[Senate Hearing 115-9]
[From the U.S. Government Publishing Office]
S. Hrg. 115-9
NOMINATION OF JAY CLAYTON
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
THE NOMINATION OF JAY CLAYTON, OF NEW YORK, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
__________
MARCH 23, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Brandon Beall, Professional Staff Member
Graham Steele, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Elisha Tuku, Democratic Senior Counsel
Dawn Ratliff, Chief Clerk
Shelvin Simmons, IT Director
Cameron Ricker, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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THURSDAY, MARCH 23, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 45
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Senator Warner
Prepared statement....................................... 45
NOMINEE
Jay Clayton, of New York, to be a member of the Securities and
Exchange Commission............................................ 4
Prepared statement........................................... 46
Biographical sketch of nominee............................... 48
Responses to written questions of:
Senator Heller........................................... 64
Senator Sasse............................................ 66
Senator Cotton........................................... 75
Senator Perdue........................................... 76
Senator Tillis........................................... 78
Senator Brown............................................ 82
Senator Reed............................................. 90
Senator Menendez......................................... 92
Senator Tester........................................... 99
Senator Warner........................................... 102
Senator Warren........................................... 107
Senator Donnelly......................................... 112
Senator Schatz........................................... 113
Senator Van Hollen....................................... 115
Senator Cortez Masto..................................... 117
Senators Heitkamp and Heller............................. 124
Senators Heitkamp, Tester, and Donnelly.................. 125
Additional Material Supplied for the Record
SEC Settlement Order for Trump Hotels & Casino Resorts, Inc.,
dated January 16, 2002......................................... 127
Correspondence from The Trump Organization to The Honorable
Harvey L. Pitt, The Honorable Isaac C. Hunt, Jr., and The
Honorable Laura S. Unger, dated December 14, 2001.............. 136
Correspondence from The Trump Organization to The Honorable
Harvey L. Pitt, dated January 28, 2002......................... 137
(iii)
NOMINATION OF JAY CLAYTON, OF NEW YORK, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
----------
THURSDAY, MARCH 23, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:33 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
This morning, we will hear testimony on the nomination of
Jay Clayton to be Chairman of the United States Securities and
Exchange Commission.
Mr. Clayton has extensive expertise in our financial
markets as a highly regarded securities lawyer. For decades he
has helped companies access our capital markets, increase their
ability to invest in the United States, and grow and create
jobs.
One area on which Mr. Clayton has already indicated he will
focus is capital formation. Capital markets drive innovation
and job creation, and access is the lifeblood of our economy.
The JOBS Act helped revitalize the primary markets, and
both Congress and the SEC should continue to find ways to help
companies go public and allow their investors to share in their
success.
Recently, this Committee marked up several bipartisan
securities bills, and we encourage you, Mr. Clayton, if
confirmed, to help us identify other securities areas which
could use legislative improvement.
The SEC has an important three-part mission: protect
investors; maintain fair, orderly, and efficient markets; and
facilitate capital formation. Each part of the mission is
equally important and should not come at the expense of
another. I raise this because the SEC's mission is critical to
every U.S. citizen and retiree. Investors should be able to
participate in our markets, on fair footing, so that they can
pay for life events such as college and save for retirement.
We also need to help investors make sure they have material
information to make informed investment decisions. I have
repeatedly stressed the need for the U.S. financial system and
its markets to remain the preferred destination for investors
throughout the world, and the SEC has an important role to that
end. I look forward to hearing more from you on how we can help
companies grow, Americans get hired, and investors share in the
wealth creation by these companies.
Another important issue that the SEC is tasked with is
ensuring that the stock market rules and regulations are still
appropriate, given that most of them were promulgated in a time
where technology was much less advanced. It is imperative that
these rules serve the needs of companies and investors.
In that vein, it is important for the SEC to do
retrospective reviews of its own regulations to ensure they are
working out as intended and are still acceptable. This is in
line with the President's own Executive orders on regulation.
Other regulators are subject to EGRPRA, the Economic Growth
and Regulatory Paperwork Reduction Act, which statutorily
mandates a review and an evaluation of existing regulations in
order to identify which are outdated, unnecessary, or unduly
burdensome.
While technically the SEC is not subject to EGRPRA, your
predecessor, Chair White, indicated before this Committee that
she was ``very much committed to reviewing [the SEC's] rules in
that fashion.'' A commitment like that is one that many would
like to see continue.
Additionally, it is important for the SEC to have robust
cost-benefit analysis. I have long stated this position, and
our President recently echoed the importance of cost-benefit
analysis in an Executive order.
I look forward to hearing from you, Mr. Clayton, today on
these issues, as well as what you hope to prioritize when you
are at the SEC.
Congratulations on your nomination, and thank you and your
family for your willingness to serve.
I now turn it over to Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman.
Congratulations, Mr. Clayton, on your nomination to be the
Chair of the United States Securities and Exchange Commission.
I appreciate your willingness to enter public service. All of
us know some of the demands that puts on you and on your
beautiful family, so thank you for your willingness to stand up
and be here.
As in past SEC nominee hearings, we have discussed a number
of points that are still relevant today, even if technology, as
the Chairman said, has changed how the markets work. For
example, how do we improve investor protection? How do we
strengthen accounting rules and reliable financial statements?
How do we better enforce violations of law and bring real
accountability for misconduct?
Candidate Trump certainly understood that the American
people are tired of the continual news of misbehavior on Wall
Street with far too often minimal consequences or
accountability. About a year ago, Candidate Trump went to
Ottumwa, Iowa, site of a ``Stand up for the Little Guy'' speech
by Teddy Roosevelt, and also the home of Radar, who my staff
told me nobody under the age of 50 will know what I am talking
about. You do? Are you over 50? You are over 50, OK.
Candidate Trump promised the people of Ottumwa that he,
quote, knew Wall Street, that he knew the people on Wall
Street, and that he would not let Wall Street get away with
murder. That was Candidate Trump. I bet the audience at that
speech would be surprised to learn that the President has
picked Goldman Sachs alumni to run the National Economic
Council, to occupy the top two jobs at Treasury, and that he
has turned to Goldman Sachs outside counsel to run the SEC.
As Candidate Trump knew, as Americans sacrifice and save
for retirement, college bills, or a downpayment on a home, they
are more skeptical and less trusting of the market. Whether it
is another flash crash, a $1 billion Ponzi scheme, a $1
trillion financial crisis, people worry about trusting the
market with their hard-earned savings. That is what you walk
into, Mr. Clayton. Americans worry that the financial system is
rigged against them. At a time when we are actually debating
whether retirement advisers should put their clients' interests
first--think of that; we debate here whether retirement
advisers should put their clients' interests first--it is hard
not to see why people feel that way.
If ordinary fears were not enough, in recent years we have
learned and witnessed the significant financial risks of
hacking and cyber crime as well as climate change. It seems as
the list of concerns grows longer, the insistence--the
insistence--for removing protections against fraud and abuse
grows louder and more sweeping as amnesia, collective amnesia,
swept across this body. I hope we do not spend the next 2 hours
discussing issues that you agree are important, only to see
those issues ignored if you are confirmed.
You spent your career protecting some of the biggest names
on Wall Street, and those relationships pose a host of
conflicts for this position. I am concerned you may need to
recuse yourself too often at a time when we need a strong,
independent SEC Chair on the front line of enforcement, not
watching from the sidelines. Your record representing banks and
bankers and hedge funds and executives speaks for itself. But
those people are already well represented among the President's
friends, supporters, advisers, and far too many people in all
three branches of Government.
I want to hear today what you will do to represent glass
workers in Lancaster, Ohio, auto workers in Warren Ohio, steel
workers in Canton, Ohio. In some cases, private equity or a
hedge fund took control of their company and hastily shipped
factory jobs overseas. The people who still have jobs continue
to scrape by as incomes are stagnant, as their paychecks and
benefits have grown smaller over the years because management
cared more about pleasing Wall Street and padding their profits
and their bottom lines than doing right by working people.
Meanwhile, executive pay keeps going up and up and up.
Workers nearing retirement have had their pension and health
care benefits slashed. That is why the pay ratio rule, the
disclosure of corporate political spending, the fiduciary rule,
the anticorruption efforts around natural resources and mining
industries--I could go on and on and on and on about the
special interest influence in this body and in the
Administration. That is why all of those rules are so
important.
There is a lot of ground to cover. If I do not get through
all my questions here--and I know colleagues will do the same--
I will submit them separately for the record.
Mr. Chairman, thank you, and, Mr. Clayton, thank you again
for your willingness to serve.
Chairman Crapo. Thank you very much, Senator Brown.
Mr. Clayton, will you now please rise and raise your right
hand? Do you swear or affirm that the testimony you are about
to give is the truth, the whole truth, and nothing but the
truth, so help you God?
Mr. Clayton. I do.
Chairman Crapo. Thank you. And one more question. Do you
agree to appear and testify before any duly constituted
committee of the Senate?
Mr. Clayton. I do.
Chairman Crapo. Thank you. You may take your seat.
Your written statement will be made a part of the record in
its entirety. Again, I give you my congratulations on your
nomination. And before you begin your statement to the
Committee, you may, if you choose, introduce the members of
your family. I see you have a beautiful family here with you.
Mr. Clayton. Great. I will do that. Thank you, Senator. I
will start at this end: My father, Walter Clayton; my mother,
Kathi Clayton; my wife, Gretchen; my daughters Haley and
Jasper; my son, Wyatt; my youngest brother, Andrew; and his
wife, Michelle, are all here for me today.
Chairman Crapo. Well, thank you. You are very fortunate to
have such a beautiful family and have them here with you.
Mr. Clayton, you may proceed.
STATEMENT OF JAY CLAYTON, OF NEW YORK, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
Mr. Clayton. Thank you very much, Senator.
Chairman Crapo, Ranking Member Brown, and Members of the
Committee, I am honored to appear before you today as President
Trump's nominee to chair the Securities and Exchange
Commission. I want to thank you and your staff for the time you
have spent with me. I have enjoyed, and learned from, our
meetings.
Our capital markets have far-reaching and profound effects
for every American. Making sure our markets are fair, open,
orderly, and efficient--and ensuring that investors are
protected--is the fundamental responsibility of the SEC. If
confirmed, I will take up this responsibility with energy and
purpose. I pledge to work with my fellow Commissioners, the SEC
staff, this Committee, and the many others who support and
defend our capital markets.
The importance of Government service was instilled in me
from a young age. Six weeks after I was born, my father shipped
out to Vietnam as a second lieutenant, and my mother, 20 at the
time, and I moved to her childhood home in Lykens,
Pennsylvania. We lived with her parents and her four younger
brothers.
Lucky for me, my grandfather, Pat Kerwin, the eighth and
last child of coal miners, a small-town lawyer and perpetual
public servant, both in title and action, took a strong
interest in me. We were great friends for 20 years. Remarkably,
for as far back as I can remember, he took me to township
meetings, real estate closings, and estate sales. These
experiences, much more Main Street than Wall Street, made a
deep and lasting impression on me.
When I entered the ninth grade, we moved as a family for
the last time to Delaware County, Pennsylvania. I met new
friends, mostly through sports. One of those friends, who has
long been my best friend, is my wife, Gretchen. We met 36 years
ago and have been married for 25 years. I want to specifically
thank Gretchen for her encouragement, love, and support. As
Chair of the SEC, I will be mindful of my responsibility to my
children and their generation.
During the course of my 20-plus-year career as a
transactional lawyer, it has been my privilege to work with
leaders in the public and private sector, including on landmark
transactions, such as the world's largest IPO, as well as
important transactions during the dark days of the financial
crisis. From my 5 years living and working in Europe--where I
worked on matters involving the laws and markets of no fewer
than a dozen countries, including France, Sweden, Turkey,
Switzerland, Italy, England, Greece, and Germany--I learned
that the world's capital markets are very interconnected and,
more broadly, that America is, indeed, the greatest country.
My work has included counseling a number of small
businesses and individuals. During my college and postgraduate
years, my mother and father operated a small warehousing and
logistics business. I worked with them on various projects,
including lease negotiations, inventory system design, and
establishing a 401(k) plan for employees. There were ups and
downs, and I learned firsthand the many challenges that small
and medium-sized businesses face as well as their importance to
our economy.
Based on all of my experiences, nationally and
internationally, on Wall Street and Main Street, I firmly
believe that:
One, well-functioning capital markets are important to
every American;
Two, all Americans should have the opportunity to
participate in, and benefit from, our capital markets on a fair
basis, including being provided accurate information about what
they are buying when they invest; and
Three, there is zero room for bad actors in our capital
markets.
I am 100 percent committed to rooting out any fraud and
shady practices in our financial system. I recognize that bad
actors undermine the hard-earned confidence that is essential
to the efficient operation of our capital markets. I pledge to
you and to the American people that I will show no favoritism
to anyone.
One last comment: For over 70 years, the U.S. capital
markets have been the envy of the world. Our markets have
allowed our businesses to grow and create jobs. Our markets
have provided a broad cross-section of America with the
opportunity to invest in that growth, including through pension
funds and retirement assets. In recent years, our markets have
faced growing competition from abroad. U.S. listings by non-
U.S. companies have slowed dramatically. More significantly, it
is clear that our public capital markets are less attractive to
business than in the past. As a result of these developments,
investment opportunities for Main Street investors are more
limited. Here I see meaningful room for improvement.
I am excited to work with you, my fellow Commissioners, and
the SEC staff to pursue those improvements, and in doing so, I
will always be vigilant to ensure that the Commission is
steadfast in protecting investors.
Thank you for this opportunity. I look forward to receiving
your advice and answering your questions.
Chairman Crapo. Thank you for your statement, Mr. Clayton.
And before I begin my questions, I would just like to
remind the Members of the Committee that we will be working on
a 5-minute timeframe for each segment, and I encourage Members
to honor that so that all of our colleagues can have an
opportunity to get their questioning in.
And as Senators are prone to do, you may get a question
right at the end of the 5 minutes, Mr. Clayton. If that
happens, I will allow you to answer the question, but I
encourage you to be brief in those answers.
First, you are a highly regarded attorney who has received
recognition for your expertise in the securities field. Some
have raised concerns that your success and your former clients
will create conflicts for you. Frankly, could you quickly
provide us your thoughts on this issue?
Mr. Clayton. Yes, Senator, and I will try to be brief. I
have been fortunate to have a diverse experience as a
transactional lawyer and a securities lawyer dealing with a
number of participants in our capital markets, both nationally
and internationally, in a number of different settings--
securities offerings, private capital raisings, mergers and
acquisitions, regulatory matters, et cetera. I believe that
that is a strength. I also believe that the types of matters I
have worked on, which involved problem solving, is a strength.
As far as the extent of my practice and whether the
recusals that would be required and the potential conflicts
will impair my ability to act as Chair of the Securities and
Exchange Commission, I do not believe they will do so. I have
discussed this at length with the SEC Ethics Office, with the
Office of Government Ethics. This is not a new issue. There is
a protocol in place for dealing with those matters. Most
importantly, I believe that if I am recused, that my fellow
Commissioners will be able to handle the matters ably and to
good effect.
Chairman Crapo. Thank you very much. And I agree with your
observation. It seems a little surprising to me that a person's
success in a field in which we are asking them to now lead an
agency could be a criticism. So I appreciate your commitment to
assure that conflicts will not arise and that you will fairly
and impartially administer the agency.
Mr. Clayton, in your opening statement, you discussed the
dearth of initial public offerings and the need to keep our
capital markets robust, serving as engines for our economy. Can
you please let us know any particular thoughts on how the SEC
can aid in this process?
Mr. Clayton. Yes, I very much--I am looking at this from
the outside. I very much look forward to discussing this with
my fellow Commissioners and with the SEC staff. But I will note
that easing the on ramp to the public capital market process--
and when I say ``easing the on ramp,'' I do not mean easing the
important regulations that public companies face. I mean making
it less costly up front to become a public company has had an
effect on the market.
When I go to meetings where a company is considering
whether to go public or not, one of the first questions that is
asked is: Is this an emerging growth company? Because that has
made it easier for companies to become registered public
companies in this country.
Chairman Crapo. Thank you.
The equity markets have seen a lot of change in the past
few decades, including in terms of companies and products
listed as well as the technology behind it and the investors
participating in it. Your predecessor as well as the current
Acting Chairman and other former Commissioners have stated that
there is a need to review the current equity market structure,
and such a review should be disciplined and conducted in a
data-driven manner.
What are your thoughts on continuing the SEC's review of
market structure? And what steps does the SEC still need to do?
Mr. Clayton. Senator, I think it is very apparent that
technology continues to change our markets, and that is
something that will continue unabated. The markets respond,
technology responds. I believe that we need to engage in a
virtually constant assessment of whether our markets are
operating efficiently and for all investors.
As far as the specifics of the market structure analysis
that the Commission has going on now, I do believe that they
should continue. I have become, thanks to some of the
questioning from you and your staff, more familiar with that,
and I do believe that we should continue examining market
structure going forward.
Chairman Crapo. Well, thank you. I would just let you know
at the conclusion of my 5 minutes that this is a very important
issue to us, and we look forward to receiving the input from
the SEC from its analysis and deliberations. So I encourage you
to pursue that very aggressively.
Mr. Clayton. Thank you.
Chairman Crapo. I will yield back 15 seconds out of my 5
minutes. Senator Brown.
Senator Brown. I will take it. Thank you.
Chairman Crapo. You will take it.
[Laughter.]
Senator Brown. Thank you, Mr. Chairman.
Given this Administration's unprecedented business in
commercial entanglements and demonstrated lack of transparency,
lack of interest in transparency, we must focus on the
potential conflicts of interest that this creates for people
like you, for the Administration's nominees. In the case of the
SEC, this is not hypothetical. In 2002, President Trump's
casino business settled an SEC enforcement action over the use
of non-GAAP financial data. Before the case settled, he sent a
letter to the entire Commission asking for leniency. Following
the settlement, he sent a thank you note to then Chair Harvey
Pitt for personally talking to him and ``being fair.''
Mr. Chairman, I want to submit those documents for the
record.
Chairman Crapo. Without objection.
Senator Brown. My question is this: In an Administration
replete with billionaires, many of whom, as we learned in
confirmation hearings, had multiple conflicts of interest and
ethical lapses, how will you ensure the SEC's independence in
matters that affect his personal business, the President's, and
other Administration officials' businesses?
Mr. Clayton. Senator, as I said in my opening statement and
I will repeat, if I am lucky enough to be confirmed, I am
committed to showing no favoritism to anyone in this position.
Senator Brown. OK. What members of the Trump administration
or its transition team did you communicate with prior to being
selected by the President as his nominee?
Mr. Clayton. Members of the current Trump administration or
transition team. I was asked by the transition team--how I got
introduced to this process, Senator, was I was asked by the
transition team for my thoughts on the capital markets and
things that could be done to improve capital formation. I met
with several members of the transition team to do that. I did
not think that I would be sitting here today when I met with
them. The possibility of me going into public service was
raised. I then met with members of the transition team who
screened candidates, and then I met with now President Trump,
Mr. Priebus, and Mr. Bannon to be interviewed for the job, and
was later nominated.
Senator Brown. Would you reconstruct, not right now but
submit to the Committee, the names of people that you can
reconstruct and look at your notes that you met with in the
first round, if you would possibly do that?
Mr. Clayton. Yes.
Senator Brown. Do you know if anyone you spoke with has
businesses regulated by the SEC?
Mr. Clayton. I do not, but I would expect they do.
Senator Brown. Would you submit that to us also?
Mr. Clayton. Yes. To the extent I can, yes.
Senator Brown. OK. Thank you.
The President signed an Executive order directing the
review of financial regulations and stated that he planned ``to
do a big number on Dodd-Frank.'' Gary Cohn, former president of
Goldman Sachs and now National Economic Council Director,
declared, ``We are going to attack all aspects of Dodd-Frank.''
What aspects of Dodd-Frank will you be attacking?
Mr. Clayton. I do not have any specific plans for attack,
Senator. I do believe that Dodd-Frank should be looked at, in
particular, rules that have been in place as to whether they
are achieving their objectives effectively. But I have no
specific plans for attacking a particular provision of Dodd-
Frank, Senator.
Senator Brown. Has anyone whom you met with talked to you,
anyone from the transition or the Administration you have
talked to made suggestions and questioned--did they question
the efficacy and the fairness of Dodd-Frank and suggested to
you that it needs reform or change or repeal?
Mr. Clayton. As a general matter, the question of whether
Dodd-Frank has been effective is a question that is on the
minds of people in the Administration based on my interaction
with them, yes. Have I had specific discussions with them about
a particular aspect of it? No. My interaction with the
Administration since I was nominated has been quite limited.
Senator Brown. Do you see your job to help the
Administration, as they said they want to, deregulate Wall
Street? Or do you see your job following the law and to finish
writing the rules mandated by Congress?
Mr. Clayton. Senator, I see my mission as very much the
tri-part mission of the SEC: investor protection, capital
formation, and efficient markets.
Senator Brown. OK.
Mr. Clayton. Thank you.
Senator Brown. Thanks.
Chairman Crapo. Thank you.
Senator Shelby.
Senator Shelby. Thank you. Welcome, Mr. Clayton.
I believe that the nominee before us today represents what
we once valued in this country: an individual who rises from
modest means to the pinnacle of his profession and then answers
the call of public service--a good dead that I can assure you
will not go unpunished here.
Instead of applauding such achievement, some will seek to
minimize your accomplishments and impugn your motivation or
ability to serve. I wished it were not true.
Following the crash of the U.S. housing market in 2007, the
near collapse of the worldwide financial system, we had a
unique opportunity here to closely study the causes of the
crisis and develop a rational and targeted legislative
response. Regrettably, that did not happen.
As an attorney, you act as an adviser, advocate, and
negotiator. We should all realize this. In so doing, you
represent the clients' best interests consistent with their own
ethical obligations and yours.
I believe attorneys should never be judged by the parties
that they represent but, rather, by the quality of the
representation that they provide. In this particular nominee, I
believe we are fortunate to have one of our Nation's very best
legal practitioners. He understands corporate structure,
capital markets, and capital formation, as well as the
statutory and regulatory requirements that govern those
disciplines.
The mission, as I understand it from many years on the
Committee, 31 years here, of the U.S. Securities and Exchange
Commission is to protect investors, maintain fair, orderly, and
efficient markets, and facilitate capital formation that is
absolutely necessary to promote and sustain economic growth in
this country. I believe your background, your education, and
experience make you particularly well qualified and suited to
be Chairman of the Securities and Exchange Commission, and I
look forward to supporting your nomination.
Having said that, I have one question. I have long
advocated here the need for comprehensive cost-benefit analysis
for all agency rulemakings, not just the SEC. If the benefit of
a rule or regulation cannot be shown to outweigh its cost, I
believe it should not be brought forth.
Would you share your views, if you have thought about
this--and I am sure you have--on the role of cost-benefit
analysis in the rulemaking process which you will be confronted
with?
Mr. Clayton. Thank you. Thank you for your comments, and,
yes, I will. I do believe that the economic impact of rules and
regulations that are promulgated--I am going to focus
specifically on the Securities and Exchange Commission--is very
important, not only quantitatively but qualitatively. I think
that we are often looking back after a decade or two decades
and saying, ``Wow, that had profound effects that we did not
realize,'' and some of them turn out to be more costly than we
would have imagined.
I think rigorously examining the effects of rules, and, in
particular, some of their far-reaching costs, is a very
important aspect of the Commission's work.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman. And welcome to
you and to your beautiful family. You know, you will have to
sit through a whole lot of boring questions, and so we
apologize for that. But the position that your father and your
husband and your son has been nominated for is incredibly
important to the functioning capitalism that we have in this
country. And I think that it is critically important that we
understand exactly how you intend to administer and participate
in that job.
I want to just make a couple quick points that relate to
some projects that I have been involved in and that I have been
working on, and that is, how the SEC relates to small business.
The vast majority of North Dakota business is small business.
Many of our startups find challenges in getting startup
capital, and we want to make sure that a bill that Senator
Heller and myself were able to get passed last time would
require the Commission to appoint at least ten individuals
across the country to serve on a new small business capital
formation advisory committee. I want your commitment that you
will make this one of your top priorities if you are confirmed.
Say yes.
[Laughter.]
Mr. Clayton. I appreciate the assistance. Capital for small
business is very important.
Senator Heitkamp. OK. And I want to make sure that when you
are making these appointments and looking at this that you find
people with rural experience. And by rural, I do not mean a
community of a half a million people. That is not rural. I want
you to take a look at, as we look at rural economic
development, bringing in broadband. We are going to have more
and more opportunities.
We also are working on another bill with Senator Heller,
Supporting American Innovators Act, which would raise the
number of investors who could participate from 100 to 250. We
received unanimous approval out of this Committee a couple
weeks ago or last week, and I just want your commitment that
you will work with us to implement that if we are able to get
it across the threshold here.
Mr. Clayton. I am very happy to work with you on anything
in the area of small business and recognize your comment about
rural being really rural, not quasi-rural.
Senator Heitkamp. Finally, I only have time for just one
more issue that I want to raise, and I think that we can all
agree that one of the great frustrations that the American
people had after the collapse of 2008 is no one went to jail.
No one seemed to be criminally responsible for what seemed like
a criminal act. And most people would say, ``If I did that, I
would be in jail. If I did that, I would be investigated
criminally.'' And so I think we need to have a clearer
understanding. As you have said, there is zero room for bad
actors, but I think we continue to see difficulties in
prosecuting folks in the white-collar area.
