you made about how the historic overlap of SEC and DOL
---------------------------------------------------------------------------
jurisdiction has been managed.
A.2. The DOL and the SEC are separate agencies with their own
perspectives, jurisdiction, and statutory authority. The SEC
oversees and enforces the Federal securities laws, including
the Exchange Act with respect to broker-dealers and the
Investment Advisers Act of 1940 with respect to investment
advisers. In general, a ``broker'' is any person engaged in the
business of effecting transactions in securities for the
account of others, a ``dealer'' is any person engaged in the
business of buying and selling securities for such person's own
account, and an ``investment adviser'' is any person engaged in
the business of advising others regarding securities for
compensation. \17\
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\17\ See Exchange Act 3(a)(4)-(5), 15 U.S.C. 78c(a)(4)-(5);
Investment Advisers Act 202(a)(11), 15 U.S.C. 80b-2(a)(11).
---------------------------------------------------------------------------
I am not in a position to describe in detail DOL's
jurisdiction under the Employee Retirement Income Security Act
of 1974 (ERISA) or the Internal Revenue Code of 1986. In
general terms, however, the statutes set minimum standards for
employee benefit plans and provide protections to plan
participants, including by prescribing certain requirements and
responsibilities for fiduciaries of those plans. \18\ A
``fiduciary'' includes a person who exercises discretionary
authority or control with respect to the management of a plan
or disposition of its assets, renders investment advice for a
fee or other direct or indirect compensation, or has any
discretionary authority or responsibility in the administration
of a plan. \19\
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\18\ See, e.g., 29 U.S.C. 1104 (standard of care for
fiduciaries).
\19\ See 29 U.S.C. 1002(21) (definition of fiduciary).
---------------------------------------------------------------------------
An SEC-regulated broker-dealer or investment adviser that
works with accounts governed by these statutes must comply with
their requirements in addition to what is demanded of the
financial institution under the Federal securities laws. For
example, advisory firms that provide advice as fiduciaries
under both the ERISA and SEC regulatory regimes must ensure
that their practices comply with the provisions for fiduciaries
under both regimes, which may include steps to address
differences between the two sets of requirements (e.g.,
different contract provisions for accounts subject to ERISA and
accounts not subject to ERISA).
The interplay between the DOL's regulations and the
requirements under the Federal securities laws, and the
application of different standards to the provision of
investment advice to retail investors, are important issues.
Consultation among the staff from the DOL and SEC has been
important to manage any conflicts and issues that may arise
related to the application of our separate regimes and
mandates. For example, in 2011 staff from the Division of
Investment Management issued a letter stating that disclosure
to participants and beneficiaries of certain plan and
investment-related information required by a rule under ERISA,
including performance information, would be treated as
satisfying the SEC's rules on mutual fund advertising,
notwithstanding differences among the requirements. \20\ More
recently, SEC staff consulted with DOL staff on the
Commission's security-based swap business conduct rulemaking
and the intersection of ERISA fiduciary status with the Dodd-
Frank Act business continuity provisions. \21\ Consultation
will continue to be important as the DOL's new conflict of
interest rule comes into effect.
---------------------------------------------------------------------------
\20\ See U.S. Dept. of Labor, SEC No-Action Letter (Oct. 26,
2011), www.sec.gov/divisions/investment/noaction/2011/dol102611-
482.htm.
\21\ Business Conduct Standards for Security-Based Swap Dealers
and Major Security-Based Swap Participants, Exchange Act Release No.
77617, 81 FR 29959, 29965-66 (May 13, 2016), https://www.sec.gov/rules/
final/2016/34-77617.pdf (clarifying that security-based swap dealers
and major security-based swap participants would not be ERISA
fiduciaries solely for complying with the Commission's external
business conduct rules). See also 29 CFR 2510.3-21(c)(2) (providing
that the provision of any advice to an employee benefit plan shall not
cause a security-based swap dealer or major security-based swap
participant to be deemed to be an ERISA fiduciary, where certain
conditions are met).
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------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
FROM MARY JO WHITE
Q.1. In a speech at Stanford you highlighted that fintech has
``the potential to transform how our markets operate in
virtually every respect--from streamlined market operations to
more affordable ways to raise capital and advise clients.''
I am interested in the approach the UK has taken to
fintech, such as Project Innovate. Do you expect the SEC will
explore ways to better understand fintech through roundtables
and other outreach efforts?
A.1. The staff continues to monitor fintech developments in the
securities industry and engage market participants to analyze
the potential effect of new technologies on market efficiency,
capital formation, and investor protection. This monitoring
includes direct outreach to and discussions with industry
participants, and staff is considering whether a roundtable or
other more formal outreach mechanisms will foster staff's
understanding of these issues.
For example, established and new firms have been exploring
the application of distributed ledger technology to potentially
improve or replace existing processes across the infrastructure
of the securities markets. Some of these firms appear to be
developing applications that could be implemented in the
clearance and settlement of securities. The staff has met with
several of these firms to discuss their activity in this
setting as well as consider potential regulatory implications.
The Commission has also solicited comment on the utility of the
new technology. For example, in response to a recent Advanced
Notice of Proposed Rulemaking and Concept Release on transfer
agent regulations, the Commission received industry feedback on
the possible use of distributed ledger technology by transfer
agents.
Q.2. In response to a question from Senator Toomey on Rule 18f-
4 and potential unintended consequences, you suggested that the
SEC is reviewing the comment letters and working to improve the
rule. I encourage you to consider the merits of the comment
letters on how best to account for the actual amount of market
risk exposure and work to tailor the rule accordingly.
Can you commit to doing so as part of the rulemaking
process?
A.2. To date, the Commission has received more than 180 comment
letters on proposed Rule 18f-4, and Commissioners and members
of the staff collectively have held more than 50 meetings with
commenters and other interested parties to discuss the
proposal. The staff is currently reviewing the comment letters,
and the Commission will carefully consider all of them,
including those urging the Commission to consider adjustments
to the proposed rule's exposure limitations, as the Commission
works to finalize Rule 18f-4.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
FROM MARY JO WHITE
Q.1. Chair White, the Commission recently updated its
interpretative release regarding automated quotations under
regulation NMS to allow for delays in price quotations. As part
of that release, the Commission announced that it would conduct
a study within 2 years regarding the effects of any intentional
access delays on market quality, including asset pricing, and
report back to the Commission with the results of any
recommendations. Based on that study, or earlier, the
Commission stated that it will ``reassess whether further
action is appropriate.''
Which office at the Commission will be responsible for
conducting the aforementioned study?
What factors will the Commission be monitoring to determine
if ``further action is appropriate'' before the aforementioned
study is completed?
What types of problems could arise due to the issuance of
the updated interpretative release that could prompt the
Commission to reassess its position?
Given that the issue of delayed quotes raises fundamental
concerns about the structure and efficiency of our financial
markets, why did you decide to approve IEX's application rather
than undertake a rulemaking?
A.1. In response to technological and market developments since
the adoption of Regulation NMS in 2005, as well as novel
proposals like IEX's exchange application, the Commission
proposed and subsequently adopted an interpretation under
Regulation NMS that ``immediate'' in the context of Regulation
NMS does not preclude a de minimis intentional delay--i.e., a
delay so short as to not frustrate the purposes of the trade-
through rule of Regulation NMS by impairing fair and efficient
access to an exchange's quotations. The Commission sought
public comment on its proposed update to its prior
interpretation of ``immediate'' in Regulation NMS, publishing a
draft for review and comment by investors, broker-dealers, and
other interested parties. These comments were carefully
reviewed and taken into account in preparing the final
interpretation.