I want to ask just one simple question--and it is not
simple, but it is really important. Do you believe that
executives who act recklessly but not knowingly and as a result
cause significant harm to our financial system should be held
criminally liable for financial crimes?
Mr. Clayton. Senator, let me say this: That is kind of a
question for the courts and for the legislature, Congress.
Senator Heitkamp. Oh, we can legislate. I am just
wondering, what is your position on changing the mens rea
standard for executives who, in fact, act recklessly even
though we might not be able to prove that they act knowingly?
Mr. Clayton. If that is where the law is, I will vigorously
enforce the law.
Senator Heitkamp. Well, you do understand that the SEC in
the past has weighed in on this and has done a number of
speeches and discussions about how do you interject a criminal
deterrent. Those of us on this dais who have been prosecutors
understand that one of the best areas for deterrence in America
is white-collar crime, and I think way too often you can hide
behind the knowing. You know, it is hard to prove someone
actually knew. But it is not hard to prove that someone
actually should have known or acted recklessly moving forward.
And I think we could apply that criminal standard, and we would
like you guys to be thought leaders on this.
Mr. Clayton. I am happy to engage on that topic with my
fellow Commissioners. I also want to tell you I agree with you.
I think that individual prosecution, particularly in the white-
collar area, has a significant effect on behavior.
Senator Heitkamp. But the difficulty we have is achieving,
you know, the level of criminal intent, and I think there is a
way that we can rectify that by lowering the standard but still
having the deterrent.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Corker.
Senator Corker. Thank you, sir.
Mr. Clayton, thank you for your desire to serve in the
public, and I appreciate the meeting we had in our office. And
welcome to your family, since I come from a smaller unit, your
tribe who are with you today. We welcome them and glad they are
participating.
We talked a little bit about public companies and the fact
that there are not many companies, there are not near as many
companies going public today as used to be the case. I wonder
if you would expand on that and share why you believe that is
the way it is today.
Mr. Clayton. Thank you, and I am more of a picture person
than a written person, so I am going to use my hands. I hope
that is OK. But the life cycle of a company is it kind of gets
started, people have a good idea, are committed to it, picks up
and grows and kind of goes like this, and this is the growth
phase of a public company where you are getting capital, you
are adding employees, you are doing things, and over time you
get up here, success.
My experience is that 20 years ago companies at about this
stage would view our U.S. public capital markets, becoming a
public company, listing on the stock exchange, as an attractive
way to raise capital to grow. For a variety of reasons,
including very robust private capital markets, but also the
costs of going public, the choice to go public here is a very
hard one. Many companies do not do this anymore. We see it
with--I am hesitate to use examples, but it is one everybody
knows. Uber is a very growing company that is still a private
company all through this phase. And then up here, you know,
they may be becoming a public company, but oftentimes that is
not to raise capital; the company is already mature.
My view of the world is that I would like to see more
companies going public here, so more people have a chance to
participate in that growth as investors.
Senator Corker. And they are not doing it, again, just to
crystallize that, they are not doing it because?
Mr. Clayton. They are not doing it for a variety of
reasons, including that it is too costly at this stage to
become a public company.
Senator Corker. I agree there are numbers of reasons.
Having served on some public company boards, I cannot imagine
desiring to go public as a first choice. But I know that has
changed dramatically over time, especially over the last decade
or so.
Let me ask you this question: The SEC, unfortunately, has
functioned in a very partisan way. It seems like everything
ends up being voted on down a party line. It was not that way
many, many years ago. As Chairman, I am sure you do not want to
operate that way. Can you observe why it has been that way and
tell me what you plan to do as Chairman to try to get things
decided along the basis of what is good for the country, what
is good for the SEC, what is good for all of us who you are
protecting, instead of just sort of ideology?
Mr. Clayton. Yeah, I do not want to speculate about why it
has been that way. I have seen it. I agree with you that----
Senator Corker. Well, we want you to speculate, though.
Mr. Clayton. OK.
Senator Corker. OK.
Mr. Clayton. People have fundamental disagreements, but my
job has been--my job for 20 years has been to reach consensus.
People do not do transactions unless they agree to do
transactions. I believe in consensus. I would very much like as
Chair to have unanimous votes on important matters.
Senator Corker. But what is it that has caused it to be the
way that it is right now? You know you are going into it. What
is it, seriously, that has caused it to function along party
lines?
Mr. Clayton. You know what, Senator? I will speculate, and
that is, I think that there is a--it is not just at the
Commission, but there has been--you know, partisanship is
pretty strong right now in Washington. I am new to Washington,
but I very much get that sense. But I do believe, having talked
to a lot of people, that the mission of the Commission does not
have to be a partisan mission.
Senator Corker. Well, what happens when it functions that
way is we have a lack of consistency, right? I mean, every time
there is a swing in the balance of power, the SEC and the
direction that it takes swings and, therefore, you know,
probably keeps people, even more people from wanting to go
public. So I am glad you have observed that. I hope that you
are going to change that when you become Chairman.
I just want to close with this, Mr. Chairman. I know there
has been some criticism of the type of people that Mr. Clayton
has represented. I used to build shopping centers around the
country and feel like I know the business pretty well and think
if this body decided there was going to be some shopping center
regulatory body, I think that would be really good.
[Laughter.]
Senator Corker. Because I know the business. And, look, I
know that you have represented numbers of large clients, and my
guess is some of them were jerks. OK? And you watched--
seriously, you watched some of your clients do some really
jerky things. And then you watched some of them do some really
great things. And my sense is that someone like you who has
represented the broad array of people that you have represented
really knows the good actors from the bad actors more so than
people who come from the outside. I know we had some folks last
time that were academics, and I have nothing against academics,
but my sense is you bring a lot of real-life experience. I am
glad you are willing to do this, and I look forward to your
service.
Mr. Clayton. Thank you very much.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. Thank you, Mr.
Clayton, for being here.
There was some talk earlier in this hearing about efforts
to repeal or dramatically scale back Dodd-Frank. I think it is
important to remember that Dodd-Frank was a response to the
financial meltdown and a lot of bad practices that went on that
helped precipitate that and left a lot of people around this
country in foreclosure and holding the bag.
As you know, last year Goldman Sachs agreed to a $5 billion
settlement in a lawsuit that arose out of what happened during
the financial meltdown. The Acting Associate Attorney General
of the Justice Department at the time said, and I quote, ``This
resolution''--referring to the settlement agreement--``hold
Goldman Sachs accountable for its serious misconduct in falsely
assuring investors that securities it sold were backed by sound
mortgages when it knew that they were full of mortgages that
were likely to fail.''
This was a very serious breach of trust with respect to
Goldman's clients. You mentioned at the outset that you wanted
to put an end to shady practices. Would you agree that what
Goldman did during that period in falsely assuring investors
that securities it sold were backed by sound mortgages when it
knew they were not was a shady practice?
Mr. Clayton. Senator, I think that settlement speaks for
itself. I am not familiar with all of the facts of that matter,
but I think the settlement speaks for itself.
Senator Van Hollen. Well, let me ask you, you represented
Goldman Sachs, right?
Mr. Clayton. I have, yes.
Senator Van Hollen. Did you represent Goldman Sachs in any
of the transactions that were the basis of the Justice
Department finding of misconduct?
Mr. Clayton. My understanding is that was a mortgage--the
case of selling mortgage securities. I can tell you that I did
not work on any mortgage securities deals for any client that I
can--I am very--any mortgage security deal for any client prior
to the financial crisis. It was not part of my practice.
Senator Van Hollen. Got it. And so you were not involved in
advising some of the investors with respect to the financial
instruments that were the subject of the settlement.
Mr. Clayton. I want to be very clear. After the financial
crisis, I did become familiar with mortgage-backed securities
and how they worked. I spent a lot of time trying to understand
how they worked. And after the crisis, I have advised a number
of people on how those securities were designed to function.
But prior to the crisis, mortgage-backed securities were not
part of my practice.
Senator Van Hollen. All right. Well, just to pick up on
what Senator Heitkamp said--and I have heard my Republican
colleagues say it many times--we think that a lot of these
settlement agreements where nobody was actually held personally
accountable and personally liable actually do not create the
kind of deterrence that we want. So I hope going forward the
American public will see people not just using their investors'
money to pay off settlements but actually be held personally
accountable.
Let me ask you this, because there are some disagreements
with respect to what has happened at the SEC and its role. Do
you think that a stockholder would have an interest in knowing
if the company they are invested in is spending $5 million to
elect Hillary Clinton or Donald Trump? Do you think that that
is something that would be of interest to a stockholder? After
all, my understanding is disclosure agreements to the public
include things like the salaries that are paid to the top
managers, potential conflict of interest between folks, matters
of the company, and others. Do you believe that that is
something that stockholders should have information about?
Mr. Clayton. The touchstone for stockholder information is
materiality. What would a reasonable investor making an
investment decision, what should they know? This issue of
political spending disclosure has been talked about in this
Committee and for a while, and I think where it stands now is
there are a number of companies who make that disclosure,
making the judgment that it is material to investors or that it
may be, and they put it in. Shareholders have access through
the shareholder resolution and proxy process to require it if
they want. The question of whether it should be mandated is one
that I am happy to think about, but, again, my touchstone for
these things is materiality.
Senator Van Hollen. Well, thank you, Mr. Chairman. I would
just say I believe there is a reputational risk to a company if
it is disclosed, if people find out through other means that
they may have spent a whole lot of money supporting one
political candidate or another. And that is something that
investors should know up front so they can take into account
the possibility of that information. So I look forward to
continuing that conversation because, as you know, there are a
number of things that are mandated by the SEC, and it is my
view that that is something that would be important to
investors. But we can follow up on that conversation.
Mr. Clayton. Thank you.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thanks very much, Mr. Chairman.
Mr. Clayton, I just want to say I am delighted that you are
willing to serve. I think you are an outstanding choice based
on your background, your expertise, the knowledge. We had a
great conversation in my office, and I appreciate it. I am
particularly pleased that you have some experience overseas. It
gives you a comparative basis to help inform your judgment
about our regulations. And I am not saying all that because you
are Pennsylvanian, but it does not hurt. OK?
You mentioned earlier--and I think we all know--that for
decades the U.S. capital markets have been the envy of the
world, the deepest, broadest, most accessible markets anywhere
ever, but that our lead is diminishing. There is no question,
by any number of metrics, our lead is diminishing.
You suggested that it is because at sort of this point in
the growth cycle it has become too costly for many companies to
go public, to become public issuers of securities. I just want
to drill down a little bit. Isn't it really too costly--where
does the cost come from? The cost is complying with the
regulations. Isn't that the principal cost?
Mr. Clayton. Yes, Senator, I believe that regulations
broadly is the principal cost.
Senator Toomey. All right. So that is what has changed.
Certainly it has changed. And we see a corresponding reduction
in public issuance, big IPOs, I would argue other--adoption of
new technologies as well. So I really hope that you are going
to focus on that, and I know you are.
I want to make another point. Isn't it also the case that
over the last certainly number of decades we have had a
dramatic transformation of the ownership of American companies,
a democratization, if you will? If you go back 50 or 60 or
certainly 80 years, I am pretty sure it is true that a very
small percentage of wealthy Americans owned all of our
companies. If you look today, our companies, the people who own
the stock in our big companies, are very often very ordinary
Americans who own it through their pensions, their 401(k)
plans, their 529 plans, their IRA plans, the universities they
send their kids to have it in their endowments, and that those
categories now are a huge, huge share of ownership. Isn't that
true?
Mr. Clayton. That is true, and it is changing the
shareholder-company dynamic.
Senator Toomey. Right. And if a company decides it has got
excess cash and it does not believe it can generate a market
return on that cash, isn't it a very reasonable thing for the
company to consider returning some of that cash to these
ordinary Americans who own this company in the form of dividend
or stock buybacks? Isn't that a perfectly reasonable
consideration?
Mr. Clayton. Senator, it is a perfectly reasonable
consideration, yes, and I think some of our greatest investors,
most respected investors, say if you cannot use the cash
wisely, give it back.
Senator Toomey. Right, which is actually good for the
ordinary Americans who own those stocks.
One of my criticisms of the SEC in recent years is that it
has not done a good job on the capital formation portion of its
mission. And I think we have passed some good legislation at
times--the JOBS Act being one such case--and I think the SEC
has implemented some of these legislative changes with rules
that are way too cumbersome. I am thinking of our crowdfunding.
I am thinking of Reg A, Reg A-plus now, a very simple reform
that got very complex in the regulations. I look at how little
American companies are using some of these new technologies,
new opportunities. I attribute it to the regulations.
What I would just ask, would you be willing to work with us
to review some of the rules implementing the legislation with
an eye toward facilitating the use of these reforms as it was
intended by Congress?
Mr. Clayton. Yes, Senator, I am--I know it is difficult to
write a regulation and, as we talked about, know all of its
effects. And sometimes I think it takes too long because you
worry about all of those effects. At some point you have to
move forward. After you move forward, you have to examine
whether you got it right. And that is the way I look at these
things. It is not I am done, out the door. We tried to do it as
well as we could. Let us look back and see if we got it right.
Senator Toomey. I think that is a very sensible approach. I
look forward to working with you on it, and I think I finished
within my time limit.
Chairman Crapo. You did. Thank you very much.
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair and Ranking
Member.
Mr. Clayton, good to see you again, and let me just say
thank you so much for taking the time to visit with me and your
candor in our conversation. I so appreciate it. It is wonderful
to see your family here with you as well.
During our conversation, if you recall, we talked about the
fact that I am from Nevada and at the time of the foreclosure
crisis was the Attorney General, and so I took a number of
enforcement actions to protect the homeowners in my State. And
you were very candid during that time, and when we met we
talked about this, and you specifically dismissed the
effectiveness of enforcement actions against companies on the
grounds that prosecutors unfairly take money from shareholders
without holding individuals responsible. I want to just follow
up on those comments, and I have some questions as well.
In fact, in a speech just before he left the Department of
Justice, Attorney General Holder described current law, saying,
``The buck still stops nowhere. Responsibility remains so
diffuse and top executives so insulated that any misconduct
could again be considered more a symptom of the institution's
culture.''
And so my question to you is: Do we need to change the law
to ensure that individuals you want to go after are not
insulated from accountability?
Mr. Clayton. OK. Thank you. And just on my view on company
accountability and individual accountability, I want to be
clear. Companies should be held accountable. If they make
illicit profits, those profits should be disgorged. There
should be deterrence at the company level. But, you know,
shareholders do bear those costs, and we have to keep that in
mind.
I also said to you, which I firmly believe, that individual
accountability drives behavior more than corporate
accountability. And as we work, all of us work together, that
will be in my mind.
Senator Cortez Masto. And so then I appreciate that, and
that goes back to, I think, what my colleague Senator Heitkamp
was getting to when she was talking about mens rea. So let me
put it in different terms, and I will talk about strict
liability. And, again, it was Attorney General Holder who
suggested that Congress change the law to provide for strict
liability for financial service executives. In other words,
executives should be liable for misconduct that occurs under
their watch, whether or not they had intent or knowledge of the
wrongdoing. Do you agree with that proposal?
Mr. Clayton. Again, it is not for me to make the law. It is
for me to enforce law. I do not understand the exact contours
of that proposal. If that--can you say it again?
Senator Cortez Masto. Sure, and I think this is what we
talked about, and this is a new realm, and I absolutely get it.
You are stepping into a different role here as an enforcer.
This is an enforcement mechanism that you are going to have
authority over, and these are decisions you are going to have
to make. So it just comes down to the issue of strict
liability. In other words, can executives--or do you believe
executives should be held liable for misconduct that occurs
under their watch, whether or not they had the initial intent
to do it or knowledge of wrongdoing? In other words, whether it
was just reckless, whether they intentionally did it or whether
it was just reckless disregard, do you agree with this proposal
that there should still be strict liability and they should be
held accountable?
Mr. Clayton. Strict criminal liability without mens rea, I
am not--you know, I am not sure about that. Not something I
have really thought about, but it strikes me as a big step.
Senator Cortez Masto. OK. Is this something that you intend
to look into and really--I guess my concern is the enforcement
side of this and your lack of ability or familiarity with it.
And as you step into this position, that is a key piece of
oversight, and I am just curious your thoughts on how you
intend to pursue or familiarize yourself with the enforcement
side of the job.
Mr. Clayton. Let me try and answer your question as quickly
as I can. In all aspects of this job, if confirmed, I am going
to have to rely extensively on the very good people at the SEC,
both the Division Directors and the staff. I have a lot of
respect for the people at the SEC that I have interacted with,
including on the enforcement staff. And I do have more
familiarity with prosecutors, working with prosecutors, and, in
particular, investigations than most transactional lawyers, and
I hope to bring that experience to bear.
Senator Cortez Masto. Thank you. Mr. Clayton, I see my time
is up. I look forward to additional questions if there is time,
Mr. Chair. Thank you again. I appreciate your willingness to
step up for public service.
Mr. Clayton. Thank you.
Chairman Crapo. Thank you.
Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Clayton, how are you?
Mr. Clayton. Well, thank you.
Senator Kennedy. I am over here in the cheap seats.
[Laughter.]
Senator Kennedy. I am in the cheap seats. You went to Penn?
Mr. Clayton. I did.
Senator Kennedy. Undergrad?
Mr. Clayton. Undergrad.
Senator Kennedy. And law school?
Mr. Clayton. And law school.
Senator Kennedy. And you went to Cambridge?
Mr. Clayton. I did.
Senator Kennedy. That would be Cambridge in England, right?
Mr. Clayton. Cambridge in England, yes.
Senator Kennedy. What did you study there?
Mr. Clayton. I studied economics.
Senator Kennedy. OK. All right. Are these your three
children? I think I met Wyatt. I shook hands when I came in. I
was late.
Mr. Clayton. Did he look you in the eye?
Senator Kennedy. Yeah.
[Laughter.]
Mr. Clayton. Good.
Ms. Jasper Clayton. I am Jasper.
Senator Kennedy. OK.
Ms. Haley Clayton. I am Haley.
Senator Kennedy. All right. Did they give you instructions
about how to behave and not make faces and stuff today? You do
not have to answer that.
[Laughter.]
Senator Kennedy. Let me ask you about Sullivan & Cromwell.
It is a big place, blue-chip clients, you know, one of the
premier firms in the world. You do not get to pick your
clients, do you? I mean, if you are a lawyer there and a client
comes in and says, ``I am in trouble, and I need help,'' you do
not say, ``Well, I do not like the color of your suit, go
away''?
Mr. Clayton. Generally not.
[Laughter.]
Senator Kennedy. How long have you been at Sullivan &
Cromwell?
Mr. Clayton. Over 20 years.
Senator Kennedy. Would you consider yourself a securities
expert?
Mr. Clayton. If anyone can be, I think----
Senator Kennedy. Well, I am kind of like Senator Corker.
Since you are going to be running the SEC, I would like you to
know something about securities law.
I want to ask you about a matter that is important to many
States but also Louisiana. Are you familiar with a gentleman by
the name of Allen Stanford, the Ponzi scheme?
Mr. Clayton. I am.
Senator Kennedy. Yeah, he at one point in 2008 was listed
on the Forbes top 400, or whatever. He had a net worth of $2.2
billion. Now he has got another number. He has got a prison
number. It is 35017183. He defrauded in a Ponzi scheme about
7,800 investors. Two thousands of them were from Louisiana,
their life savings. The Securities Investor Protection
Corporation, SIPC, denied coverage of them. SEC sued the SIPC.
I think a Federal judge threw it out. Obviously, I was
disappointed in that.
Here is my question. I wrote it out so I would be precise.
What do you intend to do to ensure that investors who lose cash
and securities in a failed brokerage or are victims of a Ponzi
scheme like this financial scheme, the one I just talked about,
receive fair treatment in the event they have to turn to the
SIPC for help, which was created to help them?
Mr. Clayton. Senator, I am familiar with the Stanford
matter, and people like Allen Stanford and other fraudsters who
we can name need to be dealt with sternly, severely, et cetera.
As far as their victims and the SIPC, I am familiar with
this issue and that there is a line where the SIPC has denied
coverage, and in particular, in the instances of fraud, its
coverage does not extend that far.
I am familiar with that being an issue. I look forward to
working with you and others on what we do about the victims of
people like Allen Stanford.
Senator Kennedy. OK. That is fair enough.
Let me just use my last minute to make an observation. I
think this is a really important nomination. I am impressed
with your credentials. I think the President has chosen well. I
think there is a lot of anger in my State and in this country.
I hear from middle-class Americans every day that the problem
as they see it is that we have got too many undeserving people
at the top getting bailouts and we have got too many
undeserving people at the bottom getting handouts, and the
folks in the middle get stuck with the bill, and they cannot
pay it anymore because their health insurance has gone up and
their kids' tuition has gone up and their taxes have gone up.
But I will tell you, what has not gone up is their income.
I believe in efficient markets. I believe in supporting
capital formation, but I also have lived long enough to
understand human nature. Some people cheat. They cheat in all
walks of life, and they cheat in all professions. But when
people cheat in securities matters, a lot of people get hurt. I
hope you will be mindful of that, and I know you will be. I am
out of time.
Mr. Clayton. Thank you.
Senator Kennedy. It was nice to meet you, Wyatt.
Chairman Crapo. Thank you, Senator.
Senator Donnelly.
Senator Donnelly. Thank you, Mr. Chairman.
We are honored to have you here, and to your whole family,
thank you for being here.
I was fortunate--we met in my office, and I just want to
read you a little bit about an article in the IndyStar, the
Indianapolis Star, recently about a Rexnord worker who is
losing his job. The jobs are going to Mexico. He did his job
great. He is presently training what is called ``Team
Monterrey,'' and what Team Monterrey is are the Mexican workers
who have come to Indiana to learn the skills to take the jobs
away. And let me tell you about John Feltner, who is the
individual here.
John's 21-year-old son, Austin, because he knows dad is
going to lose his job, his 21-year-old son has taken off time
from studying criminal justice at IV Tech, Indiana Vocational
Technical School, to manage a pizza shop so that they can raise
a few more bucks for the family.
His 19-year-old daughter, Emily, is still in school at
Indiana State. Her plans were to become a vet. It is an 8-year
track. She has looked up--she has said at this point this is
not doable. She has now gone to a 4-year program in nursing,
which is still a great thing, but like your dream was to become
a lawyer and you had a wonderful granddad who took you around,
her dream was to be a vet, and that is over now, because she is
trying to help keep the family together.
This is the real-world consequence of what happens on Wall
Street and of what you are going to be responsible to try to
make sure it does not happen. My State, in my town of Kokomo,
at the time there was the economic collapse, the transmission
plant there went from 5,000 people to less than 100.
Unemployment in Elkhart County went to 22 percent, and that is
countywide. That is not one town or this town. That was
countywide. That is the real-world effect of what happens. And
I have got 2,100 workers who have just been fired from Carrier
to pay for a stock buyback, a $16 billion stock buyback, and
they fired these workers and shipped the jobs to Mexico because
that 3 bucks an hour wage would help them make a few more
pennies to pay for the stock buyback. The real world is 2,100
families who have no idea how they are going to cover their
mortgage next month or send their kids to school.
So, you know, we talked about all those things, and I want
to know your general insight and experience advising and
counseling clients on stock buybacks.
Mr. Clayton. And, Senator, as we talked about in your
office, I am not familiar with Indiana, but there are----
Senator Donnelly. Pennsylvania is just like a cousin to us.
Mr. Clayton. Yes. Reading, PA, is a place I am very
familiar with. Look, the issue of jobs going overseas and how
that is related to the operation of a company, what choices the
management makes, is a difficult--I do not like these results
any more than you do. I do not like it at all.
Stock buybacks, there are times when stock buybacks make
sense. That is clear. A company has excess cash. They do not
know what to do with it. They do not have a good place to put
it. They should return it to their shareholders. As far as
whether that is always the case and whether they are using the
money in a way that we would like to see them use the money, I
agree with you. There are a range of outcomes, and there area
range of consequences, and there are a lot that as a citizen I
do not like. As far as the SEC goes, I am happy to talk about
that.
Senator Donnelly. And I wish I had an hour with you. I
really do. We had some good time before. But this was clearly
not a case of excess cash. This was firing workers to pick up
the difference in their wage from going to Mexico so they could
give it to the Wall Street hedge fund speculators. That is what
this was. And what happened in 2008 and 2009 was credit rating
agencies that abandoned ship and sold their reputation for a
few extra bucks, ridiculous, insane, collateralized debt
obligations and all of these things, that it was all allowed to
go on. And if it was stopped, those 5,000 people at the
Chrysler transmission plant would not have lost their jobs. And
so you are the sheriff. Besides being a great dad, you now have
the opportunity to be a sheriff. And we are very, very hopeful
you can fill that role.
Mr. Clayton. Thank you. And as I----
Senator Donnelly. My families are counting on you to do
that.
Mr. Clayton. As I said to you, I very much believe that if
growth looks like this in America, that is a lot better than
growth in America looking like this, because this is really bad
for everyday Americans.
Senator Donnelly. And what you do will help to determine
that.
Mr. Clayton. Thank you.
Senator Donnelly. Thank you.
Chairman Crapo. Thank you.
Senator Heller.
Senator Heller. Mr. Chairman, thank you, and thanks for
holding the hearing. And good to see you. I welcome your family
also. It is good to see everybody here. And, by the way,
congratulations on the nomination and this process.
Mr. Clayton. Thank you.
Senator Heller. I worked in the securities industry for a
few years, got my securities license. I worked on the Pacific
Stock Exchange, became an institutional broker. I worked in the
third market. But subsequently, a few years later, I became
Secretary of State in Nevada and ended up regulating the
securities industry for our State. And I had real working
relationships with the industry and saw some real bad players.
I think Senator Kennedy talked about a few of them, and my
colleague from Indiana talked about a few of them. And it is
usually the States that really dig up some of these issues and
some of the problems, even if it is a major trading firm like
Merrill Lynch and I think Pru--back when I was Secretary of
State.
I guess my question for you is your commitment to working
with these States. Not all securities regulators are in a
particular office. I think there are only half a dozen or so in
Secretary of State's office, but every State does have
regulators. And there is kind of a bit of back and forth. I
just want to get your feel for working with these States on
some of these issues and helping regulate their industries.
Mr. Clayton. I am very interested in working with the State
securities commissions and the many others who have
jurisdiction over the securities markets, including State law
enforcement, the Department of Justice, you know, the SEC.
To your point, it is also my experience that the bad
actors, they have been bad for a long time until they are
caught. And, you know, early on detection would be much better
than later. And where that comes from, if it comes from the
States or it comes from self-regulatory organizations, if it
comes from, you know, State law enforcement, I am all for it.
Senator Heller. The word that comes to mind is
``restitution.'' The earlier you get there, first of all, the
less damage, but the larger the chance of restoring these
individuals that have been defrauded. Do you have any views on
that?
Mr. Clayton. Yes, I do. It has been--you know, it is very
disappointing when you have these types of individuals that the
people who bear the brunt of it are ordinary investors, if you
have an Allen Stanford like we talked about or a Bernard
Madoff.
I do think some of the reforms that we have seen around
custody and tracing will help prevent that, so that is my view,
and we should be looking--to a point made earlier, we should be
looking with technology at better and more efficient ways to
monitor those individual financial advisers and brokers.
Senator Heller. In my office, when we were chatting back in
January, I talked about a new regulation called ``Industry
Guide 7'', that is, proposed new regulations that would affect
the mining industry in the State of Nevada. I am appreciative
of Chairman Crapo and Senator Tester also working with me on
this particular issue. All we are trying to do is align the
disclosure requirements with global standards so that our
domestic mines have economic competitiveness, and we are afraid
that we are going to lose that.
What all I am asking from you is if I could get your
commitment that you will work with this Committee, that you
will work with my office as we take a look at some of these new
regulations, make the necessary changes that I think are needed
to keep our mining industries across this country competitive.
Mr. Clayton. Yes, Senator, I do look forward to working
with this Committee and the staff on disclosure, and the
disclosure has followed where the market is. The mining
industry makes sense. I think the staff just put out for
comment another industry guide that had not been updated in
some time, so I understand the point and look forward to
working with you.
Senator Heller. Mr. Clayton, thank you. My time has run
out. Thank you for being here.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman. It is good to see
you again, Mr. Clayton.
A big part of the job of the Chairman of the SEC is
enforcement, a cop on the beat on Wall Street. And you have
said in your testimony today that you intend to enforce the law
strictly, and I very much agree with that goal. But I am
concerned that you will not be able to achieve it.
It is clear that the SEC will play a critical role in
deciding--the SEC Chair will play a critical role in deciding
what the enforcement position of the SEC will be. And in recent
history, Republican Commissioners on the SEC have favored
weaker enforcement while Democratic Commissioners have sought
tougher enforcement.
The Chair is often the deciding vote. And, of course, if
the Chair cannot vote and the remaining SEC Commissioners split
along party lines, then major enforcement actions do not go
forward, and serious wrongdoing may go unpunished. So it is
important to think about how often the SEC could be caught in
such a deadlock.
Under the President's Executive order for ethics, the first
2 years of your tenure as SEC Chairman you would have to recuse
yourself from participating in any enforcement matter involving
a former client of yours. That is about half of your term as
Chair.
So based on your personal client disclosures then, for half
of your tenure as SEC Chair, you would not be able to vote to
enforce the law against several big banks, including Goldman
Sachs, Deutsche Bank, Barclays, and UBS. Is that right?
Mr. Clayton. Yes, Senator. The way----
Senator Warren. Thank you. Those banks have repeatedly
violated securities laws in the past few years, but if they
violate securities laws again, in your first 2 years as SEC
Chairman you cannot vote to punish them, and I think that is a
problem. But it is just the tip of the iceberg.
Your recusals would not be limited just to your own former
clients. The ethics Executive order also requires you to recuse
yourself for 2 years from any matter in which your former law
firm, Sullivan & Cromwell, represents a party. Now, Sullivan &
Cromwell is a leading New York law firm with a very long list
of Wall Street clients. So for half of your term as SEC Chair,
you would not be able to vote to punish any corporation or bank
that uses Sullivan & Cromwell as their lawyer. Is that right?
Mr. Clayton. I believe that is a fair summary, Senator,
yes.
Senator Warren. Thank you. More potential cases with a
deadlock and no enforcement, and that is a problem.
And even beyond Sullivan & Cromwell's already long list of
Wall Street clients, any reasonably strategic company that
wanted to try to avoid an SEC enforcement action could simply
hire Sullivan & Cromwell to represent them before the agency,
and then you could not vote for enforcement against that
company. Is that right, Mr. Clayton?
Mr. Clayton. I am not sure about that, Senator.
Senator Warren. Well, you do know the rule that if they are
represented by Sullivan & Cromwell in front of the agency, then
you are going to be banned from being able to vote against
them.
Mr. Clayton. If they are represented by Sullivan & Cromwell
in front of the agency, I would not be able to participate----
Senator Warren. That was my point.
Mr. Clayton. ----but that does not mean that it would not
be----
Senator Warren. So more cases--more cases potentially that
you cannot participate in, meaning more cases potentially here
with a deadlock and no enforcement. I think that is another
problem.
So it is important to think about how often as we go
through this, if President Trump wanted to make sure that the
SEC would have a hard time in going after his Wall Street
friends, it seems to me you would be the perfect SEC Chair. You
cannot vote to punish some of the biggest names on Wall Street.
That means those cases would be at least more likely to end up
in deadlock, which means those companies could skate free.
And I just want to point out this is not a theoretical
problem. Recusals were a very big issue for the outgoing SEC
Chair, Mary Jo White. Like you, she came from a major Wall
Street law firm, and according to the New York Times, in her
short time heading up the SEC, she had to recuse herself in at
least 48 enforcement matters because of conflicts involving her
former clients, her former law firm, and her husband's clients
and law firm--at least 48 cases in which she could not vote to
punish a big company. Because the other Commissioners were
often split on enforcement matters, Chair White's recusals led
the Commission to deadlock time and time again, which meant
that corporations that may have broken the law were able to get
off easier.
Your recusal problems seem to be even more severe than
Chair White's. With you as SEC Chair, it looks like Wall Street
can breathe a little easier knowing that you will not be voting
against them. And there is likely to be weaker enforcement.
So here is my question: Can you explain why out of all the
people who could have been selected to head the SEC you are the
right person for this job?
Mr. Clayton. Thank you. I want to say that the question of
whether I am recused from a matter does not mean that there
will be deadlock. I do believe that the current Commissioners--
--
Senator Warren. Mr. Clayton, I do not quite understand
that. If there is not a majority to go forward on an
enforcement action, if the other Commissioners split 2-2, that
is a deadlock. And if you are recused, that leaves four
Commissioners--two Democrats, two Republicans. Republicans have
consistently gone for weaker enforcement, Democrats for strong
enforcement. You come here today and say, ``I am going to go
for stronger enforcement.'' You are not going for stronger
enforcement if you cannot vote.
Mr. Clayton. I am not sure about that characterization, but
I do know that----
Senator Warren. The characterization of a deadlock?
Mr. Clayton. No. The characterization of who goes for more
enforcement.
Senator Warren. Well, take a look at the data on that.
Mr. Clayton. OK. But what I would like to say is that I
believe that on enforcement matters--on enforcement matters--
the Commission is almost always unanimous on enforcement
matters.
Senator Warren. I think you want to check your numbers on
that, Mr. Clayton.
Mr. Clayton. OK.
Senator Warren. And you want to check what has just
happened. We have experience on this. I am going to yield
because I recognize the Chair has been very indulgent in
letting me go over. But I just want to underline the point that
holding Wall Street firms accountable is a major job of the
SEC's mission, and the SEC Chair needs to be able to
participate in those enforcement actions, to be the cop on the
beat for the American people, not on the sidelines when former
clients and Wall Street firms are able to skate free. And I
think that raises a very serious concern about your nomination
to be----
Chairman Crapo. Senator Rounds.
Senator Warren. Thank you.
Senator Rounds. Thank you, Mr. Chairman.
Sir, I would like to just begin by--I would like to just
kind of follow up on the questioning here just a little bit
about some of the questions that were being asked that required
a little bit longer answer than just a yes or a no. I would
like to give you an opportunity to perhaps elaborate a little
bit.
With regard to the issue of a split vote, a split vote in
the case of an enforcement action could possibly come as the
result as to whether or not there should be an enforcement
action in the first place. Would that be a fair statement?
Mr. Clayton. Yes.
Senator Rounds. In that particular case then, it would be a
matter of making a determination yes or no, and in this country
in most cases we do not decide on a split vote whether they are
guilty or not and then make the assumption that they are simply
guilty because there is a split vote involved in it. Fair
enough?
Mr. Clayton. I think that is fair, Senator.
Senator Rounds. How much time do you think, as the Chairman
of the Securities and Exchange Commission, you would spend in
terms of breaking ties on the determination of right or wrong
on the part of a company who is being brought before, compared
to the rest of the job?
Mr. Clayton. I would not expect that it would be any
meaningful amount of time, Senator.
Senator Rounds. If there were parts of the--and recognizing
that we are all limited by the amount of time that we have to
share, if there were parts of the previous questions that were
asked to you that you did not feel like you had the opportunity
because of the time constraints, would you like to share a
little bit of information to perhaps clarify or expand on your
answers?
Mr. Clayton. Thank you. As I said in my opening statement,
I have zero tolerance for bad actors. I am not only saying that
here. I will say it to the enforcement staff at the SEC. I will
say it to my fellow Commissioners. I do believe, as I have said
before, that individual accountability is extremely important
not only to get rid of bad actors, but it sets a tone for the
industry.
Much of the enforcement activity of the Commission, as I
understand it, is driven by the Enforcement Division and the
oversight of the Enforcement Division. I have every confidence
that that will continue, and that any recusals that I have to
do will not impact that.
Senator Rounds. Are you a Republican?
Mr. Clayton. No. I am an Independent, sir.
Senator Rounds. It seems to me that the suggestion was that
Republicans are lax on enforcement. As an Independent, would
you see Republicans as being lax on enforcement?
Mr. Clayton. No, that was--I do not see it that way. I
think sometimes people of different parties may have different
enforcement priorities, but I would not say that Republicans
are lax on enforcement.
Senator Rounds. Would you see your role in terms of being
an Independent and being nominated for this particular position
to be an arbiter perhaps in terms of finding common ground with
regards to issues of enforcement and in the layout of penalties
that are appropriate for organizations that are found to be in
violation of the law or the rules?
Mr. Clayton. Yes, Senator, and if I wanted to say what I
thought my--if I had to pick a single strength that I believe I
would bring to this position in that regard, it does go back to
what I said at the beginning. Being a transactional lawyer,
building a consensus is what your job is. People have different
views. They want to get to a place that is happy for everyone,
and that is very much what my job has been, and I want to
continue to do that if I am confirmed.
Senator Rounds. Thank you. Anything else you wanted to add
to that at all?
Mr. Clayton. No. I really thank you for the time.
Senator Rounds. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator.
Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
Mr. Clayton, congratulations on your nomination. Since you
and I met in February, there has certainly been quite a bit of
activity at the SEC. Of particular concern to me is Acting
Chair Piwowar's efforts to scale back the authority of the
Commission's Enforcement Division. He unilaterally reopened the
comment period on a congressionally mandated rulemaking,
disclosure of CEO-to-worker pay ratio, so I want to focus first
on the enforcement, and then I will turn to the other matter.
In 2009, former SEC Chair Schapiro gave enforcement staff
subpoena power. Before this, only the Commission had the power.
This empowered senior enforcement analyst to quickly escalate
informal inquiries to formal investigations, ultimately
strengthening the Commission's ability to investigate corporate
misconduct.
When we met and discussed enforcement issues, you said that
bad actors have cost this country billions, and I could not
agree more with you. In my view, the SEC functions best with a
strong Enforcement Division that stays ahead of the markets.
Unfortunately, Acting Chair Piwowar has taken steps to curb
the Enforcement Division's authority by revoking the subpoena
authority from 20 enforcement officials and limiting it only to
the Enforcement Division Director. That is a major reversal
from post-crisis policy designed to assist the Commission in
initiating investigations and going after bad actors that
ravaged investors and our economy at large. So I just want to
get some quick answers to these questions.
In your opinion, do you think that the SEC's enforcement
staff has abused its authority since the delegation of subpoena
authority in 2009?
Mr. Clayton. Senator, I have no idea whether they have
abused their subpoena authority or not.
Senator Menendez. Well, you are a practitioner before them.
Do you have a sense that they have abused their authority for
the last 8 years?
Mr. Clayton. Senator, in my experience, which as far as--
you know, on the defense side, is very limited, so take it with
that. I have not seen an abuse of subpoena authority by the
SEC.
Senator Menendez. Were you consulted at all on these policy
changes as the potential new Chair?
Mr. Clayton. No, I was not.
Senator Menendez. Do you agree with this policy change?
Mr. Clayton. I do not know. I will have to discuss this
with both Commissioners and with the enforcement staff, if I am
confirmed.
Senator Menendez. Well, let me ask you this: Does taking
away subpoena power from senior enforcement attorneys better
protect investors and deter misconduct?
Mr. Clayton. That is--I do not know the answer to that
question.
Senator Menendez. Really?
Mr. Clayton. No, I do not because the subpoena----
Senator Menendez. In the abstract--forgetting about--just
the proposition that taking away subpoena powers from those
line entities that are engaged in investigating misconduct and
limiting it to only one person and then having to go through a
whole process, it seems to me that we are going to largely
deter and delay investigations.
Mr. Clayton. I think those are good questions.
Senator Menendez. Well, the question--I am looking for good
answers.
Mr. Clayton. Yeah, I----
Senator Menendez. My good questions do not mean that much
if I do not get good answers. I would hope to hear from you
that what was happening before in terms of spreading that
authority was the better process of making sure that we build
on the successes of empowerment at the SEC's enforcement staff.
At the end of the day, we need an SEC and a Chair who is going
to be a cop on the beat, because what we had at one time is
they were asleep at the switch, and that gave us the excesses
that all Americans had to pay for.
Let me ask you, I have another concern about Acting Chair
Piwowar's unilateral decision--unilateral decision--to open a
new public comment period on the rule requiring public
companies to disclose the ratio of their total CEO compensation
to median worker pay, a rule adopted by the Commission nearly
18 months ago, a year-and-a-half ago.
In addition to obstructing the implementation of a
congressionally mandated rule, one that I authored in Dodd-
Frank, and diverting staff resources and time seemingly only to
justify the personal ideological views of one person, this
action actively ignores the tens of thousands of comments from
investors and investment managers expressing the view that this
information is material and important to shareholders'
evaluation of executive compensation.
In fact, yesterday a coalition of 100 investors and
investor organizations representing $3 trillion in assets under
management wrote to the Acting Chair expressing support for the
CEO-to-worker pay ratio rule and urged the SEC to maintain the
current effective date for disclosure.
So my question is: Do you agree with the Acting Chair's
unilateral decision to open a new public comment period on the
rule? And if so, why?
Mr. Clayton. Senator, Acting Chair Piwowar is the Acting
Chair. That is a decision for him to make.
Senator Menendez. Yeah, but you are going to be, if
confirmed, the new Chair. I want to know, do you think--would
you do that? Would you have done that?
Mr. Clayton. I do not know enough about the issue.
Senator Menendez. Well, that is not acceptable. What do you
mean you do not know? You do not know about CEO pay and
worker--this is a major issue that has been debated out there
for some time.
Mr. Clayton. It has been debated for some time----
Senator Menendez. And it is a congressionally mandated
provision.
Mr. Clayton. It is a congressionally----
Senator Menendez. One that has for 18 months already been a
rule, so an arbitrary and capricious decision of the Chair--you
will be the next Chair if confirmed--to ultimately undo that
seems to me--to tell me you do not know, you do not know is not
acceptable.
Mr. Clayton. That is not what I am saying, Senator. I am
saying that I do not know what motivated Chairman Piwowar----
Senator Menendez. I am asking you what you would do. Would
you have done that? If you were the Chair sitting there right
now, would you have done that?
Mr. Clayton. I cannot answer that question because I do not
have the benefit of the interaction with the staff that
Chairman Piwowar had and the history with the rule that he had.
Senator Menendez. The history of the rule is it has already
been done for 18 months. I am sorry, Mr. Clayton, but those
answers are not acceptable.
Thank you, Mr. Chairman.
Mr. Clayton. Thank you.
Senator Shelby [presiding]. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Mr. Clayton, thank
you for being here.
I sometimes go into these committees, and it reminds me of
a ``Far Side'' comic. The caption read, ``The floggings will
continue until morale improves.'' So I thank you for your
patience.
I want to ask you a question. You know, the primary mission
for the SEC is protecting investors--that is more or less
enforcement--maintain fair and orderly and efficient markets,
and to facilitate capital formation. Do you have any sense over
how well the SEC has done over the last 8 years or the last 20
years? You pick your time horizon.
Mr. Clayton. Senator, I think on the--let me focus on the
question of capital formation, if you do not mind. I do believe
that over the last 20 years, particularly in the area of our
public capital markets, we could have done better. We could
have done better.
Senator Tillis. Tell me a little bit, because that spans a
couple of Administrations. What were the highs and lows? Just
briefly, because I want to keep to my time, and I have got a
couple other questions I want to ask.
Mr. Clayton. In particular, I believe, for medium-sized
companies, companies that are in their growth phase, we have
made it more difficult and less relatively attractive for them
to be public companies. I think that almost all----
Senator Tillis. What do we have to do to get on a positive
trajectory?
Mr. Clayton. You know what? We have to reduce the burdens
of becoming a public company so that it is more attractive----
Senator Tillis. Well, that was going to be another question
I would ask you. Why do you think it is we have--I was trying
to get the number in front of me so that I am accurate. But
just comparing--hold on 1 second. There are one-third fewer
public companies today than 20 years ago. Is that healthy or
unhealthy?
Mr. Clayton. I believe that that statistic should be
telling us something, and I think it is----
Senator Tillis. What is it telling us?
Mr. Clayton. I think it is telling us that our public
capital markets are less attractive, and our public capital
markets, I believe, are a much--they are much more effective
for the Main Street investor than other forms of investing----
Senator Tillis. Is it fair to say that if we do not come up
with a way to--with proper regulatory oversight--and I worked
in the banking industry. I was a partner at
PricewaterhouseCoopers. I have worked with a number of
different financial institutions, Bank of America probably
being the one I spent the most time with. But is it fair to say
that if we do not come up with a way to improve capital
formation, we are hurting the little guy? Because capital
formation creates jobs. Is that right?
Mr. Clayton. I agree with that, Senator.
Senator Tillis. At every level.
Mr. Clayton. At every level.
Senator Tillis. I know the one thing--so, you know, it is
not a matter of going willy-nilly. I was a partner at PW back
in the 1990s. I saw the bust. I saw the very real regulatory
exposure that Enron gave light to. It had to be fixed. I am not
against all regulations. I am against regulations that prevent
the little guy from getting a job. And I think if we do not
form capital, we do not create jobs, and we do not grow our
economy, and we do not reduce the tax burden. There is a right
size to regulations, just like there is lean manufacturing
techniques and lean process techniques that the private sector
uses. And I hope that you will go in there and look at this
organization and right-size the regulations, come up with
schemes that promote responsible capital formation.
You know, there is something else that--I feel like
sometimes I am living a reality TV version of ``Atlas
Shrugged.'' There are a lot of people in this Congress that
want to just beat down job creators and employers. And I just
decided just on the fly--and I am glad my staff was able to
respond to my random request, but just take a look at Goldman
Sachs. People want to demonize Goldman Sachs. That is an easy
thing to do, right? Just beat up on a financial services
institution, an institution that is committed to--let me look
at the general numbers here. They have 36,500 employees. There
are probably a lot of little guys in there. They have
contributed billions of dollars to nonprofits. They have a
commitment to investing or financing $150 billion--am I
right?--in the clean energy sector by 2025. Demonizing
employers that employ the little guy is not looking out for the
little guy. And I have heard a marketing department recently
using ``looking out for the little guy.'' Look, I was a little
guy. When I was 19 years old, I was not in college. We have got
to look out for the little guy, and we have got to stop
demonizing businesses that have to be held accountable.
You find a bad actor--everybody thinks that I like
pharmaceuticals. I like pharmaceuticals who are responsible.
Ones who are bad, like Turing, I would like to see them go to
jail. Any financial services executive or anybody in a
financial services business that acts badly needs to suffer the
consequences. But if we just let the American people think that
they are all bad, you are hurting the little guy. And I hope
you will go to the SEC and promote responsible capital
formation and do a good job. And I think that you will.
And, Jasper and Wyatt and Haley, I think your dad is going
to do a great job.
Mr. Clayton. Thank you.
Chairman Crapo [presiding]. Thank you, Senator.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
Mr. Clayton, there are 20 regulations mandated by Dodd-
Frank that the SEC has not yet drafted or finalized. That is
more than 20 percent of the law which was passed 7 years ago.
The Acting Chairman has publicly stated that the SEC will halt
all work on Dodd-Frank-related rules. What would be the legal
basis for not finalizing rules that are required under a
statute?
Mr. Clayton. Rules required under a statute? Rules required
under a statute, rulemaking should go forward with respect to
rules required under a statute.
Senator Schatz. And at what point does a delay become a
refusal to implement the law?
Mr. Clayton. I think that depends on the context, Senator.
I do not think there is a specific----
Senator Schatz. Well, I am giving you this context, a 7-
year-old law, 20 percent of the rules not yet implemented, the
Acting Chairman refusing to move forward on implementation of
the rules. That sounds like a refusal to implement the law as
opposed to the normal sort of Administrative Procedures Act
stumbling and bumbling.
Mr. Clayton. I am not sure I would characterize it that
way, but I understand your point.
Senator Schatz. But I am asking what you think?
Mr. Clayton. Again, as I said with Senator Menendez, in
terms of a specific rulemaking, I do not have the benefit of
the interaction with the staff and the comment letters and what
the--but when--and I hope I do--I become Chairman, assessing
the rulemaking calendar, prioritizing and moving forward is
something I very much intend to do.
Senator Schatz. Do you think the SEC has the authority to
refuse to implement a rule required by the law?
Mr. Clayton. I think a rule required--a rulemaking required
by law should go forward.
Senator Schatz. Thank you.
I want to ask sort of an uncomfortable question, and you
and I had a good conversation. I also have young kids. We are
both in public service. There is a lot of travel. We appreciate
it. Your dad is doing fine. You guys are doing better than he
is because I am sure this is a little boring for you.
Mr. Clayton. They always do.
Senator Schatz. Yeah. But thank you for that. But I
appreciate the conversation that you had with Senator Warren
regarding recusals and conflicts of interest. But there is
another aspect of this. Take Mary Jo White's situation, who
recently returned to the firm she left to join the SEC. While
at the SEC she had to recuse herself from dozens of SEC
actions, as you would. This made it harder for the SEC to carry
out its mission. But now that she is back at her old firm, it
raises questions that she never really severed ties to former
colleagues, friends, and clients, and that is not because she
is doing anything nefarious. It is because of human nature. It
is only human to think that it is--it is only human to think
about the next phase of your career, and naturally we know that
future options are shaped by current actions. And for a
financial regulator, it is especially problematical.
This leads me to a sort of challenging question to ask, and
I in no way mean to impugn your personal integrity, but I have
to ask: Is it fair to say that you have friends and colleagues
at companies and institutions that are subject to the SEC's
oversight?
Mr. Clayton. Yes. And it is a fair question, and, yes, I
do.
Senator Schatz. Is it fair to say that you will consider
returning to Sullivan & Cromwell after your term is finished?
Mr. Clayton. On that, this is a huge change for me and my
family, and I am committed to doing this. As far as, you know,
whether my term is hopefully a full term, a lot is going to
change if that is the case. Even if it is--I mean, your whole
life changes when you do something like this. I am severing all
ties to the firm. I am divesting myself of all the financial
assets. You know, and I know, having done some changes in my
life, that when you do a change, your perspective on just about
everything changes. Maybe some a little bit, maybe some a lot.
Senator Schatz. I guess what I am hearing is you do not
preclude the possibility of any professional opportunity that
may present itself after you serve as Chair of the Commission.
Mr. Clayton. I am not going to preclude it. I do not think
that is an appropriate precedent to set. You know, that said, I
am committed to this job.