The Commission's interpretation referenced a study to be
completed by Commission staff within 2 years regarding the
potential effects of intentional access delays on market
quality, including price discovery. That effort will involve
staff from the Commission's Division of Trading and Markets in
cooperation with the Division of Economic and Risk Analysis.
Examples of areas that staff may evaluate include potential
impacts on the national best bid and offer for equity
securities and volume and quotation characteristics of
exchanges with an intentional access delay. Through these
efforts, or earlier as it determines, the Commission will
reassess whether further action is appropriate.
As the Commission noted in its interpretation, however,
markets and market participants already deal with short
unintentional delays in the current system, generally as the
result of geographic or technology latencies. IEX's single
intentional access delay is within existing latencies
experienced by market participants as they route orders between
dispersed exchanges. At the same time, the importance of this
issue requires careful scrutiny, and the Commission staff will
gather data to inform the evaluation of any potential impact of
any intentional access delays, including those established by
IEX.
Q.2. According to some commentators, the Commission's recent
approval of IEX's application to be a national securities
exchange is vulnerable to court challenges.
Did you consult with the Commission's general counsel about
whether the Commission's order approving IEX's application was
lawful? If so, what was the conclusion?
A.2. Included among the responsibilities of the Office of the
General Counsel is the provision of legal counsel on regulatory
actions such as this one, offering explanation and analysis of
open legal questions as well as legal consequences of potential
Commission determinations and any associated legal risks. As
part of the standard process for considering such applications,
the General Counsel's office was consulted and provided its
guidance to the Division and the Commissioners' offices on a
range of questions and on the action that the Commission
ultimately undertook.
Q.3. Did you consider proceeding with a rulemaking to amend
Regulation NMS rather than proceeding with a de facto amendment
to Regulation NMS by approving the IEX's application to allow
for intentionally delayed price quotations?
A.3. In connection with its order granting IEX's exchange
registration application, the Commission did not amend any
definition or rule of Regulation NMS. Rather, in response to
technological and market developments since Regulation NMS was
adopted in 2005, the Commission issued an updated
interpretation of the word ``immediate'' as used in the
definition of automated quotation in Rule 600(b)(3) of
Regulation NMS.
While the Commission did afford an opportunity for notice
and comment by publishing a draft interpretation for comment,
and did take the comments it received into consideration, it
was not required to undertake a notice and comment rulemaking
when updating its prior interpretation of its own regulation.
Q.4. The SEC's proposed rule to limit the use of derivatives in
registered investment companies includes a requirement to
calculate a fund's use of derivatives based on gross notional
exposure. There is concern that this form of risk measurement
may lead to the unintended consequence of overweighting to
certain equities and moving away from commodities markets.
Commodities markets are critical for owners of actual
commodities who need liquid markets. Will you commit to
addressing this concern as part of the rulemaking process?
A.4. The Commission will carefully consider all of the comment
letters received as we work to finalize the proposed rule,
including comment letters addressing the proposed rule's use of
gross notional exposure. The proposed rule did not provide
differing treatment for equity and commodity derivatives. In
addition, as described in the proposing release, the Commission
staff's analysis indicated that it should be possible for funds
to pursue, in some form, almost all existing types of
investment strategies in compliance with the proposed rule.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM MARY JO WHITE
Q.1. Shareholder voting practices have changed dramatically
over the last decade. There is an increased use of proxy
advisory firms to provide analysis and proxy voting
recommendations. Today, two firms dominate the proxy advisory
industry. In 2014, the SEC issued guidance creating oversight
of proxy advisory firms for the first time.
I would like to know what activities the SEC is undertaking
to ensure this guidance is being followed?
A.1. Since the issuance of Staff Legal Bulletin 20, SEC staff
has been monitoring the changes that have been implemented by
proxy advisory firms and investment advisers in response to the
staff guidance.
The two largest proxy advisory firms now provide a
description of their policies with regard to the disclosure of
potential conflicts on their Web sites. In addition, while the
Commission does not comment on specific examinations, the SEC's
Office of Compliance Inspections and Examinations (OCIE)
announced examination priorities for 2015, which, among other
things, sought to examine select proxy advisory service firms,
and how they make recommendations on proxy voting and how they
disclose and mitigate potential conflicts of interest. OCIE's
examination priorities for 2015 also included reviewing
investment advisers' compliance with their fiduciary duty in
voting proxies on behalf of investors. OCIE's efforts regarding
this priority were incorporated into the ongoing Never-Before-
Examined Investment Company (NBE IC) Initiative launched in
April 2015. The NBE IC Initiative was conducted as focused,
risk-based examinations in a number of higher-risk areas,
including compliance programs. As one of the areas to be
reviewed within the compliance program, OCIE announced that it
would review the funds' portfolio proxy voting policies and
procedures.
Q.2. Do you believe proxy advisory firms use sufficient
resources to perform proper due diligence in their research and
vote recommendations?
A.2. The nature and amount of resources a firm uses to perform
research and make recommendations is largely a business
decision of the particular firm. A proxy advisory firm provides
advice to investors about securities, not unlike numerous other
types of analysts and advisors in the financial markets.
As you know, some registered investment advisers may choose
to retain proxy advisory firms to assist with the advisers'
proxy voting duties. When considering whether to retain or
continue retaining any particular proxy advisory firm to
provide proxy voting recommendations, the SEC staff has stated
that an adviser should ascertain, among other things, whether
the proxy advisory firm has the capacity and competency to
adequately analyze proxy issues, which could include, among
other things, the adequacy and quality of the proxy advisory
firm's staffing and personnel.
Q.3. How can SEC inspectors work to further ensure proxy
advisory firms and their work receive proper examination,
scrutiny, and is free of any conflicts of interest?
A.3. Proxy advisory firms that are registered investment
advisers under the Investment Advisers Act of 1940 are subject
to examination by OCIE. The SEC staff has historically
conducted, and continues to conduct, examinations of registered
investment advisers, evaluating many issues, including
advisers' compliance with their fiduciary obligations and how
they disclose and mitigate potential conflicts of interest.
Q.4. There has been several meetings conducted by the advisory
committee the SEC has set up to look at equity market
structures.
Do you believe that reforms to the market structures should
be comprehensive and significant or do you support a small and
piecemeal reform approach?
Are you satisfied with the advisory committee's results so
far?
What are the current goals of the advisory committee and
how and when will you complete those goals?
A.4. Addressing the issues of our current market structure
demands a continuous and comprehensive review that integrates
targeted enhancements with an expansive consideration of
broader changes. In February 2015, as part of our broader
market structure work, the Commission established the Equity
Market Structure Advisory Committee, comprised of diverse
experts to consider specific initiatives and potential
structural changes. The Committee was established to assist the
Commission in its comprehensive reviews of the structure of the
equity markets, and I have been very pleased with the progress
of the Committee's work over the past year.