Senator Schatz. Sure. I understand. And I think from the
standpoint of not this panel or the people in this audience or
even the people watching on C-SPAN, but from the standpoint of
the regular person, it is not unreasonable to worry about
someone who comes from industry, whose social network, whose
professional network, whose friendship are within that industry
to be put in charge of being the cop on the beat; it is not
purely a matter of whether there is a square conflict and
whether you do the recusals properly, but whether those
relationships infuse all of your thinking about your own life
and about the decisions before you.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Perdue.
Senator Perdue. Thank you, Mr. Chairman. And, Mr. Clayton,
thank you for your forbearance and your willingness to step out
in mid-career to do something like this.
As a past public company CEO, I have had a personal
relationship with the SEC, and I find it on balance to be a
very supportive and constructive agency, so let us put that on
the record.
Having said that, I am very concerned that the economic
miracle of our lifetime, the last 70 years, in my humble
opinion has been based on innovation, capital formation, and
the rule of law. And I think we outcompete everybody in the
world with regard to the totality of what that means. I am
concerned that right now in the last--since 2000, we had 8
years of a Republican President and 8 years of a Democratic
President, so this is not a partisan question. But our number
of IPOs, initial public offerings, has decreased somewhere
between--well, it has gone from an average of around 450 in the
decade before to somewhere under 200 now, close to 150. And
that is a significant change over a long period of time. It
seems to me systemic. It represents, I think, some things that
are troubling with regard to our current financial situation.
This is my second question I want to come back to, to your USA
10-K. Can you speak to the fact that this reduction in public
offerings and also to the number of public companies we have
today, what is causing that? What do you think the SEC can do
to help us become more competitive with the rest of the world?
Mr. Clayton. Yes, Senator, and I agree with you. I believe
that a reduction in the number of public companies, which is a
function of fewer companies becoming public, is a problem for
our capital markets.
The ability to invest in a public company is one of the
most efficient ways for a Main Street investor to invest. The
price is there. Our equity markets have become very efficient.
You can invest. You can divest very easily. It is very
important. Who chooses to become a public company? The
management of the company. When they come to make that choice
as to where they are going to raise capital or how they are
going to incentivize their employees or other things that are
important when you make these decisions, they look at the
landscape now and very often say, ``It is just too
burdensome.'' And I think that is a problem.
Senator Perdue. Do you think that puts us at a competitive
disadvantage with other countries?
Mr. Clayton. I think it puts us at a competitive
disadvantage with other countries, and in particular, it puts
us at a competitive disadvantage in terms of something uniquely
American: the participation in the capital markets.
Senator Perdue. What I am concerned about, the private
markets are also a very efficient way to raise money, but it
only allows a certain percentage of investors to play because
the blocks of investment are so much larger, the risk per
dollar of investment is so much greater, and, frankly, it is
not as liquid. People cannot get in and out as quickly as they
can in the public markets.
So I am one that is paying attention to this as having run
a public company and a private company. I am very concerned
about that imbalance right now, particularly with regard to
global investment and the flow of capital around the world.
In my time remaining, I have one quick question. You wrote
an article--I think you co-wrote it. It is ``USA 10-K.'' In
there, you make a lot of comments. One that really speaks to my
heart, though, as one of the reasons I got involved in running
for the Senate is I am concerned about our current financial
situation. And you talk about complexity risk and the current
state of regulatory affairs. Can you just speak to that
briefly?
Mr. Clayton. I have a problem with regulations that are
unnecessarily complex, a real problem with it, because it leads
to a lot of things. One is it is very costly to address them up
front. The second is it creates loopholes. No one wants
loopholes. Complexity allows for that. And, third, it creates
an opportunity for ``gotcha.'' That is not what we meant. We
meant this: My view on regulation is, to the extent
practicable--and you cannot do this in all cases, but to the
extent practicable, reducing complexity, clarity are very
important. If people know the rules, they can operate more
efficiently.
Senator Perdue. Thank you, Mr. Chairman. You know, the
number one thing that I am looking for in this nomination is
somebody who can help the SEC create and maintain a level
playing field. And I think with your background, I think you
have all the skills and personal integrity to do just that. And
I applaud you again for being willing to step out and take on
this responsibility.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Mr. Clayton. Thank you.
Chairman Crapo. Senator Warner.
Senator Warner. Good morning, Mr. Clayton. I have got a
couple areas I want to bounce around here, so I will try to be
fast in my questions, if you could try to be somewhat fast in
your answers.
I have been very interested in the emerging challenges
around cybersecurity. To me, it was fairly remarkable that
Yahoo, for example, had a 500 million user breach and yet did
not feel that was material enough to file in their quarterly
SEC filing.
Now, I do not want to just pick on Yahoo. The remarkable
stat is there are 9,000 publicly traded companies. Less than
100 over the last decade-plus have ever reported any kind of
cyber breach or violation as material information.
As more and more companies get more and more often
threatened by this type of activity and more of their
intellectual property is subject to this kind of attack, do you
think the SEC ought to take a fresh look at reporting around
the whole threat of cybersecurity?
Mr. Clayton. Senator, let me give you my personal view, and
I think it answers your question. I do not think that the
American public--we can whittle that down to the American
investing public, particularly outside of--particularly the
ordinary investor, has as great an appreciate for the cyber
risks that our businesses face today.
Senator Warner. Well, I would just hope, though, that--you
know, we have got some bipartisan legislation that would at
least require someone on the board to have some level of cyber
experience. But to me, the whole question of materiality, if
Yahoo had 500 million, then there was some question that the
breach actually exceeded 1 billion, how that is not material is
just beyond belief.
Mr. Clayton. I think it would be inappropriate for me to
comment on a specific case or a specific matter, but what I
want to say is as I look across the landscape of discussion and
understanding of cyber threats and their possible impact on
companies, I question whether the disclosure is where it should
be.
Senator Warner. I appreciate that.
At one of the hearings Senator Crapo and I had one time--
and I think he may have touched on this--RBC Capital brought in
a chart that showed--this is around equity market structure.
They showed 839 different fee schedules that were composed of
3,722 separate fee variables. In effect, there was an ability
for the market makers, through kind of bespoke transactions, to
really gear toward people who were going to make the biggest
commission off of this. It was not by any means a level playing
field, in answer to Senator Perdue's questions.
One of the things that we pushed very hard, the former
Chair, but we have really not seen it, is to move forward on a
maker-taker pilot so that we can try to bring more clarity to
make sure that all bidders in a market are going to get a fair
shake. If confirmed, would you pledge to continue to work with
us on that type of pilot?
Mr. Clayton. Yeah. In my opening remarks, I noted that in
our interactions--and I was really glad to meet with you--I
learned things. This is a case where I have learned something
in the interim thanks to your questions. The Equity Market
Structure working group at the Commission is doing--you know, I
think is doing a good job of bringing the fact that there is a
great deal of complexity. We do not know whether it is as
efficient as it should be or as fair as it should be. And I do
want to work on this going forward.
Senator Warner. I would like that because to me, seeing
that structure, seeing this chart, to me it looked like it was
a total ability to game the system that really allowed market
makers to give to a preferred broker and, frankly, was by no
means--it was by no means the kind of level playing field that
I think we all want.
I want to get in my last question here. I know that you
have represented Valeant and Pershing Square. There was
potential insider trading in conjunction with the Allergan bid
back in 2014. As a matter of fact, a Federal judge in
California ordered both Pershing Square and Valeant to make
additional disclosures on their shareholder documents. In a
sense, it seemed like they were almost begging the SEC to take
on a case around this issue around insider trading. I also
believe that one of the challenges--I think Senator Donnelly
raised this issue around, you know, long term versus short
term. One of the challenges, there is a role for activist
investors, but in the United States, we still have under 13D
what I think is a very antiquated 10-day reporting period, so
somebody can aggregate that 5 percent of the stock, report it
after they got that 10 days, then you get another 10 days for
somebody else to be able to, in alliance as kind of co-
investors, aggregate stock without the level of disclosure
that--you know, the U.K. is down to you have got to report this
within 2 days. Hong Kong I think has got a requirement of
instantaneous disclosure. To me, 13D and the ability for these
investors to kind of aggregate shares and then provide kind of
an aggressive activist type, you know, sometimes play well, but
I do not think we are serving our market or serving the Western
investors well. Do you have any comments on 13D and how we
might be able to get this kind of information faster out? And
then also this notion of whether you think the SEC ought to
take a look at the judge's decision in the Pershing Square
case. I tried to get a lot in there. I am over time.
Mr. Clayton. Yes, that is a lot.
Chairman Crapo. Quickly, please.
Mr. Clayton. On the question of activist investors and the
benefits that they bring to the market and some of the
questions that people have raised about their activities, you
know, that is going to be an ongoing debate. I understand the
contours of the debate, and I look forward to working on it.
Senator Warner. 13D?
Mr. Clayton. 13D, I also understand that debate in terms of
you want to incentivize people who see something wrong with the
company to come in and say, you know, you are not doing a good
job. On the other hand, you do not want to give them an unfair
advantage. And, in particular, I understand your question about
whatever we want to call it, the domino effect, the group
effect.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. And
I apologize for my tardiness. I was leading, along with Senator
McCain, a hearing simultaneously with the Supreme Allied
Commander in Europe, General Scaparrotti, so I am sorry.
Mr. Clayton. It is probably more important.
Senator Reed. No, it is not. It is not. Welcome to you.
Welcome to your family. I particularly want to salute your
father's service in Vietnam. Thank you, sir, very much.
You have said in your public statement, ``There is zero
room for bad actors in our capital markets. I am 100 percent
committed to rooting out any fraud and shady practices in our
financial system.''
One of your potential predecessors, Mary Schapiro, in 2011
wrote that one of the reasons why there are some inhibitions in
doing this is because ``the authority to obtain civil monetary
penalties with appropriate deterrent effect is limited,'' i.e.,
they are capped at a relatively low level given some of the
behaviors and some of the resources. Would you be sympathetic
to statutorily raising these penalty thresholds? Senator
Grassley and I are working on such a proposal.
Mr. Clayton. Senator, actually I have to confess this is
the first time I have been asked the question about the
penalties, so I am very willing to take a look at the issue and
work with you and give you my views after I have been better
educated on it.
Senator Reed. Well, one of the things that most people--and
you do not have to be a financial analyst, just somebody back
in Rhode Island reading the newspaper--when you have a company
that settles, or admits no right or wrong, they did not do
anything wrong and they settle for money which is a fraction of
what was suggested they got through these behaviors, people get
a little cynical and skeptical. So I would urge you very much
to look at that.
Following up on Senator Warner's question about
cybersecurity, we also have a proposal--Senator Collins,
myself, and Senator Warner have a legislative proposal that
will require a publicly traded board to have at least one
person on the board who is a cybersecurity expert, and if not,
then in their disclosures, explain why they do not need it
because of steps they have taken. And let me emphasize it does
not require companies to take any actions other than just
provide this disclosure. Would you be sympathetic with that
legislation?
Mr. Clayton. Senator, as I said, I believe in materiality
being the touchstone. That said, there are areas where I
believe guidance to corporations in terms of what their
disclosures should be is appropriate. I think cybersecurity is
an area where I have said previously I do not think there is
enough disclosure. In terms of whether there is oversight at
the board level that has a comprehension for cybersecurity
issues, il that is something that investors should know,
whether companies have thought about the issues, whether it is
a particular expertise of the board or not, but I agree that
that is something companies should know. It is a very important
part of operating a significant company. Any significant
company has cyber risk issues.
Senator Reed. And that is not just the traditional sort of
financial company nowadays or any company, because the ability
to interfere with operations through the Internet is
significant.
Mr. Clayton. Yes.
Senator Reed. Let me ask a question about climate change.
It is interesting. BlackRock, which is one of the world's
largest asset managers, has just indicated that it would expect
companies such as oil producers, miners, or real estate
companies to have a demonstrated fluency in how climate risk
affects their business and how a given company will address it,
which raises, again, a similar issue. Should these companies
that are exposed to climate risk specifically be required to
make their disclosures in their publicly filed documents?
Mr. Clayton. I know that the SEC has issued guidance in
this area, in particular, not on the impact of climate change
itself on businesses, but potential regulations and other
activities. And let me say this: Public companies should be
very mindful of that guidance as they are crafting their
disclosure.
Senator Reed. I will just say this, and this is more of a
footnote than anything else. It is an interesting time when the
Secretary of Defense seems to be the most fervent believer in
climate change and the Director of the Environmental Protection
Agency does not seem to believe it at all, placing companies in
an awkward position of who do you believe. But I tend to
believe the Secretary of Defense, so let us stop there.
A final point we talked about in my office, which is
intentions are one thing, resources are another, and resources
will affect your behavior. And as I observed, one of the
impressions I had in the run-up to the collapse in 2007 and
2008 was the SEC had very good intentions, but they did not
have the budget to go out there, and Wall Street knew it. And
so they knew that there were a lot of behaviors that might have
been in that murky area, but the likelihood of, one, being
discovered, two, being prosecuted or anyone held accountable
was virtually nil because the resources were not available.
Right now the SEC is operating on a CR of about $1.6
billion. They have asked for $1.7 billion. But looking at the
skinny budget, domestic agencies are being decimated. So what
happens when you are presented with a budget which you think is
absolutely inadequate for the technology, for the enforcement
personnel, et cetera, and I think that will translate very
quickly on Wall Street, generically speaking, into the sense
that there is no sheriff?
Mr. Clayton. Well, in terms of using resources, I am very
interested in using resources as effectively as possible. In
the area of enforcement, as I have said--and I do look forward
to discussing this with the staff at the SEC, and the
prosecutors who, I know, and will, if confirmed, cooperate
with, I do believe that individual accountability has a greater
deterrent effect across the system than corporate
accountability. And I look forward to pursuing that.
On the question of budget and resources, I know lots of
instances where new CEOs have had to go into a particular
situation. They wish they had more money; they wish they had
less money. One of the things that I would have to do here is
get up to speed very quickly on the areas of acute need versus
less need and act accordingly. That is what I can tell you.
Senator Reed. Thank you.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Reed.
Mr. Clayton, that concludes our first round. We have had
just a couple of Senators ask for a second round, and so we
will do that. I think we have three Senators who have asked to
do so. And I will forgo my second round, although I will
probably make some wrap-up comments at the end, but let us
start the second round right now with Senator Brown.
Senator Brown. Thank you, Mr. Chairman. I appreciate your
indulgence, and I know Senator Warren does and Senator Cortez
Masto does. I have to go to Agriculture after this for the
confirmation for the Secretary designee there.
Again, thank you for answering the questions that you have
so far. You have clearly thought a lot about the Foreign
Corrupt Practices Act. As a lawyer in private practice, how
would you advise a client interested in complying with the act
if that client was weighing going into business in Azerbaijan
with a politically connected family known to be corrupt and
tied to the Iranian Revolutionary Guard? And you know that is
not just a ``what if.'' That is a real case.
Mr. Clayton. No, I think that is a real case, and I am
going to not comment on a real case, but I am going to comment
on the question of how do you advise a client who is subject to
the Foreign Corrupt Practices Act who may be entering into a
business in a country that is well known for corruption. I
think you have to tell that client to think long and hard about
whether you want to have the potential exposure to--and not
just the Foreign Corrupt Practices Act, but thankfully now,
which was not the case 5, 7 years ago, similar oversight and
enforcement from other OECD countries. And, in fact, there are
some jurisdictions where in the vast majority of the cases, it
may make sense just not to participate.
Senator Brown. I am sure you know that the President was
involved in that situation. In 2012, he said that the FCPA is a
horrible law that should be changed because it puts U.S.
business at a huge disadvantage. I am not asking you--I know
you have had some similar kinds of thoughts, but I think all of
us want you to understand how important it is with a President
like no other in terms of family investments, in terms of the
President's family has gone overseas to do more investing while
U.S. taxpayers have paid to protect his family when they are
overseas and how those raise questions not for this hearing but
that you need to be particularly vigilant because he is your
boss. I understand you have a fixed term, but he is your boss,
and he continues to appear to be making money from around the
world. And I am hopeful that the standard will be high. We
should send the message that American businesses--we should not
be sending the message American businesses can be so successful
partnering with corrupt entities. It is bad for our moral
standing in the world. It is bad for a developing country. It
is bad for investors. But I would just ask to make that
statement.
Let me ask another question. I do not think I have heard
anybody in Main Street, Ohio, complain about the lack of IPOs
crimping their investment choices. What they really want to
know is that we are doing what we can to prevent the busts that
can endanger their savings and retirement and to make sure the
system is not rigged against them.
I have been troubled for the last 3 or 4 years by the
collective amnesia on this Committee and in this Senate about
what happened in 2007, 2008, and 2009, and I think most
Americans share that concern and wonder about the collective
amnesia of too many of our policy holders.
So my question is this, Mr. Clayton: What do you tell
people saving and investing about a market where companies can
stay private for longer, can limit shareholder voting rights--
we are seeing that in a number of very prominent U.S.
companies--and where they can make it harder for even large
institutions to submit proposals for shareholder votes?
Mr. Clayton. Let me try and take those. In terms of--let me
go back to your first statement. In terms of whether having
fewer public companies, I do think it is--again, I do think it
is a problem, and I do think it is a problem that is not well
known because if you have fewer public companies getting on the
growth phase, and these are all here, that is fewer returns for
people who participate in the public markets. People who
participate in the private markets are capturing those returns.
I do want to see more public companies.
In terms of, you know, your other questions around amnesia,
I can tell you that I do not have amnesia. I worry about where
the risks are today. Now, the risks in 2007, 2008 were in one
aspect of our economy, and it got away from us, very much got
away from us, and we did not--I worry about where those risks
are housed today and making sure that we do not have a repeat
of that type of situation.
Senator Brown. Go back to the--thank you for answering the
collective amnesia part of it, but we talked, and you said you
want companies to be--when I said they stay private for longer,
you answered that well enough, but more and more companies are
limiting shareholder voting rights, more and more companies are
not really particularly welcoming of submitting resolutions by
even major institutional shareholders.
Mr. Clayton. On the voting rights and governance issue of
companies, you know, two things. It is well disclosed and well
understood. That is where we are. The ability of companies to
come to the market with governance structures like that is a
function of does it make sense. I also believe it is a function
of what is the supply of public companies coming to the market.
My sense--and I could be completely off on this because I have
not tested it with experts and things like that. But my sense
is that the ability of--there is so much thirst for public
companies that it is easier for a company to set a particular
set of governance requirements than it may have been in the
past.
Senator Brown. And that is not a good thing?
Mr. Clayton. I do not know if it is a good thing or a bad
thing, but I think that is a change in the balance.
Chairman Crapo. Thank you.
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chairman. Thank you
for the indulgence.
And to Mr. Clayton, I know it has been a long morning, so I
appreciate you being here and the answers to the questions. I
have two quick ones for you.
One has to do with the forced arbitration clauses. In
particular, Dodd-Frank gave the SEC the authority to rein in
the use of forced arbitration clauses. Unfortunately, the SEC
never so much as studied the issue.
So my question to you is: If confirmed, will you commit to
reining in the use of forced arbitration clauses?
Mr. Clayton. I am not going to prejudge and commit to that
issue. It is actually--I will tell you it is an issue that I do
not know a great deal about, but I will say that I will commit
to working with you and working with the staff to learn more
about it.
Senator Cortez Masto. Thank you.
Second question. A number of my colleagues today have
covered how your substantial recusals may impede the work of
the SEC. My specific interest, though, is in transparency. I
believe that Government does not do enough of being transparent
enough to the taxpayer to understand what is taking place, in
Commission hearings, in any type of process or procedure. And
while I certainly do not want market-moving information to be
disclosed before it is ripe, I think the public should know
when you or any Commissioner has recused yourself once an
enforcement matter is settled.
Will you commit to report to the public instances when you
have recused yourself and what triggered the recusal once that
enforcement matter has been settled?
Mr. Clayton. I think there are two parts to your question--
well, let me say there are three parts to your question. I do
agree with transparency. There are situations, as you know as a
prosecutor, where, you know, for example, you do not disclose
an ongoing investigation until it is over.
In terms of recusals, I think the Commission has a policy
for disclosure of recusals, and I look forward to working on
that.
As far as the particular reason for recusal, if it is not--
I will need to look into it, but there are--it is the first
time I have thought about it. There are things going through my
mind like, you know, what is the duty to a client, et cetera,
those types of things. But I will look into whether the
specific reasons for recusal is something that should be
disclosed.
Senator Cortez Masto. Thank you. And let me just couch
this. Most States, and particularly Nevada, have open-meeting
laws, and they require any type of action taken by a
commissioner to be put on the record for the public to
understand. And I completely agree with you that during a
pending investigation, you want to protect the integrity of
that investigation, whether it is civil or criminal.
My question to you, though, was: At the end of the
enforcement matter, once it is settled and done, at that point
in time would you be willing to even change a policy if it is
different than what I am asking you to identify if you recused
yourself on that particular matter, and then why you had to
recuse yourself?
Mr. Clayton. I am very open to having that dialog with the
SEC Ethics Officer and the people at the SEC who have
experience with this--it is not a new issue--finding out what
has been done in the past, and discussing it with you.
Senator Cortez Masto. Thank you. I appreciate that. Thank
you for the answers to the questions today.
Mr. Clayton. Thank you.
Chairman Crapo. Senator Warren.
Senator Warren. Thank you, Mr. Chairman, and thank you very
much for letting us have an extra round here.
Mr. Clayton, last December, President-elect Trump's
transition team announced that Carl Icahn would be serving as
special adviser to the President on issues related to
regulatory reform. Now, as you know, Mr. Icahn is a long-time
activist investor with holdings of more than $16 billion. He
has massive holdings in public companies like CVR Energy, an
oil refinery, and Herbalife, a medical supplement manufacturer.
And as far as we can tell, he has not divested any of these
investments despite his role in this Administration shaping
regulatory policy that affects the companies that he is
invested in.
Now, about 2 weeks after Mr. Icahn was named to this
position, you were nominated to lead the SEC, and according to
news reports, Mr. Icahn helped President-elect Trump choose
you. That is troubling for a number of reasons, especially
considering that the SEC is actively investigating Herbalife,
one of Mr. Icahn's largest investments.
So, Mr. Clayton, have you had any conversations or other
communications with Mr. Icahn since the election on November
8th?
Mr. Clayton. The news reports that Carl Icahn had--I do not
know--I have no knowledge of----
Senator Warren. I just asked----
Mr. Clayton. No, but--thank you. After I was--after my
nomination was announced--I had a bit of a heads up that it was
going to be announced, but after it was announced, I got a call
to ask me to meet with Carl Icahn, and I met with him.
Senator Warren. So you met with Carl Icahn not before you
were nominated but after you were nominated?
Mr. Clayton. Correct.
Senator Warren. And can you tell us what you talked about?
Mr. Clayton. We talked about Mr. Icahn's view on the
importance of activist investors and how they, through their
methods, drive performance of public companies.
Senator Warren. And let me guess. He thinks activist
investors are a good thing and should be encouraged in the
marketplace.
Mr. Clayton. I think he thinks they do well for markets.
Senator Warren. Yeah. Did he talk about any of his
investments?
Mr. Clayton. No.
Senator Warren. All right. So he just talked generally
about his view and talked about his view about how the SEC
should----
Mr. Clayton. No. No real specifics on----
Senator Warren. So he just wanted to give you his general
view on activist investors, knowing that you were the SEC Chair
nominee.
Mr. Clayton. Correct.
Senator Warren. And that was the only conversation you had
with him----
Mr. Clayton. No, we----
Senator Warren. ----or with any of his people?
Mr. Clayton. No, we talked--oh, you mean that conversation?
Senator Warren. Yes.
Mr. Clayton. That was the only time I have spoken with Mr.
Icahn or his people before or after, during----
Senator Warren. And that was the only topic of the
conversation when you met, the two of you?
Mr. Clayton. He congratulated me. We talked----
Senator Warren. Fair enough.
Mr. Clayton. ----about people we knew in common, that kind
of things. That is the first time I met him.
Senator Warren. OK. If you are confirmed, do you agree that
it would be inappropriate for you to have any conversations
with Mr. Icahn about the SEC's regulatory or enforcement plans,
especially given his massive financial interests in various SEC
decisions?
Mr. Clayton. If I am confirmed and I am in the seat of the
Chairman of the SEC, I think it is important to talk to
participants in the markets of all types.
Senator Warren. Including those that there are massive
ongoing investigations?
Mr. Clayton. That is something that needs to be navigated
very carefully. If there is a massive ongoing investigation,
that is why we have counsel and protocol, and it may be that it
is completely inappropriate to talk to somebody. But what I
want to say is receiving information about what participants in
our capital markets think about them from all different types
of people is an important part of the job. But to your point,
Senator, I agree with you. If there is an ongoing investigation
and there would be the appearance of impropriety or--you know,
even the appearance of impropriety, it may be inappropriate to
have that kind of----
Senator Warren. I would like you to upgrade that ``may be
inappropriate'' to you believe it is inappropriate.
Mr. Clayton. I am not going to--I am not going to totally
prejudge it, but I totally--I totally get your point.
Senator Warren. I would feel totally a lot happier if you
would totally prejudge that this is inappropriate.
[Laughter.]
Senator Warren. So let me go on from there just a little
bit.
Mr. Clayton. OK.
Senator Warren. In February, Mr. Icahn purchased a
significant stake in Bristol-Myers Squibb, the massive
multinational drug company. And to be clear, he purchased this
stake months after he was appointed as a special adviser to the
President for regulatory policy. So let me do this as quickly
as I can.
Mr. Clayton, I just want to ask you generally, can the
Federal Government's regulatory decisions affect the value of
holdings in a drug company like Bristol-Myers Squibb?
Mr. Clayton. Yes, Senator.
Senator Warren. Yes, good. And can the value of those
shares be affected by FDA policies?
Mr. Clayton. Yes.
Senator Warren. Good. And patent decisions?
Mr. Clayton. Yes.
Senator Warren. And Medicare and Medicaid decisions?
Mr. Clayton. Yeah.
Senator Warren. Good. Because, of course, they could. And
Mr. Icahn is helping dictate Trump administration policy at the
same time that he is buying stock in this company. It is almost
impossible to imagine how he would not have some inside
information about how these policies would affect a company
like Bristol-Myers.
So, Mr. Clayton, if Mr. Icahn had inside information about
Federal regulatory policy affecting Bristol-Myers and he chose
to purchase shares in the company based on that information, is
that potentially a violation of securities laws?
Mr. Clayton. As we both know----
Senator Warren. In general.
Mr. Clayton. OK. As we both know, the question of the scope
of the securities laws around insider trading, et cetera, is--
it is a very facts and circumstances analysis.
Senator Warren. If he had inside information----
Mr. Clayton. But it depends--it depends on where it came
from, what duty, those types of things.
Senator Warren. How about it came from the fact that he was
appointed by the President to get this information and actually
to create this inside information?
Mr. Clayton. I think we are assuming a lot.
Senator Warren. I do not think we are assuming a lot, Mr.
Clayton. And I appreciate that you want to be fair here. I know
I need to stop because I am over my time, and the Chair has
been very indulgent here. But we are talking about an
Administration that just has conflicts everywhere, and it is
very difficult to determine whether someone is actually working
in the interests of the American people or they are just lining
their own pockets or doing some secret blend of the two. The
American people should not be on guess about that. And when
Carl Icahn is influencing policy that will affect companies and
then he is investing in those companies, buying and selling in
those companies, that creates a conflict of interest that
just--is just beyond what we are even talking about everywhere
else.
I just want to make the point that we are going to have to
count on you, the American people are going to have to count on
you, and I want to hear that you are clear that this is not
right, that this will be investigated, that there is not going
to be chummy conversations, and that we will see some real
enforcement of the law on insider trading. I do not understand
how we can have someone who continues to trade in a market and
is influencing regulatory policy simultaneously, and I want to
hear the Chair of the SEC say he is going to look into this and
I hope put a stop to it.
So I will stop there. Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Warren.
Mr. Clayton. Thank you.
Chairman Crapo. And, Mr. Clayton, that concludes the
questioning. I do want to make a couple of comments and
supplement the record on one issue, and I am glad you are still
here, Senator Warren, because it relates to something you said
earlier that I want to supplement.
In your first round of questioning, you indicated that you
believe that the Republican Commissioners were more lenient in
enforcement actions than the Democratic appointees to the
Commission. And I just have some information here from two
articles back in October of 2016 in which Reuters in one case
and Law360 in another case analyzed all of the enforcement
actions of the SEC from Mary Jo White's tenure--it was about a
3-year period of time. There were 1,400 defendants, over 400
cases. And the conclusion of that lay was that over that 3-year
period of time, the Commission was unanimous in virtually all
of them. There were 4 of those 414 cases in which there was a
single negative vote from one Commissioner. And so I just
wanted to make it clear--I did not want to let your allegation
that Republican nominees are lenient stand without at least a
response, and I am glad that you--I know you would like to make
a response now as well, and you are welcome to do so.
Senator Warren. That is right, and I have not prepared for
this, but I do want to say I think we have a New York Times
analysis showing in the 48 cases where Mary Jo White recused
herself that the Republicans wanted less enforcement.
Chairman Crapo. I am not familiar with that article, but
you are welcome to----
Senator Warren. And the Democrats wanted more enforcement.
Chairman Crapo. ----present it.
Senator Warren. But we can continue to talk about this
issue.
Chairman Crapo. We will do so.
Mr. Clayton, thank you again for your willingness to serve
and your coming and participating in this hearing here today.
I have just one announcement for our Members, and that is
that the questions for the record--which will be submitted, and
we ask you to respond to promptly, Mr. Clayton--are due by the
end of business on Monday.
And, once again, thank you for being here. That concludes
our business. The hearing is adjourned.
Mr. Clayton. Thank you, Senator.
[Whereupon, at 11:55 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of nominee,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
March 23, 2017
This hearing will come to order.
This morning, we will hear testimony on the nomination of Jay
Clayton to be the Chairman of the United States Securities and Exchange
Commission.
Mr. Clayton has extensive expertise in our financial markets as a
highly regarded securities lawyer.
For decades he has helped companies access our capital markets,
increase their ability to invest in the U.S., and grow and create jobs.
One area on which Mr. Clayton has already indicated he will focus
is capital formation.
Capital markets drive innovation and job creation, and access is
the lifeblood of our economy.
The JOBS Act helped revitalize the primary markets, and both
Congress and the SEC should continue to find ways to help companies go
public and allow investors to share in their success.
Recently, this Committee marked up several bipartisan securities
bills and we encourage you, if confirmed, to help us identify other
securities areas which could use legislative improvement.
The SEC has an important three part mission: protect investors;
maintain fair, orderly, and efficient markets; and facilitate capital
formation.
Each part of the mission is equally important and should not come
at the expense of another.
I raise this because the SEC's mission is critical to every U.S.
citizen and retiree.
Investors should be able to participate in our markets, on fair
footing, so that they can pay for life events such as college and save
for retirement.
We also need to help investors make sure they have material
information to make informed investment decisions.
I have repeatedly stressed the need for the U.S. financial system
and markets to remain the preferred destination for investors
throughout the world, and the SEC has an important role to that end.
I look forward to hearing more from you on how we can help
companies grow, Americans get hired, and investors share in the wealth
creation by these companies.
Another important issue that the SEC is tasked with is ensuring
that the stock market rules and regulations are still appropriate,
given that most of them were promulgated in a time where technology was
much less advanced.
It is imperative that these rules serve the needs of companies and
investors.
In that vein, it is important for the SEC to do retrospective
reviews of its own regulations to ensure they are working out as
intended and are still appropriate. This is in line with the
President's own executive orders on regulation.
Other regulators are subject to EGRPRA, the Economic Growth and
Regulatory Paperwork Reduction Act, which statutorily mandates a review
and evaluation of existing regulations in order to identify which are
outdated, unnecessary, or unduly burdensome.
While technically the SEC is not subject to EGRPRA, your
predecessor, Chair White, indicated before this Committee that she was
``very much committed to reviewing [the SEC's] rules in that fashion.''
A commitment that many would like to see continue.
Additionally, it is important for the SEC to have robust cost
benefit analysis. I have long stated this position and our President
recently echoed the importance of cost-benefit analysis in an executive
order.
I look forward to hearing from you today on these issues, as well
as what you hope to prioritize when you are at the SEC.
Congratulations on your nomination, and thank you and your family
for your willingness to serve.
______
PREPARED STATEMENT OF SENATOR MARK R. WARNER
March 23, 2017
Mr. Clayton, I appreciated the opportunity to meet with you prior
to today's hearing to discuss your nomination to lead the Securities
and Exchange Commission (SEC).
America has the deepest, most liquid markets in the world. If
confirmed, you will have the responsibility of protecting investors
against fraud while preserving a system that fosters capital formation
and ensures fair and efficient markets.
One area that I have been passionate about is equity market
structure and ensuring our markets operate efficiently and on behalf of
all investors. Over the past few decades, we have seen remarkable
technological progress and innovation in our securities markets,
coupled with substantial regulatory reform. Some of these advances and
reforms, including decimalization, have brought considerable rewards
for individual investors by narrowing spreads and increasing liquidity.
Most trades today can happen within fractions of a second, providing
good prices and counterparties for those seeking to buy equities around
the world.
But at the same time, we have seen increased volatility and
periodic dislocations. These include a Flash Crash in 2010, ``Mini''
flash crashes in individual equities, a Flash Freeze at the NASDAQ in
2013 that halted trading for hours, a glitch at the NYSE in July 2015,
and numerous allegations (resulting in settlements) of misbehavior at
dark pools. Such events do little to engender confidence, and indeed
may hinder investment in the stock market, adversely affecting the
broader economy.
As a result, I have been a vocal proponent of market structure
reforms that will improve the resiliency and efficiency of markets, and
protect retail investors. Specifically, I have, on a bipartisan basis
with Chairman Crapo, called for the SEC to implement a maker-taker or
access fee pilot that will help shed light on order routing. I also
supported a tick-size pilot, which will provide data on whether
improvements can be made to help foster capital formation and improve
secondary market trading. Chair White had announced she would implement
a maker-taker pilot while also conducting a holistic review of market
structure, and I hope that you will move forward on both--without
letting the latter impede pilots that can offer valuable data in the
interim.
In ensuring fair and efficient markets and protecting investors, I
also hope that you will take an aggressive stance towards insider
trading. As you know, there have been prominent cases in recent years
where federal judges have practically begged the SEC to bring an
enforcement action for suspect illicit behavior, and yet the SEC has
failed to do so. A key test of your chairmanship will involve whether
you will take a more pro-investor, pro-market stance by aggressively
pursuing such violations.
Capital markets exist to help foster capital formation that can be
used to expand the investment, hire workers, and grow the economy--not
to allow machines to arbitrage fractions of pennies or to allow
participants to drive a company towards short-term maximization of
profits at the expense of the longer-term value creation and, often,
the viability of the firm. And so I believe the SEC, in carrying out
its function in promoting capital formation, should encourage
companies, through its regulatory process, to adopt policies that
foster longer-term growth and investment, as opposed to the more recent
and disturbing trend of short-termism.
I look forward to hearing your views on these topics.
______
PREPARED STATEMENT OF JAY CLAYTON
To be Chairman of the Securities and Exchange Commission
March 23, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
I am honored to appear before you today as President Trump's nominee to
Chair the Securities and Exchange Commission. I want to thank you and
your staff for the time you have spent with me. I have enjoyed, and
learned from, our meetings.
Our capital markets have far-reaching and profound effects for
every American. Making sure our markets are fair, open, orderly, and
efficient--and ensuring that investors are protected--is the
fundamental responsibility of the SEC. If confirmed, I will take up
this responsibility with energy and purpose. I pledge to work with my
fellow Commissioners, the SEC Staff, this Committee, and the many
others who support and defend our capital markets.
The importance of Government service was instilled in me from a
young age. Six weeks after I was born, my father shipped out to Vietnam
as a Second Lieutenant and my mother, 20 at the time, and I moved to
her childhood home in Lykens, Pennsylvania. We lived with her parents
and her four younger brothers.
My grandfather, Pat Kerwin, the 8th and last child of coal miners,
a small town lawyer, and perpetual public servant, both in title and
action, took a strong interest in me. We were great friends for 20
years. Remarkably, for as far back as I can remember, he took me with
him to township meetings, real estate closings, and estate auctions.
Those experiences, much more Main Street than Wall Street, made a deep
and lasting impression on me.
My parents, Kathi and Walt Clayton, are here today along with my
youngest brother Andrew. I thank them for a lifetime of support.
When I entered the 9th grade, we moved as a family for the last
time to Delaware County, Pennsylvania. I met new friends, mostly
through sports. One of those friends, who has long been my best friend,
is my wife Gretchen. We met 36 years ago and have been married for 25
years. I want to specifically thank Gretchen for her encouragement,
love, and support. We are also joined here today by our three
children--Jasper, age 14, Wyatt, age 13, and Haley, age 12. As Chair of
the SEC, I will be mindful of my responsibility to their generation.
During the course of my 20+ year career as a transactional lawyer,
it has been my privilege to work with leaders in the public and private
sector, including on landmark transactions, such as the world's largest
IPO, as well as important transactions during the dark days of the
financial crisis. From my 5 years in Europe--where I worked on matters
involving the laws and markets of no fewer than a dozen countries,
including France, Sweden, Turkey, Switzerland, Italy, England, Greece,
and Germany--I learned that the world's capital markets are very
interconnected and, more broadly, that America is, indeed, the greatest
country.
My work has included counseling to a number of small private
businesses and individuals. During my college and post-graduate years,
my mother and father operated a small warehousing and logistics
business. I worked with them on various projects, including lease
negotiations, inventory system design and establishing a 401(k) plan
for employees. There were ups and downs, and I learned first-hand the
many challenges small- and medium-sized businesses face as well as
their importance to our economy.
Based on all of my experiences, nationally and internationally and
on Wall Street and Main Street, I firmly believe that:
1. Well-functioning capital markets are important to every American;
2. All Americans should have the opportunity to participate in, and
benefit from, our capital markets on a fair basis, including
being provided accurate information about what they are buying
when they invest; and
3. There is zero room for bad actors in our capital markets.
I am 100 percent committed to rooting out any fraud and shady
practices in our financial system. I recognize that bad actors
undermine the hard-earned confidence that is essential to the efficient
operation of our capital markets. I pledge to you and the American
people that I will show no favoritism to anyone.
One last comment: For over 70 years, the U.S. capital markets have
been the envy of the world. Our markets have allowed our businesses to
grow and create jobs. Our markets have provided a broad cross-section
of America the opportunity to invest in that growth, including through
pension funds and other retirement assets. In recent years, our markets
have faced growing competition from abroad. U.S.-listed IPOs by non-
U.S. companies have slowed dramatically. More significantly, it is
clear that our public capital markets are less attractive to business
than in the past. As a result, investment opportunities for Main Street
investors are more limited. \1\ Here, I see meaningful room for
improvement. I am excited to work with you, my fellow Commissioners and
the SEC staff to pursue those improvements and, in doing so, will
always be vigilant to ensure that the Commission is steadfast in
protecting investors.
---------------------------------------------------------------------------
\1\ Today, the number of U.S.-listed public companies is down over
35 percent from 1997. In 1996, there were approximately 845 U.S. IPOs,
while in 2016, there were approximately 128. See, e.g., Anne VanderMey,
Fortune.com, ``IPOs Are Dwindling, So Is the Number of Public
Companies'' (Jan. 20, 2017), available at http://fortune.com/2017/01/
20/public-companies-ipo-financial-markets/. WilmerHale 2016 IPO Report
(March 24, 2016), available at https://launch.wilmerhale.com/
uploadedFiles/Shared_Content/Editorial/Publications/Documents/2016-
WilmerHale-IPO-Report.pdf.
---------------------------------------------------------------------------
Thank you for this opportunity. I look forward to receiving your
advice and answering your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSES TO WRITTEN QUESTIONS OF SENATOR HELLER
FROM JAY CLAYTON
Q.1. Do you believe the Securities and Exchange Commission
should be a merit-based regulator picking individual winners
and losers, or do believe that the Securities and Exchange
Commission should be a disclosure-based securities regulator
and let investors make investment decisions with accurate
information?
A.1. I believe that the Commission's efforts should focus on
advancing its tri-partite mission of protecting investors,
maintaining fair, orderly and efficient markets, and
facilitating capital formation. In this regard, I believe that
the disclosure-based regulatory framework governing our public
markets and companies has been and remains fundamentally
important and, based on my experience with, and understanding
of, the establishment, operation and evolution of various
regulatory systems in other countries and regions, has proven
to be superior to merit-based systems.
Q.2. Under your leadership how will the Securities and Exchange
Commission help encourage more initial public offerings in
order to drive future job growth?
A.2. Small and large businesses rely on our capital markets to
raise the capital they need to buy equipment, expand their
operations, and, importantly, hire American workers. In my
experience, in the past two decades, a number of factors have
developed or have become more relevant that may discourage a
private company from accessing our public markets to raise
capital. These factors include various immediate one-time costs
and ongoing incremental costs compared with remaining a private
company. In my view, we should examine whether these costs can
be addressed in a manner such that more companies choose to go
public--which would help them access capital they need to drive
job growth--without lessening, and with an eye toward
enhancing, investor protection.
Q.3. How can the Securities and Exchange Commission better
ensure that the perspective of all stakeholders are better
incorporated into the Commission's policymaking process in
order to promote more job growth?
A.3. As I stated at my nomination hearing, I strongly believe
it is important for the Commission to engage with market
participants of all types. Receiving information about what
participants in our capital markets think about various issues
before the SEC, and the funding of our markets more generally,
is an important part of the job, and I look forward to engaging
with those participants if I am confirmed. This would include
engaging with issuers, investors and other market participants
who rely on our capital markets to access the capital they need
to create jobs.
Q.4. One of the main duties of the Securities and Exchange
Commission is to facilitate capital formation that is necessary
to sustain economic growth. What will be your priorities at the
Securities and Exchange Commission to promote more capital
formation for businesses and help create jobs in Nevada? Do you
support legislative initiatives that would spur more capital
formation for small- to mid-sized businesses?
A.4. Capital formation is a critical element of the SEC's tri-
partite mission. Without commenting on any particular
legislative proposal, I generally support initiatives that
would spur capital formation for small- to mid-sized businesses
while maintaining or enhancing protection for investors. I
understand that the SEC is already taking steps to ``stand up''
the new Office of the Advocate for Small Business Capital
Formation and to begin the search for the new Small Business
Advocate. If confirmed, I look forward to working with the
staff and my fellow Commissioners to continue this effort, and
to explore ways in which we can promote capital formation for
small- to mid-sized businesses and help them access and
navigate our public and private capital markets.
Q.5. Last Congress, Chairman Crapo and I held a hearing looking
at changes in the fixed-income markets and there are early
signs that fixed-income markets are becoming more fragile and
less liquid than they used to be. Do you recognize the changes
occurring in the fixed-income markets and do you believe
regulations are affecting liquidity?
A.5. Fixed income markets have become increasingly important to
investors, including retirees with self-directed retirement
assets. I understand that Erik Sirri, former Director of the
SEC Division of Trading and Markets, and a co-author, recently
delivered a paper where they argued that `` . . . the domestic
fixed income markets are both larger and more in need of market
structure reform than their equity counterparts. Whereas the
market capitalization of listed equity markets is about $26.5
billion, the corporate asset-backed, mortgage, treasury, agency
and municipal bond market in aggregate totaled $37.1 billion.''
\1\ I believe the Commission and other regulators should be
mindful of whether these markets are as efficient and resilient
as we would expect them to be and whether regulatory and market
developments have had adverse impacts.
---------------------------------------------------------------------------
\1\ Ryan Davies and Erik Sirri, ``The Economics and Regulation of
Secondary Trading Activities'' (Draft of March 16, 2017), at 70-71,
available at http://www.law.columbia.edu/sites/default/files/
microsites/capital-markets/davies_sirri_economics-of-trading-
markets.pdf.
Q.6. Each year, institutional investors cast millions of votes
that determine corporate governance policies at thousands of
publicly traded U.S. companies. Many institutions outsource the
analysis and process of developing voting recommendations to
proxy advisory firms. Today, two firms dominate the proxy
advisory industry. There has been serious allegations of
conflicts of interest, lack of transparency, and errors in
reports by these firms. Do you have any concerns about proxy
advisory firms and would you address these issues at the
---------------------------------------------------------------------------
Securities and Exchange Commission?
A.6. I believe that this is an evolving industry that has seen
change, including in response to staff guidance to various
participants as well as industry commentary and industry
engagement, including with proxy advisors. I believe the area
requires continued scrutiny, including in light of the
importance and influence of these firms. By way of example, I
understand that, following the release of the 2014 staff
guidance, the SEC's Office of Compliance Inspections and
Examinations listed as a priority the examination of proxy
advisory firms with respect to their process for making voting
recommendations and how they address potential conflicts of
interest. If confirmed, I look forward to studying these and
other issues, including the results of OCIE's efforts, and
discussing them with the staff and my fellow Commissioners.
Q.7. Given the rapidly changing nature of the global securities
markets, will you commit to working to promote more market
innovations while ensuring proper investor safeguards?
A.7. I believe that market innovations are relevant to all
three elements of the SEC's tri-partite mission. They can be an
important driver of capital formation, market efficiency and
investor protection, including through various efforts designed
to drive more efficient and effective monitoring and reporting
such as the Consolidated Audit Trail. If confirmed, I look
forward to working with the staff and my fellow Commissioners
to continue to explore ways in which innovations can advance
the SEC's mission, including through engagement with investors
and other industry participants, while being mindful of related
risks, including, for example, cybersecurity risks.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM JAY CLAYTON
Q.1. How can the SEC better define the scope of lawful trading-
related activity defined in its rulemakings? Where is clarity
most necessary? Will you commit to taking concrete action to
this end within 6 months of your confirmation?
A.1. This is in response to Questions 1 and 2. I recognize that
this is an issue that has received attention, particularly in
light of recent high-profile court cases, which have created
some uncertainty regarding the contours of various aspects of
insider trading and market manipulation under our securities
laws. As a general matter, I believe that clarity should be a
goal of regulation and that appropriate guidance is one method
to foster clarity. If confirmed, I look forward to engaging
with my fellow Commissioners, the SEC staff and the many other
regulatory and enforcement officials with interests in this
area to explore whether and, if so, by what means, further
clarity should be pursued.
Q.2. How can the SEC increase its use of informal guidance to
provide better clarity about the scope of unlawful trading-
related activities? Where is clarity most necessary? Will you
commit to taking concrete action to this end within 6 months of
your confirmation?
A.2. Please see my response to Question 1 above.
Q.3. I'd like to learn more about your approach to securities
regulations.
Is there a risk that regulations can give large incumbent
firms a competitive advantage over smaller farms? If so, what
can be done to mitigate this risk?
A.3. In my experience, many costs associated with regulatory
compliance are more ``fixed'' than variable and, as a result,
may in some circumstances, have a greater effect on smaller-
and medium-sized companies as compared with ``large cap''
companies. I believe we should be mindful of the effects that
regulations can have on all businesses and, in particular,
smaller businesses in this regard. If confirmed, the
Commission's tri-partite mission is paramount and will be at
the front of my mind. I agree with the fundamental principles
of our disclosure-based regulatory system. I agree that
securities trading markets should be fair, efficient, and deep.
I believe in the importance of capital formation to our
markets, our economy, and our society more generally. I also
agree that there is no place for ``bad actors'' in our markets.
At a more granular level, I believe that regulators should
recognize risks and limitations of rulemaking and other
actions, including that certain actions may unnecessarily
impair competition, have unforeseen costs and other
consequences, and otherwise not be as beneficial or effective
as expected. In this regard, the notice-and-comment rulemaking
process and economic analysis can be very helpful, and, to
address unforeseen consequences, retrospective review may be
appropriate and, in this regard, the Commission has exemptive
authority. At a more general level, if confirmed, I intend to
assess the actions of the Commission through the lens of what
is in the interest of Main Street investors.
Q.4. Is it appropriate--in the words of former Chair Mary Jo
White--to ``effectuate social policy or political change
through the SEC's powers of mandatory disclosure''?
A.4. As I stated at the hearing, I believe that materiality is
the touchstone with respect to disclosure. In that regard, I
believe that the SEC's core mission is best served when the
Commission's efforts with respect to mandatory disclosure
requirements are focused on ensuring that investors have access
to material information in an effective and efficient manner,
without regard to unrelated facts. If confirmed, I look forward
to engaging with my fellow Commissioners and the staff to
advance the SEC's core mission of protecting investors,
maintaining fair, orderly and efficient markets, and
facilitating capital formation.
Q.5. Is there a danger that disclosure requirements become so
voluminous that they become unhelpful to investors? If so, what
can be done to avoid this problem?
A.5. I firmly believe in our disclosure-based regulatory system
for public companies and the general approach that we have
followed for the past eighty-plus years. Public companies
should provide core required disclosures, and those core
disclosures should be supplemented by other information
material to investors, in each case reflecting Commission and
staff guidance that has been reviewed and updated to ensure
that our disclosure requirements are achieving their important
investor protection objectives in an effective and efficient
manner.
In this regard, I recognize that investors also bear the
costs of disclosure mandates. If I am confirmed, I look forward
to working with my fellow Commissioners and the SEC staff on
this topic, including engaging with them on the Disclosure
Effectiveness Initiative.
Q.6. In light of the SEC's mission to ``protect investors,
maintain fair, orderly, and efficient markets, and facilitate
capital formation,'' I'd like to ask you about the SEC's
rulemaking schedule.
What factors should dictate the SEC's rulemaking schedule?
Does the SEC's rulemaking schedule reflect the right
balance between focusing on these three missions? If not, how
would you change it?
A.6. Rulemaking, both mandatory and discretionary, is a
critical function of the SEC. I believe it should, among other
things, reflect the Commission's tri-partite mandate, include
effective economic analysis, seek clarity over complexity
wherever practicable, reflect input from a diverse array of
affected parties and market participants and proceed as
efficiently as practicable. The rulemaking process is
important, and in many cases demands significant resources. The
Commission's resources are limited and, accordingly, the
overall approach to rulemaking should reflect the Commission's
mandate and be the product of consultation among the
Commissioners, the staff and, in the case of multi-agency
rulemaking, other authorities, being mindful of the obligation
to proceed with mandatory rulemaking at a reasonable pace and
also being responsive to market developments. Because I have
not yet had the opportunity to discuss the rulemaking schedule
with the Commissioners and the staff, it would be premature for
me to make an assessment as to whether the schedule properly
balances the SEC's tri-partite mission and reflects the
principles outlined above and any other important factors. If
confirmed, I look forward to engaging with my fellow
Commissioners and the staff regarding the current rulemaking
calendar and outlook, including any necessary or advisable
changes.