The Committee as a whole has met six times to consider
issues such as the operation of Regulation NMS, the impact of
access fees and rebates widely used by stock exchanges, the
regulatory structure of trading venues, and the impact of
various market structure issues on customers. At the July
meeting, the full Committee voted on recommendations from two
of its subcommittees for an access fee pilot program and
trading venue regulatory reforms related to NMS plan governance
and self-regulatory organization proposals requiring technology
changes. I expect that the staff will be considering all of
these items and preparing its own recommendations for how the
Commission should take account of the Committee's work in these
areas. In particular, I expect that the staff will be working
to develop plans for an access fee pilot program for the
Commission's consideration.
At the Committee's most recent meeting on August 2, the
other two subcommittees presented their preliminary
recommendations to the full Committee. Specifically, the Market
Quality Subcommittee's recommendations focused on various
market quality and safety features, such as limit up-limit down
mechanisms and marketwide circuit breakers. The Customer Issues
subcommittee focused on issues concerning retail investors,
such as investor sentiment of equity market structure and
modifications to Rules 605 and 606 of Regulation NMS.
Maintaining and enhancing the high quality of the U.S.
equity markets is one of the Commission's most important
responsibilities. The Committee's work is an important part of
that and is of great assistance in our efforts to ensure that
the equity markets optimally meet the needs of investors and
public companies.
Q.5. A few months ago Senator Crapo and I held a hearing
looking at changes in the fixed-income markets and looking at
how regulators should work to keep the fixed-income markets
open and liquid. There are early signs that fixed-income
markets are becoming more fragile and less liquid than they
used to be. The U.S. Treasury Department has issued a request
for information from industry participants to deepen their
understanding about what is happening in the fixed-income
markets and the Federal Reserve is also examining this issue.
Because the mission at the SEC is to maintain fair,
orderly, and efficient markets, I would like to know if the SEC
recognizes the changes occurring in the fixed-income markets
and do you believe that future rules and regulations should be
evaluated for potential impacts on liquidity in the bond
markets before implementation?
A.5. Commission staff actively monitors developments in the
fixed-income markets, including changes in liquidity
conditions, whether driven by market conditions, regulatory
changes, or competitive forces. For example, in connection with
implementation of the Volcker Rule, Commission staff, along
with staffs of the Office of the Comptroller of the Currency,
Federal Reserve Board, Federal Deposit Insurance Corporation,
and the CFTC, monitors liquidity in the corporate bond market
and provides quarterly reports to the House Committee on
Financial Services.
Before the Commission adopts or implements any rule or
regulation, the initiative is carefully considered and
evaluated, taking into account public input to inform our
efforts. Among other things, this process allows for market
participants to identify concerns they may have about the
impact on liquidity. Any potential future rules or regulations
impacting the fixed income markets under the Commission's
jurisdiction would be subject to a similar process and would be
considered and evaluated in light of the Commission's ongoing
monitoring of evolution and developments in those markets.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT
FROM MARY JO WHITE
Q.1. Do you agree that competition among Nationally Recognized
Statistical Rating Organizations (NRSROs) is important to
protecting investors and that the SEC should seek to prevent
entrenchment of the largest incumbent rating agencies in
investor guidelines?
A.1. The Office of Credit Ratings, established pursuant to the
Dodd-Frank Act, assists the Commission in executing its
responsibility for protecting investors, promoting capital
formation, and maintaining fair, orderly, and efficient
markets. Congress stated that one of the objectives of the
Credit Rating Agency Reform Act is to improve ratings quality
by fostering competition in the credit rating agency industry,
and we support Congress' objective in a number of ways.
Pursuant to the Credit Rating Agency Reform Act, the staff
reports on the state of competition annually as part of the
Annual Report to Congress on NRSROs. As noted in the staff's
December 2015 Annual Report to Congress on NRSROs, \1\
comparing the number of ratings outstanding for established
NRSROs and newer (smaller) NRSROs may not provide a
comprehensive picture of the state of competition as
``outstanding'' ratings may not fairly reflect ``new issue''
rating activity. Instead, information relating to recent market
share developments in the asset-backed securities rating
category may provide a better gauge of how effectively newer
entrants are competing with more established rating agencies.
In that regard, some of the smaller NRSROs have built
significant market shares in the asset-backed securities rating
category, including U.S. commercial mortgage-backed securities.
Additionally, some of the smaller NRSROs are rating newer asset
classes, such as single-family rental securitizations and
marketplace lending securitizations. With respect to preventing
entrenchment of rating agencies in investor guidelines, as
discussed below, to reduce investors' reliance on credit
ratings, the Commission has adopted final amendments to remove
references to credit ratings in approximately 30 rules or
forms.
---------------------------------------------------------------------------
\1\ ``Office Of Credit Ratings, SEC, Annual Report on Nationally
Recognized Statistical Rating Organizations'' (Dec. 2015), https://
www.sec.gov/ocr/reportspubs/annual-reports/2015-annual-report-on-
nrsros.pdf.
Q.2. Will you commit to changing Rule 2a-7 to require a
---------------------------------------------------------------------------
reversion in investor guidelines to the term ``any NRSRO''?
A.2. On September 16, 2015, the Commission adopted amendments
to remove credit rating references in the principal rule that
governs money market funds, Rule 2a-7 of the Investment Company
Act of 1940, and in Form N-MFP, the form that money market
funds use to report information to the Commission each month
about their portfolio holdings. The amendments implemented
section 939A of the Dodd-Frank Act, which requires the
Commission to review its rules that require the use of an
assessment of creditworthiness of a security or money market
instrument and any references to or requirements in the rule
regarding credit ratings, remove any reference to or
requirement of reliance on credit ratings, and substitute in
those rules other standards of creditworthiness that are
determined as appropriate by the Commission. Under amended Rule
2a-7, a money market fund may invest in a security only if the
fund's board of directors (or its delegate, typically the
fund's adviser) determines that the security presents minimal
credit risks after analyzing, to the extent appropriate,
certain prescribed factors.
The amendments to Form N-MFP require a money market fund to
disclose NRSRO ratings that the fund uses in its evaluations of
portfolio securities. Specifically, a fund must disclose for
each portfolio security any NRSRO rating that the fund's board
of directors (or its delegate) considered in making its minimal
credit risk determination, as well as the name of the NRSRO
providing the rating. According to data submitted on Form N-MFP
as of June 30, 2016, approximately 16 percent of money market
funds report that they used NRSRO ratings in their credit risk
evaluations of the funds' portfolio securities.
Q.3. What is your authority to regulate the investor guidelines
of mutual funds and pension funds?
A.3. The Investment Company Act of 1940 (1940 Act) regulates
the organization of investment companies, including mutual
funds, which engage primarily in investing, reinvesting, and
trading in securities, and whose securities are offered to the
investing public. The 1940 Act was designed to protect
investors from certain abuses and requires full and fair
disclosure to the investing public of information about the
fund, including about its investment objectives, financial
condition, and its structure and operations, and prohibits an
investment company from changing its fundamental investment
policies without shareholder approval. The 1940 Act also limits
funds' issuance of debt and other senior securities, and
includes requirements related to valuation, redemptions of fund
shares, and dealings with service providers and other
affiliates. The Commission does not regulate pension funds.
Q.4. What other authorities does the SEC have to create a
ratings environment that fosters access to the best research
instead of allowing the entrenchment of incumbent NRSROs
through outdated investor guidelines?
A.4. The Commission began removing references to credit ratings
in Commission rules and forms in 2009 and accelerated that
process after the enactment of section 939A of the Dodd-Frank
Act. To date, the Commission has adopted final amendments to
remove references to credit ratings in approximately 30 rules
or forms. For example, as noted above, the Commission on
September 16, 2015, adopted amendments to remove credit rating
references in the principal rule that governs money market
funds, Rule 2a-7 under the Investment Company Act of 1940, and
Form N-MFP, the form that money market funds use to report
information to the Commission each month about their portfolio
holdings. In these amendments, the Commission eliminated
requirements that limited money market funds to investing in
securities that had received certain NRSRO ratings and instead
requires that a money market fund invest only in securities
that the fund's board of directors (or its delegate, typically
the fund's adviser) has determined present minimal credit risks
after analyzing, to the extent appropriate, certain prescribed
factors.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM MARY JO WHITE
Q.1. I'd like to ask about the SEC's recent grant of exchange
status to IEX.
Does the SEC expect that other exchanges will respond to
the newly approved speed bump with similar innovations?
If so, how will this impact the securities market?
In approving IEX's application, the SEC issued staff
guidance stating that ``delays of less than a millisecond are
at a de minimus level that would not impair fair and efficient
access to a quotation . . . '' but that some intentional delays
could be ``unfairly discriminatory, not an appropriate or
unnecessary burden on competition, and otherwise consistent
with the Act.'' Given this framework, how would the SEC
evaluate an intentional delay that did not apply consistently
and equally to all users of the exchange that implemented a
delay?
Do the issues raised by IEX's successful application to
become an exchange merit a review of Regulation NMS that is
``comprehensive and part of formal rule making,'' as former SEC
Commissioner Paul Atkins has called for?
A.1. In light of IEX's exchange registration application and
technological and market developments since the adoption of
Regulation NMS, the Commission decided to revisit its
interpretation of the term ``immediate'' under Regulation NMS.
The interpretation is applicable to all exchanges and provides
that, solely in the context of determining whether a trading
center maintains an ``automated quotation'' for purposes of
Rule 611 of Regulation NMS, the Commission does not interpret
the term ``immediate'' by itself to prohibit a trading center
from implementing an intentional access delay that is de
minimis--i.e., a delay so short as to not frustrate the
purposes of the trade-through rule of Regulation NMS by
impairing fair and efficient access to the exchange's
quotations. While I cannot predict how other exchanges will
react, the Commission's interpretation is equally applicable to
them. Whether and, if so, how multiple access delays will
impact the securities markets is something that the
Commission's staff will monitor and consider, if such delays
are ultimately implemented. The Commission's interpretation
noted that a study will be completed by Commission staff within
two years regarding the potential effects of intentional access
delays on market quality, including price discovery.
As noted in the interpretation, any exchange that proposes
to adopt an intentional access delay must do so through a rule
filing of the exchange, which must be filed with the Commission
and published for notice and comment by the public.
Importantly, the interpretation does not change the existing
requirement that, prior to being implemented, an intentional
delay of any duration must be fully disclosed and codified in a
written rule of the exchange that has become effective pursuant
to section 19 of the Securities Exchange Act of 1934 (Exchange
Act), where the exchange met its burden of articulating how the
purpose, operation, and application of the delay is consistent
with the Exchange Act and the rules and regulations thereunder
applicable to the exchange. If the Commission cannot find that
a proposed access delay is consistent with the Exchange Act, it
would disapprove the proposal, rendering moot the issue of
whether a quotation with such a delay is protected. Generally,
the Commission would be concerned about access delays that were
imposed only on certain market participants or intentional
access delays that were relieved based upon payment of certain
fees.
The general issues surrounding IEX's exchange application,
notably whether exchanges with intentional access delays can
maintain protected quotations, has been addressed by the
Commission's interpretation. Nevertheless, based on the results
of the staff's study or earlier as it determines, the
Commission will reassess whether further action is appropriate.
Q.2. I'd like to talk about the SEC's rulemaking schedule. The
SEC's mission is to ``protect investors, maintain fair,
orderly, and efficient markets, and facilitate capital
formation.'' Unfortunately, as former SEC Commissioner Dan
Gallagher has said, ``issues specific to small business capital
formation too often remain on the proverbial back burner. This
lack of attention doesn't just harm small business; it also
harms investors and the public at large.'' Is there a danger
that the SEC's focus on completing its various mandated
rulemakings makes it difficult to fulfill its mission to
facilitate capital formation?
What is the SEC currently doing to focus on the ``capital
formation'' prong of its mission, in particular for smaller
businesses?
Where are new areas that the SEC can explore to expand
access to capital? For example, many have sensibly called to
expand the definition of ``accredited investor'' to encompass
sophisticated investors.
While the SEC does have an annual Government-Business Forum
on Small Business Capital Formation, the SEC rarely acts on
these recommendations, especially without Congressional
prodding. Can you commit that the SEC will seriously evaluate
every recommendation from the forum next year?
A.2. The Commission is deeply committed to the priority of
facilitating capital formation for small businesses. The SEC's
rules provide small and emerging companies with a range of
options for raising capital, and it is important to assess
whether those options are meeting their needs, in light of
their business models and capital needs, while providing strong
investor protections that promote confidence in the markets.
As I mentioned in my written testimony, the SEC has
completed all of the rulemakings directed by the JOBS Act,
which resulted in significant changes to the avenues for
capital formation in the securities markets, especially for
smaller issuers. In addition to statutorily mandated
rulemakings, we also engage in discretionary rulemakings and
other initiatives to promote capital formation. For example,
the Commission last year issued a proposal to amend rules for
smaller and intrastate securities offerings that would help
facilitate State-based crowdfunding and smaller regional
securities offerings by smaller companies.
Another important initiative is the pilot program to widen
the minimum quoting and trading increments--or tick sizes--for
stocks of some smaller companies. Following a study directed by
the JOBS Act, the Commission last year approved a proposal,
submitted in response to a Commission order, by the national
securities exchanges and the Financial Industry Regulatory
Authority (FINRA) for a 2-year pilot program. The SEC plans to
use the pilot program to assess whether wider tick sizes
enhance the market quality of these stocks for the benefit of
issuers and investors. The pilot is scheduled to begin on
October 3, 2016.
We are committed to our mission of facilitating capital
formation for all businesses, large and small, and we
understand it is particularly important to hear the views of
small business owners, investors, and other stakeholders in the
small and emerging business community. As you note, the SEC
hosts an annual forum focusing on small business capital
formation, called the Government-Business Forum on Small
Business Capital Formation (Small Business Forum). This forum
has assembled annually since 1982, as mandated by the Small
Business Investment Incentive Act of 1980, and provides a
platform to highlight concerns related to small business
capital formation and to consider the ways in which these
concerns can be addressed. Every year, the Small Business Forum
seeks to develop recommendations for Government and private
action to facilitate small business capital formation.