Q.7. During your confirmation hearing, you rightly spoke of the
importance of helping more firms go public.
What is the role for private capital markets in a high-
functioning economy, particularly given the prominent role you
envision for public markets?
Are the private capital markets high-functioning at the
moment?
A.7. Based on my experience, I believe that over the past
several decades, private capital markets have grown
substantially and, as a result, have increased the availability
of private capital (including to medium- and larger-sized
companies). These markets also appear to have experienced
greater competition and appear to have become more efficient
providers of capital. I believe the private capital markets
hold a significant place in our economy and have significant
effects on our capital markets generally. In light of this
importance and interconnectivity, if confirmed, I look forward
to engaging with the SEC staff and my fellow Commissioners on
these issues with an eye toward ensuring that the Commission's
approach to the regulation of the private capital markets
reflects the Commission's tri-partite mandate.
Q.8. In 2014, former SEC Commissioner Dan Gallagher said that
``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.''
Do you agree?
If so, as SEC Chair how will you work to improve small
business capital formation and respond to our economy's near-
historic low levels of firm creation?
The SEC Small Business Advocate Act of 2016 created the
Office of the Advocate for Small Business Capital Formation. If
confirmed as Chair, will you work closely with this advocate
and seriously consider the Office's recommendations?
The SEC Small Business Advocate Act of 2016 also created
the Small Business Capital Formation Advisory Committee, which
will issue recommendations on improving small business capital
formation. Unfortunately, the SEC has traditionally largely
ignored these sort of recommendations, such as those of the
annual Government-Business Forum on Small Business Capital
Formation. While the SEC is required to respond to the
recommendations of the Advisory Committee, it is are not
required to follow them. If confirmed as Chair, will you
strongly consider supporting the recommendations of the
Advisory Committee?
A.8. As I stated at the hearing, availability of capital for
small business is very important. I also agree with
Commissioner Gallagher that addressing issues specific to small
business capital formation can yield benefits for small
businesses, investors, and the public at large.
I understand that the SEC is already taking steps to
``stand up'' the new Office of the Advocate for Small Business
Capital Formation and to begin the search for the new Advocate.
\1\ If confirmed, I look forward to working with the staff and
my fellow Commissioners to continue this effort, and to explore
ways in which we can promote capital formation for small
businesses and help them access and navigate both our public
and private capital markets.
---------------------------------------------------------------------------
\1\ Opening Remarks of SEC Acting Chairman Michael Piwowar before
the SEC Advisory Committee on Small and Emerging Companies (Feb. 15,
2017), available at https://www.sec.gov/news/statement/piwowar-opening-
remarks-acsec-021517.html.
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With respect to the Small Business Capital Formation
Advisory Committee, it would be premature for me to take a
position on a potential recommendation without further
exploring the issue. However, if I am confirmed, I look forward
to engaging with my fellow Commissioners, the SEC staff, the
Advisory Committee and other interested parties regarding the
Advisory Committee's recommendations on improving small
business capital formation.
Q.9. Some have criticized proposals to increase investment
options to the public because it would be allegedly risky for
investors. This has particular relevance for debates about Reg.
D and crowdfunding.
What role, if any, does the SEC have as a prudential
regulator?
A.9. As a general matter, I believe we should be exploring
means to increase the number and type of investment options
available to the public, including through various forms of
private placements. I also recognize the concerns of many that
these types of investments can involve more investment risk and
more risk of fraud than more familiar public market
investments, and agree that these are important considerations.
If confirmed, I am interested in identifying and acting on
opportunities, including in connection with current rulemaking
and in response to technological and other advancements and
changes, to increase investor choice while preserving investor
protections.
Q.10. Is it ever appropriate for the SEC to engage in the
``merit review'' of investment choices, where the SEC would
elevate its evaluation of a particular investment over the
evaluation of a private investor?
A.10. As a general matter, I do not believe that the Commission
should elevate its evaluation of a particular investment over
the evaluation of that investment by a private investor. In
this regard, I believe that the disclosure-based regulatory
framework governing our public markets and companies has been
and remains very important.
Q.11. How would you strike the balance between investor
protection and investor freedom when it comes to the definition
of accredited investor?
A.11. I believe investor protection and investor freedom are,
in many circumstances, complementary. In my experience, this
positive dynamic depends on other factors, including reasonable
disclosure requirements and enforcement of anti-fraud laws, and
is not without limit. With regard to the definition of
accredited investor, I believe that the Commission should
assess whether changes in the definition will affect, among
other things, market protocols that have developed in response
to the current definition, the size and composition of the pool
of accredited investors, and, significantly, investor
protections. If confirmed, I look forward to reviewing these
issues with my fellow Commissioners and the staff.
Q.12. Would you support expanding the definition of
``accredited investor'' beyond income and assets to also
include investor expertise, such as possessing a graduate
degree in a related field, or passing a test for investor
sophistication?
Does it trouble you that according to some reports, roughly
90 percent of Americans cannot invest in Regulation D
securities? \2\
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\2\ https://www.mercatus.org/system/files/
peirce_reframing_ch11.pdf, p. 278.
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Would you consider withdrawing the two Reg. D amendments
proposed in July of 2013? \3\
---------------------------------------------------------------------------
\3\ See Securities and Exchange Commission, ``Proposed Rule:
Amendments to Regulation D, Form D and Rule 156'', Federal Register,
Vol. 78, No. 142 (July 24, 2013), pp. 44806-44855.
A.12. I understand that the SEC has been examining these
issues, and that the staff recently issued a report that
analyzed, among other things, the feasibility of using
qualification metrics other than wealth or income. If
confirmed, I look forward to reviewing this issue further and
working with SEC staff and my fellow Commissioners in
revisiting the accredited investor standard more generally,
including considering whether the metrics should be adjusted
and/or expanded beyond income and net worth, as well as the
status of current rule proposals.
With respect to the 90 percent figure cited above, as I
discussed at the hearing, it is of concern to me that certain
types of investment opportunities for Main Street investors may
be more limited than they reasonably could be.
Q.13. How would you strike the balance between investor
protection and investor freedom when it comes to evaluating
proposals to expand or improve upon federal crowdfunding
regulations?
Are Federal crowdfunding regulations workable?
A.13. If confirmed, I intend to consult with the staff, my
fellow Commissioners and other market participants on these and
other crowdfunding-related issues. For example, I understand
that the SEC staff has been collecting data on crowdfunding
efforts since the SEC's Regulation Crowdfunding became
effective. I look forward to hearing more about the staff's
analysis of that data and how it may inform the Commission's
approach going forward.
Q.14. Last Congress, Rep. Emmer introduced H.R. 4850, the
``Micro Offering Safe Harbor Act'', the original version of
which would have allowed an issuer to sell up to $500,000 worth
of securities, upon certain conditions. How would you evaluate
a legislative proposal to introduce a safe harbor for small
equity raises?
A.14. If confirmed, I look forward to working with Congress on
important legislative proposals that affect our markets. Before
taking a position on a particular proposal relating to the
introduction of a safe harbor for small equity raises, I would,
if confirmed, want to engage with my fellow Commissioners and
the SEC staff to review the details and consider the potential
impacts, positive or negative, of such a proposal. As a general
matter, I am supportive of efforts focused on capital formation
for small businesses and recognize that there should not be a
one-size-fits-all approach to securities regulation.
Q.15. Many argue that despite the JOBS Act, Reg. A+ is still
prohibitively costly for smaller firms. Only around 44 firms
qualified for Reg. A+ during its first year, \4\ compared to
33,429 who used Reg. D in 2014. \5\ I've been told that few if
any investors in my State find it worthwhile to use Reg. A+.
---------------------------------------------------------------------------
\4\ https://www.crowdfundinsider.com/2016/07/87745-looking-
regulation-one-year-later/ (cited by https://www.mercatus.org/system/
files/peirce_reframing_ch11.pdf, p. 278.
\5\ https://www.mercatus.org/system/files/
peirce_reframing_ch11.pdf, p. 278. See also https://
www.nextgencrowdfunding.com/static/uploads/2016/10/03/
NextGenCrowdfundingRegA+WhitePaper_October62016.pdf.
---------------------------------------------------------------------------
Is Reg. A+ currently workable for most smaller firms?
As SEC Chair, will you examine how the SEC can make Reg. A+
easier to use for smaller firms, and advocate for such changes?
A.15. I have not yet had the opportunity to engage with the
Commissioners and the SEC staff regarding Regulation A+, but if
confirmed as Chair, I look forward to studying this issue,
including the potential impacts of any potential reform
options. As a general matter, I believe we should be looking
for means to increase the number and type of investment options
available to the public, including through various forms of
private placements. I also recognize the concerns that these
types of investments can involve more investment risk and more
risk of fraud than more familiar public market investments.
Q.16. The marketplace online lending ecosystem has grown
significantly as of late.
How would you approach this field?
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 firms?
A.16. While I have not yet had an opportunity to engage with
the Commissioners or the staff regarding regulatory issues
related to online marketplace lending, I do have some
experience with these types of businesses as a practitioner and
recognize that their operations, and the operations of other
participants in the marketplace, involve, or potentially
involve, various regulatory regimes and agencies, including the
SEC. I also recognize that this industry is growing and
changing. In this regard, if confirmed, I would expect to work
with my fellow Commissioners, the staff, other regulators,
market participants and other interested parties to understand
the current and evolving practices in this area and to consider
the effectiveness and adequacy of existing regulation,
including the timing and content of the SEC filings you
identify. I also recognize the importance of coordination and
discussion with other agencies involved in regulating
marketplace online lending, and, if confirmed, would encourage
the SEC staff to pursue such coordination and discussion.
Q.17. Under what circumstances is it appropriate for the SEC to
send cases to Administrative Law Judges?
A.17. I understand that certain matters involving the
Commission's Administrative Law Judges are subject to current
court proceedings, and as such, it would not be appropriate for
me to comment on those matters. As a general matter, I
recognize that Congress has authorized the SEC to use
Administrative Law Judges in a number of circumstances, and
that some commentators have questioned the scope of the
Commission's use of Administrative Law Judges as well as its
exercise of discretion, including on due process grounds. If
confirmed, I would expect to engage with the staff and my
fellow Commissioners on these issues, including with respect to
any potential impacts the pending matters could reasonably be
expected to have on the operations of the Commission.
Q.18. Does anything need to be done to improve the use of cost-
benefit analysis at the SEC? If so, will you commit to
advocating for these steps?
A.18. I believe economic analysis--including assessing the
expected relevant costs as well as the relevant benefits of a
proposed regulation--is an integral part of the rulemaking
process. In my experience, in most cases, the initial analysis
is reasonably designed, but history has shown that, over time,
rules can have wide-ranging effects, and that those effects can
be under- or over-estimated at the time a rule is initially
adopted, or even missed entirely. History also has shown that
recurring costs, including compliance costs, often grow faster
than expected, including because yesterday's ``state of the
art'' becomes today's expectation. As the market changes, which
it inevitably does, the divergence between expectations and
reality can grow over time; accordingly, a rule that may have
seemed reasonable from an economic perspective at the time it
was adopted may later be viewed differently. For this reason, I
believe retrospective review can be appropriate and important,
and certain rules may merit re-evaluation over time.
I also believe that it can be important to reassess not
only the subject of a prior analysis but also the prior
analysis itself, with an eye toward improving future efforts.
If confirmed, I look forward to discussing this issue--what has
been learned from past economic assessment exercises that can
inform future efforts--with the staff and my fellow
Commissioners.
Q.19. 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.
By one estimate, more than 600 of the SEC's various forms are
still document-based. As you know, a recently proposed SEC
rulemaking would require public firms to file their financial
statements in Inline XBRL. Should the SEC work to modernize its
treatment of Government data and transition toward open-data?
If so, how would you support this transition as SEC Chair?
A.19. As a general matter, I believe that the Commission should
be actively looking for ways to improve efficiency at the
Commission and for the markets as a whole, including through
technology. I have not yet had an opportunity to engage with
the Commissioners or the SEC staff regarding the proposed rules
addressing the technical formatting of SEC filings, but I look
forward to doing so if I am confirmed.
Q.20. Australia has created a Standard Business Reporting
regime (SBR) that allows a firm 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 A$1.1 billion annually
by one estimate. \6\
---------------------------------------------------------------------------
\6\ See https://www.xbrl.org/sbr-savings-in-australia-soar/.
---------------------------------------------------------------------------
As SEC Chair, would you examine if a similar SBR system
would be possible in the United States?
If so, would you work with other regulatory agencies to
make this vision a reality?
A.20. As a general matter, it is my expectation that, due to
advances in technology, there is room for improvement in
regulatory coordination with respect to reporting and
information gathering. If confirmed as Chair, I look forward to
consulting with my fellow Commissioners, SEC staff, other
regulators, including but not limited to the CFTC, and other
interested parties to identify specific areas for potential
improvement and to explore possible reform options.
Q.21. I'd like to ask about the SEC's 2005 adoption of
Regulation NMS.
What have been the most significant changes--technological
and otherwise--to securities market since the adoption of
Regulation NMS? For example, has the market become more complex
since the adoption of Reg. NMS?
Were any of these changes unexpected?
Do you think there have been any unintended consequences
that have resulted from these changes, specifically from how
the Reg. NMS rules were expected to impact the market?
Do the aforementioned changes and unintended consequences
merit a comprehensive review of Regulation NMS, such as one
that is ``part of formal rulemaking'' as former SEC
Commissioner Paul Atkins has called for?
A.21. As a general matter, I agree that the public equity
trading markets have become more complex over the last decade,
and that the factors contributing to this increased complexity
include, but are not limited to, technological developments.
While I do not know with specificity the scope and contours of
expectations at the time Regulation NMS was adopted, I believe
it is almost certainly true that there have been unexpected
developments and changes, some of which have been significant.
Promoting fairness and efficiency in our markets is a core
element of the SEC's tri-partite mission, and I recognize that
important concerns have been raised, including with respect to
transparency, fee structures, and potential conflicts of
interest. I understand that the SEC staff has been reviewing
structural market issues, and that the Equity Market Structure
Advisory Committee and its Regulation NMS Subcommittee have
proposed a framework for an access fee (or maker-taker) pilot
and made other significant recommendations. For example, I
understand that Regulation NMS is on the current list of rules
to be reviewed pursuant to the Regulatory Flexibility Act, and,
if confirmed, I look forward to reviewing the public comments
on the regulation and engaging with my fellow Commissioners and
the staff.
As a general matter, I also believe that retrospective
review of existing rules and regulations can be appropriate and
important. If confirmed, I look forward to discussing the
status of the current review of equity market structure with my
fellow Commissioners and the SEC staff, with an eye toward
ensuring that the Commission is pursuing its mandate
effectively in the area of market structure.
Q.22. I'd like to ask about the Securities Information
Processor (SIP).
Should policymakers be concerned about the public SIP as a
single point of failure?
In terms of market efficiency, how much should policymakers
be concerned about latency between the public SIP and private
data feeds, including any potential for arbitrage between
exchanges?
Does the centralized nature of public SIP limit the ability
of technical improvements to the SIP to reduce latency?
A.22. I am not in a position to comment meaningfully on
specific aspects of the SIP, including the types and severity
of risks. I do, however, recognize the general risks associated
with core systems, and, as an example, I am focused on
cybersecurity risks. I expect that, if confirmed, I will study
these issues, along with market structure issues, with my
fellow Commissioners and SEC staff.
Q.23. Within a reasonable timeframe of your confirmation, will
you promise to provide the Senate Banking Committee with an
evaluation of the SEC's policies and procedures to protect
sensitive information about markets and participants, along
with any recommendations for improvement?
A.23. If confirmed, I look forward to engaging with the Staff
and my fellow Commissioners to learn more about the SEC's
policies and practices regarding the protection of sensitive
market-related information, as well as any potential areas for
improvement. I agree that protection of this type of sensitive
information is an important issue, and, if confirmed, I look
forward to working with you and other Members of the Committee
to address these policies and procedures, including seeking to
identify areas where improvement is needed or advisable.
Q.24. Should the SEC be allowed to ask for nonpublic, sensitive
information about investment strategies from regulated
entities? If so, when? What kind of protections should exist to
protect the proprietary information?
A.24. I am aware that, in connection with various functions,
the SEC requests and reviews material, nonpublic information,
including in the mergers and acquisitions space. In my
experience, the Commission and the staff have taken the
responsibilities that come with receipt of this type of
information seriously and, to my knowledge, have acted
responsibly. It also is my experience that the staff has not
requested more information in this area than would be
reasonably necessary to effectively carry out the Commission's
mandate. If confirmed, I look forward to engaging with my
fellow Commissioners and the staff on this issue, and intend to
discuss with them whether the Commission brings a similar
perspective to receipt of the type of information that you
cite, recognizing that the contexts are different.
With regard to protections and in particular protections
from cyber and other forms of theft, if confirmed, I look
forward to engaging with my fellow Commissioners and the staff
on this issue as well.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON
FROM JAY CLAYTON
Q.1. Since FINRA's launch in 2007, the number of broker-dealers
has declined by 23 percent. Does this decline concern you, and
what can the SEC do to address it?
A.1. I believe that investors of all types should have
reasonable access to investment advice and an appropriate range
of investment options, and declines in the availability of
advice and investment options would concern me. I also believe
that, on balance, having more broker-dealers in the industry
would be likely to promote competition, which is beneficial to
the industry as a general matter and investors specifically. If
confirmed, I look forward to consulting with the staff, my
fellow Commissioners, FINRA and other market participants on
the state of the market, including the decline in the number of
broker-dealers, any resulting adverse effects on the market
and, if so, what should be done to address them.
Q.2. As SEC Chair, how will you evaluate FINRA rules to make
sure the rulemaking is not unnecessarily burdening competition?
A.2. In reviewing SRO rulemaking proposals, the SEC is required
to determine whether the proposal is consistent with the
requirements of the Exchange Act and the applicable rules and
regulations thereunder. \1\ Among other things, I understand
this review generally includes consideration of the effects of
the proposed rule on efficiency, competition, and capital
formation, including a consideration of whether any resulting
burden on competition is necessary or appropriate. \2\ If
confirmed, I look forward to working with FINRA on rulemaking
proposals, and with the staff and my fellow Commissioners, as
well as other interested parties, to ensure the SEC fulfills
its statutory requirements.
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\1\ 15 U.S.C. 78s(b)(2)(C)(i). See also id. 78c(f); 78o-
3(b)(6), (9).
\2\ In addition, Section 23(a)(2) of the Exchange Act prohibits
the Commission itself from adopting any rule under the Exchange Act
that would impose a burden on competition not necessary or appropriate
in furtherance of the purposes of the Exchange Act. 15 U.S.C.
78w(a)(2).
Q.3. How can the SEC ensure that political activists don't
---------------------------------------------------------------------------
abuse the shareholder proposal-submission process?
A.3. If confirmed, I intend to enforce the SEC's rules
governing permissible shareholder proposals. I understand that
opinions differ on the shareholder proposal process, including,
for example, the requirements that a shareholder should be
required to satisfy in order to submit a proposal for inclusion
in the company's proxy and a shareholder vote. I also
understand that this is an issue that has been previously
reviewed by the Commission and that market practices are
continuing to evolve. If confirmed, I would want to work with
the staff and my fellow Commissioners, as well as investors and
issuers, to review the current state of the market and the
details of any particular recommendations on this issue. In
doing so, I would pay particular attention to the potential
effects on capital formation, investor protection and the
maintenance of fair and efficient markets.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM JAY CLAYTON
Q.1. Shareholder Communications: Mr. Clayton, the SEC's
shareholder communications and proxy voting rules have not been
updated since 1985. In 2010, the SEC issued a wide-ranging and
comprehensive Concept Release on the U.S. Proxy System. Will
you support making the modernization of the SEC's shareholder
communications and proxy rules a high priority at the
Commission? Would you be inclined to update proxy rules with
the view towards ensuring quicker and cheaper communications
both between companies and their shareholders as well as
between shareholders?
A.1. I am aware of the Concept Release and that it discussed a
number of issues related to the mechanics of shareholder
communications and proxy voting. As a general matter, I believe
it is important that investors, particularly retail investors,
have access to information that will enable them to make
informed voting decisions, and that they are able in practice
to cast their ballots. I also recognize that various changes in
the market, including changes in communications and investor
services, as well as the concentration of holdings in certain
companies, have affected the issuer-shareholder communications
and voting dynamic. If confirmed, I look forward to discussing
the Concept Release and subsequent efforts and developments in
this area with the staff and my fellow Commissioners. I also
look forward to exploring with them ways in which we may be
able to improve the efficiency of these processes as well as
efficient and informed retail shareholder participation in the
proxy process.
Q.2. Investment Disclosure Rules: Mr. Clayton, I know that you
are familiar with the SEC Form 13F and more importantly that it
has not been substantively updated since 1979. Since 1979, the
ownership of publicly listed companies have dramatically
shifted from individuals to institutions and therefore
increases the importance of these disclosure forms. Before the
widespread adoption of the internet, I understand the need for
a 45 days buffer after the end of a quarter to report
investment holdings. However, the unintended consequence means
that most of the ownership information in these filings is no
longer accurate by the time it reaches the market. Without an
update, these rules inhibit the ability of public companies to
identify and engage with their shareholders and accommodate
shareholder demands for greater board accountability. Would you
support an SEC initiative to modernize the 13(f) rules, so that
all market participants would receive more timely information?
A.2. I understand that opinions differ on the length of time
that should be permitted to pass before an institutional
investor is required to report its holdings on Form 13F. I also
recognize that, while there are various important factors to
consider, the Commission generally has an interest in promoting
the public availability of data, thereby increasing investor
confidence in the integrity of the U.S. securities markets, and
for issuers to know in a timely manner who is holding their
stock, including to promote shareholder engagement. I also
understand there is an interest for institutional investors to
protect their investment allocation decisions and proprietary
investment ideas, including against ``free-riding'' and
``front-running'' of their proprietary investment ideas by
other investors. There have been petitions to the Commission
with respect to this issue, \1\ and it would be inappropriate
for me to pre-judge it or make a policy recommendation at this
time, but, if confirmed, I would look forward to discussing the
matter further with the staff and my fellow Commissioners, as
well as receiving the views of market participants, including
issuers and institutional investors.
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\1\ See Petition for Rulemaking Under Section 13(f) of the
Securities Exchange Act of 1934, submitted by NYSE Euronext, Society of
Corporate Secretaries and Governance Professionals, and the National
Investor Relations Institute, File No. 4-659 (Feb. 1, 2013), available
at https://www.sec.gov/rules/petitions/2013/petn4-659.pdf.
Q.3. SEC Cybersecurity: Mr. Clayton, cybersecurity and the
protection of personally identifiable information of Americans
has risen to the forefront of Congress's priorities. The cyber-
breaches at Yahoo, OPM, and others have highlighted just how
vulnerable the personally identifiable information of average
Americans are to a cyber-intrusion. Therefore, I raise my
concern with a potential vulnerability in the National Market
System Plan to implement a Consolidated Audit Trail (CAT NMS
Plan). Although I agree that the consolidation of all market
activity in a central repository would facilitate regulators'
ability to oversee the securities market and help create
greater confidence in the system, I have deep reservations with
the fact that SEC staff do not have to abide by the same
stringent security protocols that all other users of CAT data
must abide by. GAO has previously identified several weaknesses
related to the SEC's cybersecurity protocols that the SEC has
yet to address. Would you take active measures to ensure that
the SEC adopt the same security safeguards required of all
---------------------------------------------------------------------------
other CAT participants under the NMS Plan?
A.3. As a general matter, I place great importance on
cybersecurity, both for entities regulated by the SEC as well
as at the SEC itself. I recognize that cyber-risks, including
denial of service threats and data thefts, raise fundamental
risks for organizations of all types, as well as systemic
risks. If confirmed, I intend to prioritize cybersecurity
efforts at the SEC, including with respect to the CAT NMS Plan.
I recognize that it will be important regularly to discuss
those efforts with the staff, my fellow Commissioners and this
Committee.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM JAY CLAYTON
Q.1. In recent years, the SEC has spent a disproportionate
amount of its time and resources pursuing enforcement actions,
and as everyone knows, enforcement is merely one facet of the
SEC's three-part mission. How do you plan on restoring the
balance of the SEC's mission, and how does doing so ensure that
we have a system that enables robust enforcement?
A.1. If confirmed, each aspect of the Commission's tri-partite
mission will be at the front of my mind. I agree with the
fundamental principles of our disclosure-based regulatory
system, including the focus on information material to an
investment decision. I agree that securities trading markets
should be fair, efficient, and deep. I believe in the
importance of capital formation to our markets, our economy,
and our society more generally. I also agree that there is no
place for ``bad actors'' in our markets. If confirmed, all of
these principles will be important to me in the context of
balancing the SEC's agenda.
Q.2. What is your plan for identifying and addressing some of
the operational inefficiencies that exist at the SEC?
A.2. If confirmed, I also would look forward to discussing with
the staff and my fellow Commissioners the operational
efficiency of the SEC, and whether there are ways in which it
may be improved to enable us to more efficiently promote the
SEC's mission. I do not believe I am in a position to identify
specific areas for potential improvement without the input of
the staff. While I expect my areas of inquiry will change as I
learn more, I am interested in learning from the staff about
the SEC's coordination with other agencies and authorities, as
well as its coordination across offices.
Q.3. There has been increased attention to market structure
reform efforts after the 2008 crisis. Some have argued that our
market structure systems have become increasingly complex and
that the layered regulations have created incentives to game
the system. Can you help me understand your views on reforming
our domestic market structure and can you commit to working
with the Committee in addressing some of the languishing issues
that have been pervasive in market structure over the last 10+
years? I am interested in your general thoughts as well as on
Reg. NMS, venture exchanges, and anything else you find
pertinent.
Can you give me your short- and medium-term assessments of
challenges and risks in our equity market structure, and can
you commit to this body that you will take a comprehensive
approach to reviewing US equity market structure?
A.3. Promoting fairness and efficiency in our markets is a core
element of the SEC's tri-partite mission, and I recognize
concerns have been expressed with respect to aspects of market
structure. I understand that the SEC staff has put forth
certain initiatives to assess market structure issues. For
example, I understand that Regulation NMS is on the current
list of rules to be reviewed pursuant to the Regulatory
Flexibility Act, and, if confirmed, I look forward to reviewing
the public comments on the regulation and engaging with the
staff, my fellow Commissioners and the Committee. I also
understand that the Equity Market Structure Advisory Committee
and its Regulation NMS Subcommittee have proposed a framework
for an access fee (or maker-taker) pilot and made other
significant recommendations.
If confirmed, I look forward to discussing the status of
these issues and efforts, and other important matters related
to equity market structure, with the staff, my fellow
Commissioners, and this Committee to ensure that the Commission
is pursuing its mandate effectively in this area.
Q.4. What are the short-and medium-term risks for the domestic
capital markets?
A.4. Risks to the markets generally are of concern to me, along
with the related issues of responsiveness, mitigation, and
resiliency. I believe we need to be vigilant in identifying and
assessing risks, recognizing that the risk landscape is
changing. By way of general illustration, I believe that the
potential short- and medium-term risks for the domestic capital
markets that the Commission should consider monitoring include,
but are not limited to: (1) market risks, such as the types of
risks we have seen in the past, including in the financial
crisis, where consequences are severe and confidence is
undermined on a systemic basis; (2) shocks, where market
confidence is undermined for exogenous reasons, such as an
extra-jurisdictional event; (3) system failure, with
cybersecurity issues being front of mind for me; and (4) fraud,
which, as we have seen, does direct damage to many individuals,
undermines market confidence and has lasting effects. I
recognize that the SEC and other regulators are monitoring
these and other risks and, if confirmed, I look forward to
engaging with my colleagues in this regard.
I also believe that the risks facing the domestic capital
markets include risks that have not yet been identified. If
confirmed, I would want to work with the staff, my fellow
Commissioners, this Committee and others to be proactive in
connection with the identification, assessment, and mitigation
of risk.
Q.5. What are the biggest impediments that you see to companies
going public in the U.S., and can you commit to working with my
office on legislative solutions to address these issues?
A.5. In my experience, a number of factors may discourage a
private company from becoming a public company, including but
not limited to various immediate one-time costs and ongoing
incremental costs compared with remaining a private company. We
should examine whether these costs can be addressed so that
more companies choose to go public without lessening, and with
an eye toward enhancing, investor protection.
Audited financial statements form a key basis of our
disclosure regime and, along with clear disclosure of the
issuer's business and financial condition, are a fundamental
and important aspect of our investor protection framework. In
addition to the cost of preparing such financial statements and
important financial and business disclosures, today, companies
that transition to public status must also establish and
maintain a system of reporting and compliance controls and
procedures, and comply with various additional ongoing
disclosure, compliance and other requirements that comparable,
well-run private companies may determine are not in the best
interests of shareholders. Other significant incremental costs
typically include those relating to the retention of internal
and outside professionals and advisors, including auditors,
accountants, attorneys, investor relations personnel, and
others. Companies preparing to go public also often need to
retain additional experienced executives and board members and,
relatedly, secure substantially increased insurance coverage.
In my experience, certain companies view the operational
and other pressures inherent in quarterly earnings as costly,
including because they detract from long-term planning and
strategic initiatives. In addition, companies considering going
public must consider, and in my experience put substantial
weight on, the greater risks and potential costs, including the
diversion of management attention, associated with the risk of
public and private litigation and regulatory proceedings.
Many of these costs go beyond out-of-pocket costs and the
direct costs of regulation and are more ``fixed'' than variable
and, as a result, may in some circumstances, have a greater
effect on smaller and medium-sized companies as compared with
``large cap'' companies.
I believe strongly in our disclosure-based public market
regulatory regime and, in particular, the value of well-
prepared SEC registration statements and Exchange Act reports,
but also believe we should be examining this situation with an
eye toward identifying less burdensome means to achieving
effective regulation of newly public companies that encourages
well-run companies to participate in our public capital
markets, while always being mindful of investor protection. If
confirmed, I look forward to working with you and your office,
as well as with my fellow Commissioners and the SEC staff, to
address these issues.
Q.6. Private funds are extremely important to the U.S. and
North Carolina economy, and I am concerned that the current
regime and rule structure under the Investment Advisers Act of
1940 is outdated and has placed a large burden on advisers to
private funds. Can you commit to working with me on addressing
issues with the Advisers Act of 1940, and on ensuring that it
is appropriately structured for our modern economy?
A.6. I understand that this is an issue that has been raised,
particularly with respect to smaller, private funds. If
confirmed, I look forward to working with you and your office,
as well as my fellow Commissioners and the SEC staff, to
explore the issue further.
Q.7. Given your experience as a transactional attorney, what
value does a strong SEC enforcement program play in ensuring
that investors and issuers feel comfortable using our capital
markets to invest and raise money?
A.7. I believe that the enforcement of our securities laws has
significant value in promoting investor confidence in American
markets. Market participants need to know that regulators are
seeking to punish and exclude ``bad actors.'' At the same time,
it is important that investors and regulated entities alike are
confident that we are enforcing our laws vigorously and doing
so fairly.
Q.8. Cybersecurity is an area of great concern for companies
that the SEC regulates. What will you bring from the expertise
you developed in advising companies about cybersecurity to your
role at the SEC? How do you plan on addressing cybersecurity
concerns in our public and private capital markets?
A.8. As a general matter, I place great importance on
cybersecurity, both in the context of the entities regulated by
the SEC as well as at the SEC itself. I recognize that cyber-
risks, including denial of service threats and data thefts,
raise fundamental risks for organizations of all types, as well
as systemic risks. I believe that my experience advising public
companies on cybersecurity matters will be beneficial in
considering these issues. For example, 2 years ago, I co-
organized an educational cybersecurity conference for public
company directors and other decision makers to discuss
practical solutions and tools for more effective and efficient
management through all stages of cyber-risk prevention,
response and recovery. Since then, I have advised companies on
a number of cybersecurity matters and recognize that
effectively dealing with these matters generally requires
information technology and cybersecurity expertise and
coordination across an organization. If I am confirmed, I
believe these experiences will be helpful in my work with the
SEC staff, my fellow Commissioners, market participants and
this Committee as we consider cybersecurity concerns going
forward.
Q.9. Financial institutions, due to their size and complexity,
are more at risk of cybersecurity breaches than ever before.
There is a robust body of guidance that exists domestically and
internationally to assist financial services entities with
developing a cybersecurity risk management strategy. Given
these entities are already tasked with implementing a number of
regulations to ensure safety and soundness, the common sense
approach for U.S. financial regulators would be to leverage
cyber-risk management guiding principles over prescriptive,
onerous requirements. What approach do you think would be best?
A.9. Although I have not yet formed a view on a principles- vs.
rules-based approach in this context, I believe as a general
matter that we should be mindful that cybersecurity risks are
continuously evolving, and regulation in this area should take
into account its dynamic nature including that, in such
circumstances, specific requirements may be appropriate but
also have the risk of becoming outdated. If confirmed, I look
forward to exploring potential options in this area with the
staff, my fellow Commissioners, market participants and this
Committee.
Q.10. IT modernization enables financial services firms to
protect constituent financial information. In an environment of
increasing cybersecurity threats, how will you use your role at
the SEC to promote IT modernization across the financial
services sector and at the SEC? How will you ensure that
regulations set by the SEC do not impede progress on IT
modernization?
A.10. I believe that the Commission should be actively looking
for ways to promote IT modernization and improve efficiency,
resiliency, and security in financial services firms. The
Commission should also be aware of these objectives, where
appropriate, when promulgating new regulations.
Q.11. I am interested in creating a formalized process for the
SEC to conduct a retrospective review of its existing rules and
regulations. As I am sure you are aware, President Obama issued
two executive orders directing independent agencies to conduct
such reviews, but the SEC's previous efforts failed to produce
meaningful results. Can you commit to working with me and my
office in creating a system, like EGRPRA, for the SEC?
A.11. I believe that, as a general matter, it is appropriate to
consider whether rules and regulations have had their intended
effects and whether actual effects, both intended and
unintended, are consistent with expectations. History has shown
that many expected effects can be under- or over-estimated at
the time a rule is initially adopted.
For these reasons, I agree that retrospective review of
existing rules and regulations can be appropriate and
important. I understand that the SEC reviews certain rules
under the Regulatory Flexibility Act. If confirmed, I look
forward to working with you and your office, as well as with my
fellow Commissioners and the SEC staff, to explore potential
additional approaches to retrospective review.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM JAY CLAYTON
Q.1. Chair White expanded SEC policy to seek admissions from
defendants in enforcement proceedings. Under her leadership,
she required enforcement staff to seek admissions in a larger
universe of cases.
In your view, did Chair White's admissions policy go far
enough? What changes would you need to make in order for the
SEC to start seeking admissions from all, or more, defendants
in enforcement actions?
A.1. I have a great deal of respect for Chair White, and,
accordingly, if confirmed, I will be mindful of her comments
regarding the SEC, particularly in the enforcement area. I also
agree that pursuing admissions from defendants in enforcement
proceedings should be a key consideration for the Commission.
As I stated at my nomination hearing, I strongly believe in the
deterrent effect of enforcement proceedings that include
individual accountability. However, I also understand the SEC's
interest in avoiding, where appropriate, drawn-out proceedings
that strain the staff's resources and lengthen the time it
would take for resolution, including for investors to receive
restitution. I believe each matter should be decided based on
its own facts and circumstances, including analysis of whether
the added deterrent effect of securing admissions will be
offset by other relevant factors. It would be premature for me
to make a general policy recommendation in this regard without
the benefit of consulting with the staff and my fellow
Commissioners.
Q.2. In 2009, under Chair Schapiro, the SEC's Enforcement
Division was empowered to pursue investigations without a
Commission vote. Chair White expanded some of those powers. In
February, however, Acting Chair Piwowar withdrew those powers
authority from senior Enforcement Division staff.
Do you commit to restoring those powers to the senior
enforcement staff, or even expanding them? If not, how does
limiting the authority of the enforcement staff help you
attract the best prosecutors?
During your confirmation hearing, you stated ``I have zero
tolerance for bad actors. I'm not only saying that here, I will
say it to the enforcement staff at the SEC.''
Do you believe the Enforcement Division will be able to
achieve a ``zero tolerance'' policy if investigatory powers
continue to be limited?
A.2. In my view, a key element of effective management is
empowerment. I believe most people do their best work if they
have clarity on their objectives and sufficient autonomy and
support to pursue them. I also believe effective empowerment
and functioning of the Enforcement Division are very important
to the fair and efficient functioning of our markets and the
protection of investors. I am also mindful that even the
commencement of an investigation can have significant adverse
impacts on respondents, particularly public companies and their
shareholders. If confirmed, I am committed to consulting with
my fellow Commissioners and the senior members of the
Enforcement Division staff on organizational matters, including
the appropriate and most effective delegation of authority
within the Enforcement Division, including subpoena authority,
and I will work to promote the effectiveness of the Division
and its personnel.
Q.3. On January 17, 2017, two days before she left the
Commission, Mary Jo White gave a speech titled ``The SEC After
the Financial Crisis: Protecting Investors, Preserving
Markets.'' \1\ In that speech, former Chair White expressed
serious concern that the SEC's independence was being
compromised.
---------------------------------------------------------------------------
\1\ https://www.sec.gov/news/speech/the-sec-after-the-financial-
crisis.html
---------------------------------------------------------------------------
She said:
In short, the environment necessary for independent
agencies to be able to do the jobs you all want us to
do is not getting better. Indeed, recent trends have
even raised the question of whether or not the
independence of the SEC can be preserved at all.
Does her opinion concern you?
A.3. I have great respect for Chair White. Independence is
fundamental to the tri-partite mission of the SEC. If
confirmed, I will be mindful of protecting the Commission's
independence, and I believe that focusing on its core tri-
partite mission should facilitate that objective.
Q.4. In that speech, Chair White also cited a bill \2\ that
passed the House of Representatives this January that imposes
additional cost-benefit analysis on the SEC.
---------------------------------------------------------------------------
\2\ SEC Regulatory Accountability Act, H.R. 78, available at
https://www.congress.gov/115/bills/hr78/BILLS-115hr78eh.pdf.
---------------------------------------------------------------------------
In your practice you have read the very detailed, often
hundreds of pages long rules issued in recent years by the SEC
that contain extensive economic analysis. In what ways have you
found them to be deficient?
A.4. I believe economic analysis--including assessing the
expected relevant costs as well as the relevant benefits of a
proposed regulation--is an integral part of the rulemaking
process. In my experience, in most cases, the initial analysis
is reasonably designed, but history has shown that, over time,
rules can have wide-ranging effects, and that those effects can
be under- or over-estimated at the time a rule is initially
adopted, or even missed entirely.
History also has shown that recurring costs, including
compliance costs, often grow faster than expected, including
because yesterday's ``state of the art'' becomes today's
expectation. As the market changes, which it inevitably does,
the divergence between expectations and reality can grow over
time; accordingly, a rule that may have seemed reasonable from
an economic perspective at the time it was adopted may later be
viewed differently. For this reason, I believe retrospective
review can be appropriate and important, and certain rules may
merit re-evaluation over time.
Q.5. During the financial crisis, you saw first-hand banks that
were on the verge of collapse or that failed.
Did the incentive system lead to excessive risk-taking?
Have we learned any lessons from those excesses? What would
have happened if the Treasury and Federal Reserve were not able
to step in either with the TARP program or federal backstops?
Where can the SEC do more to improve financial stability and
support the other financial regulators?
A.5. I believe a number of factors contributed to the financial
crisis, some of which were also hallmarks of past crises such
as new, more risky forms of credit that, in the end, had
various unforeseen detrimental effects on our market, including
driving a bubble in asset prices. I also agree that misguided
incentive compensation programs can contribute to excessive
risk taking. We should remain mindful of those and other
factors as we monitor our capital markets. I cannot speculate
on what would have happened if the Treasury and Federal Reserve
had acted differently.
The SEC has an important role in safeguarding the stability
of our securities and capital markets and coordinating with
other financial regulators, including, without limitation, in
monitoring the compliance of broker-dealers with capital and
other requirements. Another more general way the SEC can do
this is through effective pursuit of its tri-partite mission,
including promoting fair and efficient markets that are well
understood by market participants and others who depend on
those markets.
Q.6. In 2009, the SEC amended Item 407 of Regulation S-K to
require companies to disclose in proxy statements whether a
nominating committee considers diversity in identifying
nominees for the company's board of directors and, if it is
considered, how it is considered. The rule also requires that
if the company has a policy with regard to the consideration of
diversity in identifying director nominees, how that policy is
implemented and how its effectiveness is assessed.
In 2015, several leading public fund administrators
submitted a petition for rulemaking that would require new
disclosures related to nominees for board seats in order to
provide investors with the information they need to make
informed voting decisions. In a July 2016 speech, former Chair
White recognized the importance of diversity on corporate
boards and the interest investors have in diversity disclosure
about board members and nominees. \3\ She further added that
the SEC's 2009 rule change had resulted in vague reporting and
investors were not satisfied with the disclosures. \4\
Accordingly, she directed SEC staff to review the rule and
prepare a recommendation to propose an amended rule to require
companies to include more meaningful board diversity disclosure
on their board members and nominees. \5\
---------------------------------------------------------------------------
\3\ https://www.sec.gov/news/speech/chair-white-icgn-speech.html
\4\ Id.
\5\ Id.
---------------------------------------------------------------------------
In February 2017, the SEC's Advisory Committee on Small and
Emerging Companies (ACSEC) submitted the following
recommendation regarding corporate board diversity disclosure
to the Commission:
The Commission amend Item 407(c)(2) of Regulation S-K
to require issuers to describe, in addition to their
policy with respect to diversity, if any, the extent to
which their boards are diverse. While, generally, the
definition of diversity should be up to each issuer,
issuers should include disclosure regarding race,
gender, and ethnicity of each member/nominee as self-
identified by the individual. \6\
---------------------------------------------------------------------------
\6\ https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-
021617-coporate-board-diversity.pdf
If confirmed, will you continue former Chair White's
efforts to enhance diversity disclosure for board nominees and
work to advance rulemaking based on the recommendation from the
---------------------------------------------------------------------------
ACSEC?
A.6. I believe diversity has value, including at public
companies and their boards. I have witnessed this first hand
and I know that many experienced investors share this view. I
understand that there has been meaningful and ongoing
engagement on this issue between companies and their
shareholders, including institutional investors, and that
disclosure practices are evolving as a result. If confirmed, I
will work with my fellow Commissioners, the staff (including
the Office of Minority and Women Inclusion) and the ACSEC to
monitor this issue and compliance with Item 407 of Regulation
S-K.
Q.7. In February 2016, a group of Chinese investors led by the
Chongqing Casin Enterprise Group announced its intention to
acquire the Chicago Stock Exchange (CHX).
If confirmed, will you commit to review the CHX acquisition
for compliance with SEC rules and requirements, in particular
with respect to limits applicable to beneficial ownership and
voting rights?
A.7. It would not be appropriate for me to comment on a
specific pending proposal. If confirmed, one of my goals will
be to hold non-U.S. acquirers to the same standards as U.S.
acquirers, including disclosure standards. If confirmed, I will
work with the staff and my fellow Commissioners to review this
and any other proposal for consistency with the standards set
forth in our securities laws.
Q.8. During your confirmation hearing you stated, ``[w]e have
to reduce the burdens of becoming a public company, so that
it's more attractive.'' Additionally, you stated, ``[f]or a
variety of reasons, including very robust private capital
markets, but also the costs of going public, the choice to go
public here is a very hard one.'' Please detail the ``variety
of reasons'' other than costs or regulations that you believe
discourage companies from going public and describe whether
those factors will have less impact if costs or regulations are
reduced.
A.8. In my experience, a number of factors may discourage a
private company from becoming a public company, including but
not limited to various immediate one-time costs and ongoing
incremental costs compared with remaining a private company. We
should examine whether these costs can be addressed so that
more companies choose to go public without lessening, and with
an eye toward enhancing, investor protection.
Audited financial statements form a key basis of our
disclosure regime and, along with clear disclosure of the
issuer's business and financial condition, are a fundamental
and important aspect of our investor protection framework. In
addition to the cost of preparing such financial statements and
important financial and business disclosures, today, companies
that transition to public status must also establish and
maintain a system of reporting and compliance controls and
procedures, and comply with various additional ongoing
disclosure, compliance and other requirements that comparable,
well-run private companies may determine are not in the best
interests of shareholders. Other significant incremental costs
typically include those relating to the retention of internal
and outside professionals and advisors, including auditors,
accountants, attorneys, investor relations personnel, and
others. Companies preparing to go public also often need to
retain additional experienced executives and board members and,
relatedly, secure substantially increased insurance coverage.
In my experience, certain companies view the operational
and other pressures inherent in quarterly earnings as costly,
including because they detract from long-term planning and
strategic initiatives. In addition, companies considering going
public must consider, and in my experience put substantial
weight on, the greater risk and potential costs, including the
diversion of management attention, associated with the risk of
public and private litigation and regulatory proceedings.
Many of these costs go beyond out-of-pocket costs and the
direct costs of regulation and are more ``fixed'' than variable
and, as a result, may in some circumstances, have a greater
effect on smaller- and medium-sized companies as compared with
``large cap'' companies.
I believe we should be examining this situation with an eye
toward identifying less burdensome means to achieving effective
regulation of newly public companies. We should encourage well-
run companies to participate in our public capital markets,
while always being mindful of investor protection.
Q.9. The JOBS Act amended the Securities Act of 1933 to
facilitate initial public offerings (IPOs) and the Securities
Exchange Act of 1934 to expand the number of security holders a
private company may have without registering with the SEC.
Previously, companies would consider an IPO as they approached
the old limit of 500 investors--notably Google in 2004 and
Facebook in 2012. To what extent did the JOBS Act's expansion
of the allowable number of security holders at private
companies negatively impact the number of IPOs?
A.9. The JOBS Act did expand the allowable number of security
holders at private companies. However, at this time I cannot
state for certain its significance in the decision of whether
or not to become a public company.
Q.10. Which specific regulations do you believe are hindering
IPOs? How may they be revised in ways that do not weaken
investor protection?
A.10. I believe the disclosure-based regulatory framework
governing our public markets and companies has been and remains
very important--for example, I believe in the value of well-
prepared SEC registration statements and Exchange Act reports.
In connection with efforts to encourage more well-run companies
to access the public capital markets, as an example, an avenue
I would consider exploring is comparing the reporting and
control environments at respected private companies with public
company requirements and practices. If confirmed, I look
forward to working with my fellow Commissioners and the staff,
and consulting with market participants, regarding such an
exercise or other means through which we can identify measures
that will facilitate access to our public markets while
maintaining or enhancing protections for investors.
Q.11. If regulations are rolled back in the hopes of promoting
more IPOs, what are the measures by which you would determine
or define success? Specifically, is success achieved by
increasing the number of IPOs in a year? What if IPOs increase,
but more companies delist anyway, resulting in a decrease in
the aggregate number of listed companies?
A.11. The focus on increasing the attractiveness of our public
capital markets is driven by the three-part mandate of the
Commission. I believe our public equity markets have, over
time, proven to be an efficient and fair means for investors,
particularly Main Street investors, to participate in the
growth of the American economy. Success should be defined by
whether the Commission is addressing its mandate, including
whether Main Street investors have efficient means to
participate in investment opportunities with appropriate
investor protection.
I also am very open to exploring other avenues to achieve
this objective and, if confirmed, look forward to discussing
this issue with the staff and my fellow Commissioners and this
Committee.
Q.12. According to a recent report by Credit Suisse, concurrent
with the decline in IPOs since the peak in 1996, there has been
substantial increase in the volume of mergers and acquisitions
(M&A) activity and the assets managed by venture capital funds
(nearly 7x higher) and buyout funds (over 10x higher). If IPOs
increase, do you expect a commensurate decrease in M&A activity
or the size of venture capital and buyout funds? If so, are
IPOs preferred to M&A activity or private fund investments? If
not, what would prevent such a decrease?
A.12. There are a variety of factors that drive M&A activity,
both in the public and private markets, and private investment
activity. It is not clear to me that there is a correlation
between IPOs and M&A activity and I cannot predict the effect
that an increase in IPOs would have on public M&A activity or
the size of venture capital and buyout funds.
Q.13. Among the significant differences between public and
private companies are required disclosures by public companies
and transferable shares that generally confer voting rights and
allow input on governance matters. If the burdens of being a
public company, including these, are to be reduced to encourage
more IPOs, please explain how limiting either or both of these
elements would be positive for transparency or shareholder
rights.
A.13. I believe the disclosure-based regulatory framework
governing our public markets and companies has been and remains
very important and, in this regard, I believe transparency and
shareholder rights have substantial value. I believe that any
efforts to make our public markets more attractive to companies
should take into account these fundamental principles,
recognizing that many factors drive decisions around governance
structures.
Q.14. In February, I joined the other Democratic Members of the
Senate Finance Committee in a letter to Chairman Hatch
requesting that then Department of Health and Human Services
Secretary nominee Tom Price provide accurate and complete
responses regarding his answers to questions about privileged
and discounted access to a private placement of stock by an
Australian biomedical company. In addition, other Members of
Congress questioned the numerous stock transactions by Mr.
Price while he was Chairman of the House Budget Committee and a
member of the House Ways and Means Subcommittee on Health. Mr.
Price's financial disclosures show that he engaged in
transactions involving the stock of 40 different companies in
the health care sector. Given his prior positions, Mr. Price
potentially had access to information that could impact the
companies he invested in and that was not available to the
public. Please confirm that the Division of Enforcement staff
will have your full support to consider the issues raised by
Mr. Price's investments and the applicability of the STOCK Act
and that all appropriate regulatory actions will be pursued.
A.14. As I noted at my nomination hearing, matters such as
these are highly dependent on the facts and circumstances and
it would not be appropriate for me to comment on any specific
matter at this time. As a general matter, however, if
confirmed, I will actively support the staff in investigating
violations of the securities laws and pursuing enforcement
actions and can assure you that no individual will be above the
securities laws.
Q.15. At your confirmation hearing, you agreed to provide the
names of current Trump administration officials, or its
transition team, that you communicated with prior to being
selected by the President as his nominee, and if you know
whether any of those individuals have businesses regulated by
the SEC. Accordingly, please provide that information for the
record.