Further, twice during my time as Chair, the SEC has renewed
the charter for its Advisory Committee on Small and Emerging
Companies (ACSEC). The ACSEC includes expert members from
across the small business spectrum and provides the SEC with
valuable recommendations and input. Pursuant to its charter,
the ACSEC provides advice on our rules, regulations, and
policies as they relate to:
capital raising by emerging privately held small
businesses and publicly traded companies with less than
$250 million in public market capitalization through
securities offerings, including private and limited
offerings and initial and other public offerings;
trading in the securities of emerging companies and
smaller public companies; and
public reporting and corporate governance
requirements of emerging companies and smaller public
companies.
Both the Small Business Forum and the ACSEC help ensure
that the views of small businesses, investors, and other
stakeholders in this community are clearly heard here at the
SEC, and their recommendations are considered thoroughly. For
example, we recently proposed amendments to the ``smaller
reporting company'' definition that would expand the number of
companies that qualify as smaller reporting companies, thus
enabling them to provide certain existing scaled disclosures
under Regulation S-K and Regulation S-X. This change was a
recommendation of both the Small Business Forum and the ACSEC.
You also asked about the ``accredited investor''
definition. In another important step for modernizing the
private offering market, the SEC published a staff report in
December 2015 regarding this definition. The report analyzes
various approaches for modifying the accredited investor
definition and provides staff recommendations for potential
updates and modifications. The report recommends that the SEC
consider additional measures of sophistication for individuals
to qualify as accredited investors (other than looking solely
at income and net worth). The report also evaluates the impact
that potential changes to the definition would have on the size
of the accredited investor pool.
In July 2016, the ACSEC provided recommendations to the SEC
regarding the accredited investor definition. I have directed
the staff to prepare recommendations for the SEC on whether and
how the definition should be modified, and the recommendations
provided by the ACSEC and the SEC's Investor Advisory
Committee, as well as all of the comments we are receiving in
response to the report, will help inform the next steps.
In addition to our rulemaking initiatives and our continued
engagement with the Small Business Forum and ACSEC and their
respective recommendations, SEC staff routinely engages with
the public and companies on questions of small business capital
formation. For example, staff in the Division of Corporation
Finance's Office of Small Business Policy answers questions
from market participants on a daily basis about disclosure and
other issues relating to smaller public companies and about
limited, private, and intrastate offerings of securities. This
exchange is an important part of the work we do on behalf of
investors and issuers involved in smaller businesses.
Q.3. I'd like to discuss the marketplace online lending
ecosystem, which has grown significantly as of late.
My understanding is that SEC regulations require online
marketplace lenders such as Proper and Lending Tree to update
their regulatory filings with the SEC every week or so. Do you
believe this is the most effective way to regulate these
companies?
A.3. The Federal securities laws are designed to protect
investors in connection with the offer and sale of securities.
Those investor protections include disclosure requirements and
antifraud provisions that hold companies responsible for
providing false or misleading information to investors.
Obtaining money from investors to fund borrower loans
through an online lending platform involves the offer and sale
of securities. These offers and sales are subject to the same
registration provisions of, and can take advantage of the same
exemptive provisions from, the Securities Act of 1933 as any
other company engaging in an offering of their securities,
including ``brick and mortar'' lenders. The requirements for
updating the information provided to investors is the same as
those for other companies engaged in the offer and sale of
securities.
Commission staff has worked with online marketplace lenders
to help them meet registration and disclosure requirements. For
example, staff in the Division of Corporation Finance consulted
with online marketplace lenders as they crafted a structure to
fund loans and sell notes in a manner compliant with the
Federal securities laws. As with other companies engaging in
continuous registered offerings of securities under the Federal
securities laws, these companies have an obligation to provide
disclosure to investors about the securities being acquired.
Q.4. Is the SEC exploring alternative means of regulating
online marketplace lenders that do not involve such a robust
filing requirement? Would any of these changes require
statutory authorization?
A.4. The Commission and the Federal securities laws provide a
number of ways companies can raise capital, with different
disclosure and reporting standards depending on who they sell
to and how much they raise. To date, the need for an
alternative system to regulate online marketplace lenders is
not apparent based on the practices we have observed in the
industry.
When marketplace lenders seek to access the public capital
markets, as with any other company, they must comply with the
registration and disclosure requirements of the Federal
securities laws. I believe that investors need certain
disclosures, including about the risk of loss of all principal
and interest upon a borrower's default, to make an informed
investment decision.
Q.5. Would there be merit to creating a broad safe harbor for
marketplace online lenders which scales registration
requirements to reflect their unique business model?
A.5. I believe the Federal securities laws provide a number of
options already, and it is not clear to me at this time that
the business model of marketplace lenders would merit its own
registration regime. Marketplace lenders are currently able to
raise capital in private and public markets.
Q.6. Some have criticized the SEC's treatment of machine-
readable, open data, including for its implementation of a
dual-filing requirement for both XBRL and old fashioned
documents, and a slow transition toward allowing the filing of
inline XBRL, which is both human-readable and machine-readable.
In addition to this step, how does the SEC plan to modernize
its treatment of Government data and transition toward open-
data?
A.6. The Commission has a longstanding commitment to using
developments in technology and electronic data communications
to facilitate easier access to information. Machine-readable
financial market data enhances our rulemaking and market-
monitoring activities and makes disclosures more usable for the
public.
What to disclose, and how to disclose it, are vital
questions that we ask in any rulemaking that involves the
reporting of information to the Commission. Thus, in several
recent rulemakings, the Commission has either proposed or
adopted disclosures that would be made in a structured format.
For example, in adopting Regulation Crowdfunding, the
Commission required Form C (containing issuer disclosures) to
be filed in eXtensible Markup Language (XML). Similarly, the
final rule amendments to Regulation AB required asset-level
disclosures in XML. In addition, in the recently issued
Regulation S-K concept release, the Commission specifically
sought comment on whether to require registrants to provide
additional disclosures in a structured format.
I am also committed to exploring other ways to enhance the
availability and usability of structured data. For example,
staff has posted on the Commission's Web site reformatted
financial information that was reported by companies in their
filings in XBRL format. Specifically, staff has combined and
organized as-reported XBRL data into structured file sets to
facilitate improved data analysis by the public.
Finally, in addition to promoting the public availability
and usability of structured data, the SEC has been proactively
incorporating structured data into its own internal processes.
Structured data enhances our rulemaking and market-monitoring
activities; for example, it is a valuable input into several
risk assessment tools that our Division of Economic and Risk
Analysis, Division of Enforcement, and Office of Compliance
Inspections and Examinations have been jointly developing and
deploying to enhance the effectiveness of Commission staff in
detecting wrongdoing.
Q.7. Australia has created a Standard Business Reporting regime
(SBR) that allows a company to complete one filing to comply
with multiple regulatory disclosure requirements. This has
extensively reduced the amount of required data fields, saving
the Australian economy more than $1 billion annually by one
estimate. Could a similar regulatory regime be possible in the
United States? Have you discussed this possibility with other
regulators?
A.7. It is my understanding that Standard Business Reporting
(SBR) is an Australian Government initiative that was
introduced in 2010 to simplify the business reporting
obligations of companies that report to the Australian
Government. SBR uses standard terms that are built into
software technologies to facilitate the dissemination of
business and accounting information across participating
Government agencies. While it may be possible to implement a
similar regulatory regime among regulatory authorities in the
United States, such a regime likely would involve significant
planning and close coordination among various regulatory
agencies with different missions and priorities and may require
statutory changes to implement. I have not discussed this
possibility with fellow regulators.
The SEC's disclosure rules require companies that offer and
sell securities to the public and that are required to file
periodic reports with the Commission to provide information
about their business and financial condition, among other
things. The staff of the Division of Corporation Finance is
engaged in a broad-based review of our disclosure rules to
determine how we can make our requirements more effective for
investors and companies. The Commission has issued releases
resulting from this review on a variety of topics, including a
concept release on business and financial disclosures required
by Regulation S-K. Among the topics addressed in the concept
release is the use of data tagging to facilitate disclosure and
review of information. The staff is currently considering the
comments received on the concept release.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM MARY JO WHITE
Q.1. Are you concerned by the fact that issuance of private
stock has now outstripped public shares sold to all retail
investors, in terms of new issuance? He asked this question
during the hearing but would like to follow up with QFRs on the
same topic with the following two questions.
What are the long term implications of this shift?
What if anything is the SEC doing about this trend, to try
to stimulate IPOs?
A.1. As you note, in recent years, the size of the private
capital raising market in terms of the total number of
offerings conducted and dollar amounts raised has outpaced the
size of registered securities offerings. While the long term
implications of the current trend are not entirely clear, it is
the responsibility of the Commission to ensure that investors
are protected, whether in public or private markets, and that
issuers have a range of means to raise the capital they need to
fuel their businesses.
Specifically, a robust private capital raising market must
provide all investors--irrespective of their income or net
worth--with investment opportunities and strong investor
protections. In implementing its JOBS Act mandates, the SEC
created new and revitalized existing exemptions for capital
raising options for companies and investment opportunities for
investors, including rules that allow companies to generally
solicit investors in certain private offerings, conduct
securities-based crowdfunding offerings, and raise capital
pursuant to an updated and expanded Regulation A. The fact that
companies are increasingly relying on these and other avenues
for capital is consistent with our goal of promoting capital
formation by providing issuers a diverse range of capital-
raising mechanisms backed with strong investor protections.
In addition to creating new avenues for capital formation,
the JOBS Act included provisions that created a new category of
companies in registered offerings, called ``emerging growth
companies'' (EGCs). These provisions provided a number of
accommodations for companies that qualify as EGCs.
Since enactment of the JOBS Act, SEC staff has issued
detailed guidance on the EGC-related provisions and procedures
to assist companies in navigating the so-called IPO on-ramp. To
date, the SEC has received over 1,100 confidential submissions
of draft registration statements by EGCs seeking to conduct a
registered initial public offering.
Having an effective disclosure regime is critical for
capital formation and investor protection. In late 2013, based
in part on the results of a JOBS Act mandated report on the
disclosure requirements for companies included in Regulation S-
K, I directed SEC staff to develop specific recommendations for
updating our rules that dictate what a company must disclose in
its filings. The overall goal of the disclosure effectiveness
initiative is to comprehensively review our disclosure
requirements and to make recommendations to update those
requirements to make disclosure more meaningful, accessible,
and efficient for investors. Last year, as part of this review,
the SEC published a request for comment on what investors,
companies, and market participants would like to see with
respect to the form and content of financial statement
disclosures by entities other than the registrant under
Regulation S-X. Additionally, this year as part of the
disclosure effectiveness initiative, as well as to facilitate
implementation of the Fixing America's Surface Transportation
(FAST) Act, the SEC issued a broad-based concept release
seeking input from investors, issuers, and other affected
market participants on our business and financial disclosure
requirements, proposed rules to modernize the SEC's disclosure
requirements and policies for mining properties, and, most
recently, proposed amendments to address outdated and redundant
disclosure requirements while continuing to require companies
to provide investors with the information they need to make
informed decisions.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM MARY JO WHITE
Q.1. Chair White, last year, NASDAQ and NYSE filed petitions
for rulemaking asking the SEC to promulgate rules to increase
transparency around short selling. Other groups supported those
petitions as well. While short selling can be important for
liquidity and hedging, it is also important to ensure an
equitable disclosure regime for short and long investors. As
you know, there is currently more disclosure required for long
positions.
Can you please comment on the status of these petitions?
Does the SEC plan to act on this issue?
A.1. Extensive short sale data is currently publicly available,
free or on a fee basis, including daily short sale volume and
transaction data, short interest data, and fails to deliver
data. The Commission staff has worked with the self-regulatory
organizations (SROs) to make short sale data available to the
public, including aggregate daily short selling volume in
individual equity securities; on a 1-month delayed basis,
information regarding individual short sale transactions in
exchange-listed equity securities; and semimonthly statistics
on short interest. The Commission also publishes on its web
site ``fail-to-deliver'' information semimonthly for all equity
securities.
I am committed to ensuring that short sale data strikes the
right balance between disclosures necessary to protect
investors while preserving the benefits of price discovery and
liquidity that short selling can bring to the market. In
comparing disclosure regimes for short and long investors, it
is important to consider the different purposes that such
requirements would seek to address. Most notably, public
disclosure of long positions provides information regarding
persons that may have potential influence over, or control of,
the issuer. Similar disclosure of short positions would not
provide such information.
The Commission staff continues to consider, as part of
Dodd-Frank Act section 929X and in conjunction with the June
2014 staff study of real-time short sale disclosure required by
the Dodd-Frank Act, whether additional transparency may be
warranted. In that context, the Commission staff also takes
into account feedback from all market participants, including
the petitions from NASDAQ and NYSE.
Q.2. Over the past few years, investors and market participants
have experienced disruptions in the timely dissemination of
public market data via the Securities Information Processors or
SIPs, operated by various exchanges, including at NASDAQ in
2013. After the NASDAQ glitch, which shut down trading on
NASDAQ listed stocks for three hours, you convened a meeting
with exchange CEOs to discuss how to improve resiliency. These
same entities sit on the governance committee overseeing our
current market structure. Yet SIP outages affect the entire
stock and options markets, and so it seems to me that entities
who must make the decisions about whether or not to invest in
the public data feeds and make necessary improvements to vital
market infrastructure ought to not be the only voice in the
room. While the current set of recommendations may be
insufficient, the Equity Market Structure Advisory Committee
has recommended changes to the governance structure. Would you
agree that it is time to update the governance structure for
NMS Plans and the operating committee?
A.2. NMS plan governance is one of the many important topics
the Commission currently is assessing as part of its broad-
based review of equity market structure. For example, the
Equity Market Structure Advisory Committee at its July 8, 2016,
meeting recently made a number of recommendations to the
Commission relating to trading venues regulation. \1\ Those
recommendations include expanding the role of NMS plan advisory
committees to provide them with a formal vote on any matter on
which the operating committee votes, as well as to initiate
their own recommendations to the operating committee, so as to
make NMS plan advisory committees more significant, formalized,
and uniform. \2\ I expect the Commission will give these
recommendations full consideration as it considers governance
structure changes in NMS plans.
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\1\ The recommendations can be found at the Equity Market
Structure Advisory Committee's spotlight page. See ``Equity Market
Structure Advisory Committee Telephone Meeting'', SEC.gov (July 8,
2016), https://www.sec.gov/video/webcast-archive-player.shtml?
document_id=070816emsac.
\2\ See id.
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As we assess possible changes to the governance structure
for NMS plans, it is important to bear in mind that such plans
serve important regulatory purposes, such as ensuring that
accurate and reliable consolidated market data is widely
available to investors, that our markets have robust mechanisms
to protect against excessive volatility, and that SROs can
effectively surveil the markets. At the same time, I recognize
the importance of incorporating the views of broker-dealers and
other stakeholders in the operation of an NMS plan at an early
stage of the decision-making process. Early-stage engagement
may, among other things, enhance the quality of the proposals
developed by the NMS plans as well as facilitate more swift
adoption and implementation. Accordingly, enhancements to the
governance of NMS plans designed to ensure that the views of
key stakeholders are taken into account are among the
significant issues under consideration.
Q.3. Chair White, you previously announced as part of the
Regulatory Flexibility agenda for the Spring of 2016 that a
potential rulemaking to shorten the settlement time for
securities would be complete by the end of June of this year.
Can you please give me an update on the status of this
rulemaking?
A.3. I and my fellow Commissioners have publicly stated our
support for efforts to shorten the settlement cycle from the
third business day after the trade date to no later than the
second business day (T+2). Shortening the settlement cycle
should yield important benefits, including reduced counterparty
risk, decreased clearing capital requirements, reduced
procyclical margin and liquidity demands, and increased global
harmonization. While current SEC rules do not prevent the
implementation of T+2, updates to those rules could help
support the move to T+2 by all market participants, as well as
to shorter settlement cycles potentially in the future. I
therefore have instructed Commission staff to develop a
proposal to amend SEC Rule 15c6-1(a) to require settlement no
later than T+2 for Commission consideration this year. In
developing the proposal, Commission staff has been working with
various market participants regarding the key issues
surrounding shortening the settlement cycle to T+2. I expect
that the proposal will be published in the fall of this year.
While this initiative complements the work of the
securities industry and the SROs, it should not be seen as a
precondition or an impediment to the ongoing industry progress
to shorten the settlement cycle. There has been a tremendous
amount of work done to date by a broad range of market
participants toward achieving the transition to T+2, and this
effort must continue expeditiously to completion.
Q.4. On July 21, 2015, Sen. Mike Crapo and I wrote to you to
ask when the Commission would fix its duplicative requirement
for public companies to file two versions of every financial
statement--first as a document, then the same information again
in the XBRL open data format. We pointed out that collecting
two versions (1) distracted Commission staff from enforcing the
quality of the data version; (2) delayed the broader
modernization of the Commission's whole corporate disclosure
system from document-focused to data-centric; and (3) imposed
unnecessary costs on public companies, who must check the two
versions against each other. On August 19, 2015, you responded
that the Commission staff were ``developing recommendations to
allow filers to submit XBRL data inline as part of their core
filings.'' I was pleased to see that just last week, June 13,
the Commission issued an order allowing (but not requiring)
public companies to file a single version of their financial
statements, using the inline XBRL format, which is both human-
readable and machine-readable. The order expires in March 2020.
What do you expect the Commission will learn from this
temporary period of voluntary inline XBRL filing?
A.4. I believe that inline XBRL has the potential to provide a
number of benefits to filers and users of structured financial
information. For example, inline XBRL could decrease filing
preparation costs, improve the quality of structured data, and,
by improving data quality, increase the use of XBRL data by
investors and other market participants.
As the Commission's exemptive order noted, permitting the
voluntary use of inline XBRL allows the Commission to further
assess the usefulness of inline XBRL and can facilitate further
development of inline XBRL preparation and analysis tools,
provide investors and companies with the opportunity to
evaluate its usefulness, and help inform any future Commission
rulemaking in this area.
Additionally, a voluntary period of inline XBRL filing can
allow the Commission to review and evaluate whether our beliefs
regarding the potential benefits of inline XBRL are correct. It
can also provide us with additional input to inform our
consideration of whether to adopt a mandatory rule and, if so,
whether the rule should include certain exemptions or phase-in
provisions. A voluntary filing period can also provide an
opportunity for any technological or practical issues
associated with inline XBRL to be identified and resolved prior
to potentially requiring the use of inline XBRL.
Q.5. Although I am pleased to see that the Commission has
finally announced a pathway toward full open data for corporate
financial statements, I am disappointed that the Commission did
not publish the data structure (known as a specification) for
inline XBRL filing in advance, to give public companies,
disclosure management software providers, data consumers and
other stakeholders a chance to review and comment on it.
Instead, the Commission published the specification and issued
the order simultaneously, leaving public companies and software
providers scrambling to review the specification, and creating
a delay before inline XBRL filing can begin and uncertainty
about the impact of this change on data consumption.
This failure to publish a data structure in advance of the
legal order contrasts with the approach taken by the Treasury
Department in implementing the DATA Act of 2014, which I
introduced in the Senate and which requires the Federal
Government to adopt a standardized open data structure for its
own financial information. The DATA Act requires standardized
financial reporting by Federal agencies to begin in May 2017,
but the Treasury Department has already published several
versions of the data structure for review and comment by
agencies, software firms serving them, and other interested
parties.
For future changes to the data structures it uses to
collect securities disclosures, will the Commission commit to
publishing such data structures at least 60 days in advance of
any legal order permitting or mandating their use?
A.5. The Commission seeks to provide the public with adequate
notice regarding technical implementation issues associated
with structured data. For example, when the Commission in
December 2015 proposed a new rule specifying the form and
manner with which security-based swap data repositories (SDRs)
will be required to make security-based swap data available to
the Commission--specifically, requiring SDRs to make data
available using schemas published on the Commission's Web site
and referencing international industry standards Financial
products Markup Language (FpML) and Financial Information
eXchange Markup Language (FIXML)--the Commission also posted
for public comment the related technical schemas. Similarly,
draft copies of amendments to the EDGAR Filer Manual are
generally posted on the Commission's Web site in advance of
Commission approval to help filers, agents, and software
developers prepare for potential technical changes related to
filing on EDGAR. More generally, Commission staff proactively
engages with the software and services vendor community,
inquiring about their capabilities and readiness with respect
to various matters that the Commission has indicated an
interest in potentially pursuing, such as inline XBRL, the IFRS
taxonomy, or structuring of data outside the financial
statements.
With respect to the inline XBRL exemptive order, the
Commission was permitting voluntary implementation, rather than
requiring compliance by a date certain. One of the objectives
of this voluntary filing program is to provide investors,
preparers, and third party service providers a means to assess
the technical requirements and provide feedback to staff during
the voluntary period, in advance of any determination whether
to require issuers to file using Inline XBRL. Delaying
effectiveness of the exemptive order to provide advance notice
of the technical requirements would have impeded issuers and
preparers from voluntarily participating in the program and
providing valuable feedback when ready. In this regard, I note
that the first inline XBRL filing was submitted to the
Commission on July 1, three weeks after the exemptive order was
issued.
Q.6. Financial statements are filed as part of larger periodic
filings under the Exchange Act of 1934. Forms 10-K and 10-Q
include a great deal of information beyond the financial
statements that today is expressed in plain-text document form,
not open data. For example, Exhibit 21 to the 10-K requires a
public company to identify its subsidiaries. This list of
subsidiaries is plain text, not electronic data fields, which
makes it very difficult for investors' software to
automatically identify a company's subsidiaries and link them
to other databases. But by adopting inline XBRL, the Commission
is opening an easy avenue to transform more of the periodic
filings from plain text into open data. Companies will be
filing each Form 10-K and 10-Q as a single human-readable HTML
document with embedded electronic tags that identify particular
data fields. At first, only the financial statements will be
tagged, but the Commission could add new tags to information
such as Exhibit 21 to make such information electronically
searchable as open data. Do you expect that the adoption of the
inline XBRL approach for financial statements will start a
broader modernization of the Exchange Act filings, with
electronic tags being added for other types of information
contained in them?
A.6. What to disclose, and how to disclose it, are vital
questions that the Commission must ask in any rulemaking that
involves the reporting of information to the Commission. Thus,
in several recent rulemakings, the Commission has either
proposed or adopted disclosures that would be made in a
structured format. For example, in Regulation Crowdfunding, the
Commission required Form C (containing certain issuer
disclosures) to be filed in eXtensible Markup Language (XML).
Similarly, the final rule amendments to Regulation AB required
asset-level disclosures in XML. In addition, a number of
recently proposed rules also have included structured
information, including those on executive compensation and
enhanced reporting by investment companies.
In addition, the Commission has been considering whether to
extend structuring requirements in its existing rules. In the
recently issued Regulation S-K concept release, the Commission
specifically sought comment on whether to require registrants
to provide additional disclosures in a structured format,
including whether there are categories of information in Parts
I and II of Form 10-K or in Form 10-Q that investors would want
to receive as structured data. We look forward to input from
commenters to help us assess investor interest in the
structuring of existing disclosures outside the financial
statements.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
FROM MARY JO WHITE
Q.1. I am very concerned that the SEC, under your leadership,
has dropped the issue of political spending from its agenda.
When it comes to spending on political activity, only
roughly 2.2 percent of all public companies in the United
States make such disclosures voluntarily. \1\ There's been a
dramatic increase in spending by corporations that do not
disclose their donors in recent years from less than $5.2
million in 2006 to over $300 million in the 2012 Presidential
election cycle.
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\1\ Calculation made using number of public companies that
disclose corporate political spending divided by total number of public
companies. Dan Strumpf, ``U.S. Public Companies Rise Again'', The Wall
Street Journal, Markets, 5 February 2014, http://www.wsj.com/articles/
SB10001424052702304851104579363272107177430.
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As you mentioned in the hearing, 50 percent of the S&P 500
companies disclose their political spending voluntarily.
However, in a cursory glance of a handful of those companies,
the disclosure of this type of spending varies widely. Some
public companies disclose the topline information about a
company's policy and political priorities while others list
specific amounts donated for races that range from candidates
running for President to officials at the State and local
level.
In 2012, included on the Regulatory Plan and Unified
Agenda, in a Proposed Rule State, was ``the Disclosure
Regarding the Use of Corporate Resources for Political
Activities.''
In the Spring 2013, consideration of the political
disclosure rule was missing from the Update to the Unified
Agenda. Instead, the agenda item had been relegated to the list
of Spring 2013 Long Term Actions. This move coincided with your
arrival at the SEC.
In the Fall of 2013, the political disclosure rule was
omitted altogether from both the Unified Agenda as well as the
Long Term Actions. This omission was several months into your
first year as SEC Chair.
Considering the timeline, it is difficult not to draw a
line directly from the start of your time at the SEC to the
eventual dismissal of a political spending disclosure rule.
While the political spending disclosure rule is no longer
on the SEC's agenda for consideration, many Americans believe
it should be. To date, more than 1.2 million securities
experts, individual and institutional investors, ranging from
former SEC Chairs Levitt and Donaldson and SEC Commissioners to
mutual funds and State Treasurers as well as members of the
public have pressed the SEC for a rule that would require
public companies to disclose this very material information. In
addition, 44 Senators wrote in support of the petition to the
SEC to take up the political disclosure rule.
Former SEC Commissioner Luis Aguilar in a 2012 speech said
that shareholders of corporations are ``often in the dark as to
whether the companies they own, or contemplate owning, are
making political expenditures. Withholding information from
shareholders is a fundamental deprivation that undermines the
securities regulatory framework which requires investors
receive adequate and appropriate information, so that they can
make informed decisions about whether to purchase, hold, or
sell shares--and how to exercise their voting rights.''
The founder of the largest provider of mutual funds,
Vanguard's John C. Bogle, said, ``It's high time that the abuse
of corporate political spending comes to an end. Disclosure of
corporate political contributions to the corporation's
shareholders--its owners--is the first step toward dealing with
the potentially corrupt relationship between corporate managers
and legislators. Shareholders must not be left in the dark
while their money is spent without their knowledge.''
As Chair of the SEC, do you believe that shareholders, as
owners of the company, have the right to know about the
corporation's spending for political purposes?
Do you believe this information is material to investors?
If not, why not?
A.1. The subject of corporate political spending (and requiring
its disclosure) is an important one on which there are strong
and differing views. There is no specific statutory or rule-
based disclosure requirement under the Federal securities laws
or other Federal law mandating that public companies disclose
information relating to their political contributions. While
there is no specific mandate under existing law, if a company's
corporate political spending has a material impact on its
results of operations or financial condition (or if omission of
disclosure on this subject would make other disclosure included
in a filing materially misleading), disclosure to shareholders
by the company is required.
In addition, under the Commission's Rule 14a-8, a
shareholder may submit a proposal for inclusion in its
company's proxy materials seeking disclosure or other action on
political contributions. This avenue has been used by a number
of shareholders, with such proposals in 2016 averaging support
of 26.1 percent of votes cast. \2\
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\2\ See Gibson Dunn, ``Shareholder Proposal Developments During
the 2016 Proxy Season'' (June 28, 2016), http://www.gibsondunn.com/
publications/Documents/Shareholder-Proposal-Developments-2016-Proxy-
Season.pdf.
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As I noted during the hearing, a number of other public
companies have also made voluntary disclosures of their
political spending. For example, a 2015 Center for Political
Accountability report found that 87 percent of companies in the
S&P 500 have adopted policies addressing political spending, 54
percent of S&P 500 companies have a dedicated web page or
similar space on their Web site for political spending
disclosure, and 43 percent of S&P 500 companies have board
oversight of their political contributions and expenditures.
\3\ Further, the study noted that in 2015, 52 percent of S&P
500 companies had a detailed policy on their Web sites
governing political expenditures with corporate funds, and 60
percent of S&P 500 companies provided information on which
political entities they will or won't give money to. These
avenues of engagement are important and to be encouraged, and I
will continue to follow them closely.
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\3\ See Center for Political Accountability, ``The 2015 CPA-
Zicklin Index of Corporate Political Disclosure and Accountability''
(Oct. 8, 2015), http://files.politicalaccountability.net/index/CPA-
Zicklin_Index_Final_with_links.pdf.
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As you know, the Consolidated Appropriations Act of 2016
prohibits the Commission from using any funds made available by
the Act to finalize, issue, or implement any rule, regulation,
or order regarding the disclosure of political contributions,
contributions to tax exempt organizations, or dues paid to
trade associations. I have not committed, and do not plan to
commit, staff resources in FY16 to develop a rule regarding
disclosure of political contributions as encompassed by the
Appropriations Act prohibitions.