A.15. Based on my recollection, I communicated on a substantive
basis with the following current Trump administration officials
or former transition team members prior to being selected by
the President as his nominee to Chair the Commission: President
Donald J. Trump, Reince Priebus, Stephen Bannon, Ambassador
Martin Silverstein, Ira Greenstein, Darren Blanton, Peter
Thiel, and Rebekah Mercer. While I have not specifically looked
into it, I believe it is fair to presume that one or more of
these individuals may be affiliated with one or more public
companies or other companies that are regulated by the SEC.
Also, on January 4th, after my nomination had been publicly
announced, I met with Carl Icahn. On December 24th, following
press reports of my meeting with then President-elect Trump
earlier in the week, Mr. Icahn's office contacted me to request
a meeting on a to-be-determined date. That meeting was not set
until several days after I received word that I would be
nominated.
Q.16. Please describe examples of steps you plan to take to
improve investor protection. How will an Ohioan saving for
retirement or to send her kids to college know you are working
to protect her?
A.16. Investor protection, particularly the protection of Main
Street investors, is a critical element of the SEC's tri-
partite mission, and it is very important to me. If confirmed,
I intend to make this aspect of the SEC's mandate clear both in
word and deed. I will make it clear that protection of Main
Street investors is a touchstone for our rulemaking,
enforcement, and other related activities.
Q.17. The Foreign Corrupt Practices Act (FCPA) forbids U.S.
companies and their subsidiaries from paying foreign Government
officials to obtain or retain business. What is your specific
plan for enforcement of the FCPA?
A.17. Bribery and corruption have no place in society.
Moreover, they often go hand-in-hand with many other societal
ills, including inequality and poverty, and have anti-
competitive effects, including disadvantaging honest
businesses. Accordingly, combating corruption is an important
governmental mission.
U.S. authorities, including the SEC, other financial
regulators, and law enforcement agencies, both at home and
abroad, play an important role in combating Government
corruption. I believe the FCPA can be a powerful and effective
means to effect this objective. I also believe that
international anti-corruption efforts are much more effective
at combating corruption if non-U.S. authorities are similarly
committed and seek to coordinate. Fortunately, international
enforcement efforts appear to be more prevalent than they were
a decade ago. If confirmed, I look forward to working with my
fellow Commissioners, Enforcement Division staff, and other
authorities in the U.S. and abroad to coordinate enforcement of
the FCPA and other anti-corruption laws. In particular, I
believe that coordination with the Department of Justice is
integral to effective enforcement of the FCPA.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JAY CLAYTON
Q.1. The Securities and Exchange Commission still has not
finalized all of the rules required under Title VII of the Dodd
Frank Wall Street Reform and Consumer Protection Act. Will you
give us your commitment that the Commission, if you are
confirmed, will finalize these derivatives rules before your
term is complete? If so, how will you sequence the completion
of these remaining rules so that they are all complete by the
end of your term?
A.1. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law and that such rulemakings should be pursued on a basis that
is timely and feasible. The rulemaking process is important,
and in many cases demands significant resources. The
Commission's resources are limited and, accordingly, the
overall approach to rulemaking should reflect the Commission's
mandate and be the product of consultation among the
Commissioners, the staff and, in the case of multi-agency
rulemaking, other authorities, being mindful of the obligation
to proceed with mandatory rulemaking at a reasonable pace and
also being responsive to market developments. If confirmed, I
look forward to engaging with my fellow Commissioners and the
staff regarding these issues and working to carry out the
statutorily mandated rulemakings.
Q.2. The Public Company Accounting Oversight Board (PCAOB) was
created in the wake of a series of corporate accounting
scandals, such as Enron and WorldCom, which cost investors
billions of dollars and hurt the U.S. economy. But the 2002
Sarbanes-Oxley law creating the Board also required PCAOB's
disciplinary proceedings to be kept confidential through
charging, hearings, initial decision, and appeal. For example,
an accounting firm that was subject to a disciplinary
proceeding continued to issue no fewer than 29 additional audit
reports on public companies without any of those companies
knowing about its PCAOB disciplinary proceedings. PCAOB's
closed proceedings run counter to the public enforcement
proceedings of other regulators, including the Commission you
have been nominated to chair, the Securities and Exchange
Commission, as well as the Department of Labor, the Federal
Deposit Insurance Corporation (FDIC), the Commodity Futures
Trading Commission (CFTC), the Financial Industry Regulatory
Authority (FINRA), and others. Since you are ``100 percent
committed to rooting out any fraud and shady practices in our
financial system,'' would you agree that the PCAOB's
disciplinary proceedings should be made transparent?
A.2. As a general matter, I believe that effective enforcement
and oversight are critical to the fair and efficient
functioning of our markets and the protection of investors. I
also firmly believe in our disclosure-based approach to
regulation. I am also mindful that the disclosure of an
investigation related to a public company can have significant
adverse impacts on the company and its shareholders, even if
the investigation is of an accounting firm and does not relate
to conduct by the company or its personnel and would not be
expected to affect the company's performance. I am also mindful
that the scope of the PCAOB's disciplinary authority was set
forth by Congress in the Sarbanes-Oxley Act of 2002.
If confirmed, I would want to study this issue in more
detail with my fellow Commissioners and the SEC staff,
including with the benefit of the PCAOB's experience with this
issue over the past decade, keeping in mind the principles and
considerations discussed above, including the value of
transparency.
Q.3. During your hearing, there was some discussion regarding
why fewer companies may be choosing to go public. Is it
possible that the JOBS Act itself through its expansion of
exempt offerings might have contributed to fewer initial public
offerings? If you believe otherwise, how have you arrived at
this conclusion?
A.3. The JOBS Act did expand the allowable number of security
holders at private companies. However, at this time I cannot
state for certain its significance in the decision of whether
or not to become a public company.
If confirmed, I would expect to study these issues in more
detail, including with the SEC staff, to determine whether my
experience is consistent with the views and experience of the
staff and market participants.
Q.4. Also during the hearing, I asked about my bipartisan
legislation with Senator Grassley that would increase the SEC's
authority to obtain civil monetary penalties. You stated that
you would appreciate a moment to look at the issue and that you
would provide your views after you had looked at the issue. Now
that you have had time to reflect on this issue, I would
appreciate knowing your views. To restate the question, in 2011
former SEC Chair Mary L. Schapiro explained that ``the
Commission's statutory authority to obtain civil monetary
penalties with appropriate deterrent effect is limited in many
circumstances.'' Do you agree with former Chair Schapiro?
A.4. As a general matter, I believe that the effective
empowerment and functioning of the SEC Enforcement Division are
fundamental to the fair and efficient functioning of our
markets and the protection of investors. Under existing law,
the Commission has the authority to seek civil monetary
penalties in a number of circumstances. I would not want the
Division or the Commission to be unnecessarily or
inappropriately constrained in pursuing civil monetary
penalties, which can serve an important deterrent effect in
appropriate circumstances. If confirmed as Chair, I will work
with my fellow Commissioners and the Enforcement Division staff
to enforce the law as it is written, including with respect to
civil monetary penalties. I also would be willing to engage
with Congress regarding any changes to the SEC's statutory
authority to seek monetary penalties that Congress deems
appropriate.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JAY CLAYTON
Q.1. Mr. Clayton, as we discussed during your confirmation
hearing, in 2009, former SEC Chair Mary Schapiro gave subpoena
authority to the Commission's enforcement staff. Prior to then,
only the Commission itself could authorize subpoenas. This
change empowered senior enforcement attorneys to quickly
escalate informal inquiries to formal investigations,
ultimately strengthening the Commission's ability to
investigate corporate misconduct.
Unfortunately, Acting Chair Piwowar has taken steps to rein
in the enforcement division by revoking subpoena authority from
20 enforcement officials and limiting it to the enforcement
division director. This is a major reversal from post-crisis
policy designed to assist the Commission in initiating
investigations into bad actors that ravaged investors and our
economy.
During the hearing, you were unable to answer any questions
on this topic. Now that you have had time to research and
develop an opinion, please answer the following questions.
Do you agree with this policy change?
In your opinion, does taking away subpoena authority from
senior enforcement attorneys better protect investors and deter
misconduct?
If confirmed, do you plan to continue this policy?
What specific actions will you take to empower the SEC's
enforcement division?
A.1. I believe that effective and appropriate empowerment and
functioning of the Enforcement Division are very important to
the fair and efficient functioning of our markets and the
protection of investors. I am also mindful that even the
commencement of an investigation can have significant adverse
impacts on respondents, particularly public companies and their
shareholders.
If confirmed, I am committed to consulting with my fellow
Commissioners and the senior members of the Enforcement
Division staff on organizational matters, including the
appropriate and most effective delegation of authority within
the Enforcement Division, including subpoena authority, and I
will work to promote the effectiveness of the Division and its
personnel.
Q.2. Mr. Clayton, as we discussed during your confirmation
hearing, Acting Chair Piwowar recently decided to open a new
public comment period on the CEO-to-worker pay ratio rule, as
required by section 953(b) of the Dodd-Frank Wall Street Reform
and Consumer Protection Act. The rule was adopted by the SEC in
2015. Acting Chair Piwowar's unilateral decision not only
obstructs the implementation of a congressionally mandated rule
and diverts staff resources away from other responsibilities,
but it selectively ignores the tens of thousands of comments
from investors expressing the view that this information is
material and important to shareholder evaluation of executive
compensation.
In fact, last week, a coalition of 100 investors and
investor organizations representing $3 trillion in assets under
management wrote to Acting Chair Piwowar expressing support for
the rule and urging the SEC to maintain the current effective
date for the disclosure.
During the hearing, you were unable to answer any questions
on this topic. Now that you have had time to research and
develop an opinion, please answer the following questions.
Do you agree with Acting Chair Piwowar's decision to open a
new public comment period on the rule?
Is it your sense that the first comment period on the
rulemaking failed to appropriately capture issuer concerns
about compliance? If so, please provide a detailed explanation.
Does it concern you, from an SEC governance perspective,
that one commissioner, without consulting the other, decided to
reopen a public comment period on a rule that has already been
adopted by the Commission?
Can I have your commitment that, if confirmed, you will
adhere to this congressional mandate and implement the 953(b)
rule, including retaining the current effective date, without
delay?
A.2. A statement on the SEC's website indicates the reason for
the extension was to better understand the nature of
unanticipated compliance difficulties encountered by some
issuers and to determine whether additional guidance or relief
may be appropriate. If confirmed, I look forward to working
with the staff and my fellow Commissioners to understand the
nature of these concerns and to proceed in an appropriate
fashion with the rulemaking process for this rule.
Q.3. In 2011, a bipartisan group of corporate and securities
law professors filed a rulemaking petition with the SEC that
would require publicly traded companies to disclose political
expenditures to their shareholders. To date, more than 1.2
million securities experts, institutional and individual
investors, and members of the public have pressed the SEC for
such a rule, including support from former Republican SEC Chair
William Donaldson and former Democratic SEC Chair Arthur
Levitt.
As a matter of corporate governance and investor
protection, the case for disclosure is clear and convincing.
This information is material to how shareholders decide where
to invest their money and how they vote in corporate elections.
In response to a question from Sen. Van Hollen, you
acknowledged that a number of companies already make this
disclosure. You also said that you would be willing to think
about whether this disclosure should be mandated.
Do you agree with the concept that shareholders, those that
actually own the wealth of corporations, should be able to
access information regarding a company's political spending
decisions?
As noted above, you acknowledged during the hearing that a
number of companies provide information to shareholders on
political spending. As more and more companies begin to
recognize this information is material to shareholders, do you
agree that a standardized disclosure regime would provide
shareholders with access to clear and comparable disclosures?
As you said in response to questions on the need for the
political spending regulation, materiality is the touchstone
for making disclosure decisions at the agency. Materiality is
defined as relevant information to investors. With that in
mind, can you explain why a disclosure rulemaking petition that
has received the most investor (institutional, retail, and
pension) support--tenfold times any other proposed rulemaking
in agency history--could realistically be deemed immaterial?
Currently, the SEC has the authority to take preliminary
steps to consider a rulemaking that would require publicly
traded companies to disclose their political spending to
shareholders, including holding a public roundtable on the
issue. If confirmed, will you commit to hold a public
roundtable on the issue of corporate political spending
disclosure?
Given the record support for this rulemaking petition, I am
concerned that the SEC has been too dismissive of the comments
from investors and members of the public regarding an issue
that goes to the core of the SEC's mission. What assurances can
you provide that you will take seriously these 1.2 million
comments in support of a rule to require publicly traded
companies to disclose their political spending to shareholders?
A.3. I am aware that issues related to corporate disclosure of
political spending have generated significant interest and
divergent views. As I stated at the hearing, I believe that
materiality is the touchstone with respect to disclosure.
I understand that through shareholder engagement, a number
of companies have elected to provide information regarding
their political spending activities. In addition, under the
SEC's shareholder proposal rule, Rule 14a-8, investors can
submit proposals to be included in a company's proxy materials
that would require specific disclosure of items regardless of
whether they meet the materiality threshold. Based on publicly
available information, shareholder support for political
spending and lobbying disclosure proposals under Rule 14a-8 has
averaged close to but less than 25 percent in recent years.
If confirmed, I would expect to engage with the staff, my
fellow Commissioners, and market participants to further
consider this issue.
Q.4. I worked with former Senator Akaka on section 913 of the
Dodd-Frank Wall Street Reform and Consumer Protection act to
authorize the SEC to require broker-dealers that provide
investment advice about securities to retail customers to
adhere to a fiduciary standard. In January 2011, as mandated by
section 913, the SEC published a study on gaps in the
protection of retail investors, and SEC staff recommended a
uniform fiduciary standard for broker-dealers and investment
advisers.
Specifically, the study states, ``[r]etail customers do not
understand and are confused by the roles played by investment
advisers and broker-dealers, . . . They should not have to
parse through legal distinctions to determine whether the
advice they receive was produced in accordance with their
expectations.'' \1\
---------------------------------------------------------------------------
\1\ https://www.sec.gov/news/studies/2011/913studyfinal.pdf
---------------------------------------------------------------------------
Consistent with Congress's grant of authority to the SEC in
section 913, the study recommends the consideration of a
rulemaking that would apply a uniform fiduciary standard to
both broker-dealers and investment advisers, when providing
personalized investment advice about securities to retail
customer. Former SEC Chair Mary Jo White agreed with the
findings and recommendations of this study, but the SEC has
filed to take any additional steps to date.
If confirmed, what significance will you place on SEC staff
findings and recommendations?
If confirmed, will you commit to move forward with a
uniform fiduciary duty rulemaking as authorized under section
913 and as recommended by SEC staff?
A.4. I am aware that this issue has generated significant
interest. I believe investor protection, particularly
protection of Main Street investors, is a critical element of
the SEC's tri-partite mission. Based on my experience, I
believe that as a general matter it is important that our
regulations are designed to ensure that Main Street investors
making an investment decision are well informed. I understand
the current debate regarding the duty owed to these investors,
including key issues raised by the related fiduciary rule
issued by the Department of Labor, such as potential divergence
of regulatory standards across account types, uncertainty in
application, compliance costs, coordination among regulatory
agencies, potential limitations on investor choice and
investment opportunities, and, importantly, investor
protection. These would be important issues to consider when
assessing whether the SEC should issue a similar rule. If
confirmed, I look forward to working with my fellow
Commissioners and the SEC staff, and consulting with market
participants, to determine whether the Commission should move
forward and, if so, in what manner, always keeping in mind the
interests of Main Street investors.
I also recognize the importance of coordination and
discussion with other agencies and stakeholders generally and
with respect to these issues in particular. If confirmed, I
would encourage the SEC staff to pursue such coordination and
discussion.
Q.5. In 2009, the SEC adopted a rule requiring publicly traded
companies to disclose more information on director selection
and diversity. However, because the rule failed to actually
define diversity, the disclosures are vague and provide little
information to investors on actual board diversity. Last year,
former Chair White acknowledged that the rule has not resulted
in particularly meaningful disclosures. Earlier this year, the
SEC's Advisory Committee on Small and Emerging Companies
submitted a memo to Acting Chair Piwowar recommending that the
Commission amend the rule to include ``disclosure regarding
race, gender, and ethnicity of each board member/nominee as
self-identified by the individual.''
What is your view on the effectiveness of the SEC's
corporate board diversity rule?
Will you commit to working to update the rule so that
investors have access to meaningful disclosures such as the
racial, ethnic, and gender composition of boards, and any
company efforts or strategies to improve board diversity?
A.5. I believe diversity has value, including at public
companies and their boards. I have witnessed this first hand
and I know that many experienced investors share this view. I
understand that there has been meaningful and ongoing
engagement on this issue between companies and their
shareholders, including institutional investors, and that
disclosure practices are evolving as a result. If confirmed, I
will work with my fellow Commissioners, the staff (including
the Office of Minority and Women Inclusion), and the SEC's
Advisory Committee on Small and Emerging Companies (ACSEC) to
monitor this issue.
Q.6. Given your role in representing Ally Financial in the
fallout of the subprime mortgage crisis, I wanted to get your
perspective on Goldman Sachs' activities to meet the consumer
relief portion of its settlement with the Federal and State
Governments. As I'm sure you know, last January, Goldman Sachs
entered into a settlement of more than $5 billion over its role
in packaging and selling toxic mortgage-backed securities in
the years leading up to the crisis. The settlement requires
Goldman to provide $1.8 billion in consumer relief, and to
satisfy that portion of the settlement, Goldman has purchased
approximately 26,000 severely delinquent mortgage loans from
Fannie Mae for approximately $4.5 billion, loans which
represent $5.7 billion in unpaid principal balance.
In essence this deal allows Goldman to purchase loans for
pennies on the dollar, and once borrowers restart their monthly
payments, the ability to sell the loan for a profit and receive
credit under the terms of their settlement.
And because Goldman gets settlement credit for purchasing
these loans, it has the financial ability to outbid other more
community-oriented buyers that may have a greater incentive to
keep borrowers in their homes.
Do you think it's fair that Goldman Sachs, who pedaled
toxic mortgage-backed securities and paid a record $550 million
penalty in a settlement with the SEC for misleading investors
about subprime mortgage products, can meet its settlement
obligations by purchasing delinquent mortgage loans and
reselling them for a profit?
A.6. It would not be appropriate for me to comment on a
particular enforcement matter. As a general matter, I believe
that all participants to a settlement should fulfill their
settlement obligations.
Q.7. In my mind, the Office of the Whistleblower serves a
critical function at the SEC, empowering whistleblowers to
provide key information to the Commission. As you know, Dodd-
Frank required the SEC to establish a whistleblower program,
and since 2011, the SEC has received more than 18,300 tips and
awarded more than $111 million to 34 whistleblowers.
Importantly, since 2014, the SEC has pursued enforcement
actions against a number of companies that retaliated against
whistleblowers.
Do you agree that the Office of the Whistleblower has been
successful?
In your view, what can the Commission do to enhance
protections for whistleblowers and ensure that tips and
information on misconduct and illegal activity continue to flow
to the Commission?
A.7. As a general matter, I believe that effective enforcement
is critical to the fair and efficient functioning of our
markets and the protection of investors. While I do not have
substantial experience with the SEC's whistleblower program, it
is my general understanding that the Office of the
Whistleblower provides an important tool for identifying
misconduct and facilitating restitution to investors. I
understand certain protections on which the Office has been
focused include preserving the confidentiality of
whistleblowers and taking action to protect against
retaliation. If confirmed, I look forward to learning more
about the efforts of the Office from my fellow Commissioners
and the staff and hearing their views on how to make the Office
a more effective component of the SEC's enforcement efforts
specifically and its tri-partite mission more generally.
Q.8. The shareholder proposal process set forth in Rule 14a-8
describes the process by which shareholders can file
resolutions. The rule provides an important mechanism whereby
eligible shareholders can place proposals in proxy statements,
thereby allowing shareholders to vote on a proposed change in
the company's bylaws or make recommendations to management to
amend company policies. In February, the Business Roundtable
sent a letter to Gary Cohn, the Director of the National
Economic Council, detailing recommendations on various Federal
regulations. \2\ The letter specifically identifies the
shareholder proposal process and suggests, among other
recommendations, that the threshold requirements for being able
to file, refile, and vote on shareholders resolutions should be
significantly increased.
---------------------------------------------------------------------------
\2\ https://businessroundtable.org/sites/default/files/
Regulations%20of%20Concern%20Letter%20and%20List%201702_22.pdf
---------------------------------------------------------------------------
What is your opinion of proposals to curtail the
shareholder proposal process as outlined in Rule 14a-8?
Do you believe that the current shareholder proposal
process needs any changes? If so, please provide a detailed
explanation of such changes.
A.8. I understand that opinions differ on the shareholder
proposal process, including, for example, the requirements that
a shareholder should be required to satisfy in order to submit
a proposal for inclusion in the company's proxy and a
shareholder vote. I also understand that this is an issue that
has been previously reviewed by the Commission and that market
practices are continuing to evolve. If confirmed, I would want
to work with the staff and my fellow Commissioners, as well as
investors and issuers, to review the current state of the
market and the details of any particular recommendations on
this issue. In doing so, I would pay particular attention to
the potential effects on capital formation, investor protection
and the maintenance of fair and efficient markets.
Q.9. There are currently two petitions for rulemaking pending
with the SEC requesting rules to require disclosure of short
positions in parity with the existing required disclosure of
long positions (File No. 4-689 and File No. 4-691). The current
lack of transparency around short positions deprives companies,
investors, and the market of valuable information and may
encourage trading behaviors that unfairly harm growing
companies and their investors.
Would you support a disclosure regime for short sellers,
modeled after the Regulation 13D disclosures required of long
investors, to shine a light on manipulative behaviors, protect
long-term business growth, and allow all market participants to
make informed trading decisions?
A.9. I am generally aware of these rulemaking petitions. It
would not be appropriate for me to pre-judge the issue or to
make policy recommendations at this time. However, if
confirmed, I look forward to consulting with SEC staff and
other interested parties to understand the types of data
currently available to the public, the staff's knowledge and
assessment of the identified concerns, the expected effect that
additional disclosures would be anticipated to have on those
concerns, and the expected effects that such additional
disclosure requirements may have on other matters such as
liquidity and price discovery in the market.
Q.10. Title VIII of the Dodd-Frank Wall Street Reform and
Consumer protection act added a new regulatory framework for
financial market utilities designated by the Financial
Stability Oversight Council as systemically important. U.S.
clearinghouses that have been determined to be systemically
important financial market utilities, SIFMUs, are subject to
prudential regulation by the Federal Reserve Board. Title VIII
allows SIFMUs to maintain accounts at a Federal Reserve Bank
and provides access to the Fed's discount window in unusual and
exigent circumstances. SIFMUs are currently able to compete for
business opportunities abroad because these rules align with
international standards. However, certain legislative proposals
in Congress have proposed repealing Title VIII.
Will you commit to work with Congress to ensure SIFMUs are
not denied access to foreign markets?
A.10. As a general matter, I agree that we should be mindful of
the issue of SIFMU access to foreign markets, recognizing the
international nature of many aspects of our capital markets. If
confirmed, I look forward to working with Congress on important
legislative proposals that, consistent with the SEC's mission,
affect our markets.
Q.11. As you know, the SEC is currently reviewing the proposed
acquisition of the Chicago Stock Exchange by a group of Chinese
investors led by the Chongqing Casin Enterprise Group.
Given Chongqing Casin's various business lines in China
including property development, insurance, and municipal
commercial banks, and its likely ties to the Chinese
Government, in your opinion, does the potential acquisition
raise U.S. market integrity, transparency, and confidence
concerns?
If confirmed, what specific steps will you and your staff
undertake to thoroughly review the near and long-term
implications of Chongqing Casin's acquisition of a U.S.
exchange?
A.11. It would not be appropriate for me to comment on a
specific pending proposal. If confirmed, one of my goals will
be to hold non-U.S. acquirers to the same standards as U.S.
acquirers, including disclosure standards. If confirmed, I will
work with the staff and my fellow Commissioners to review this
and any other proposal for consistency with the standards set
forth in our securities laws.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
FROM JAY CLAYTON
Q.1. Foreign Corrupt Practices Act: Mr. Clayton, I am a strong
believer that our markets and our Government work best when we
shine a light on them. Transparency and eliminating conflicts
of interest are key to a strong democracy.
Now I want to ask you about a paper you co-wrote back in
2011 with nine other lawyers, about the Foreign Corrupt
Practices Act.
Your paper to the New York City Bar Association is critical
of the law.
I think it is also important to note that President Trump
has also publicly shared his disdain for the FCPA. Which is
concerning given the fact that the President's company has a
history of doing business internationally in places like
Azerbaijan.
So I guess my first question is do you continue to oppose
the FCPA?
Would you elaborate on your thoughts about corporations and
bribery, and what you will do to ensure that these two things
do not cross paths?
A.1. Bribery and corruption have no place in society. Moreover,
they often go hand-in-hand with many other societal ills,
including inequality and poverty, and have anti-competitive
effects, including disadvantaging honest businesses.
Accordingly, combating corruption is an important governmental
mission.
U.S. authorities, including the SEC, other financial
regulators, and law enforcement agencies, both at home and
abroad, play an important role in combating Government
corruption. I believe the FCPA can be a powerful and effective
means to effect this objective. I also believe that
international anti-corruption efforts are much more effective
at combating corruption if non-U.S. authorities are similarly
committed and seek to coordinate. The New York City Bar
Association paper you reference focused on this coordination
point but also was clear that effectively combating Government
corruption is an important policy objective that should be
pursued vigorously. Fortunately, international enforcement
efforts appear to be more prevalent than they were a decade
ago. If confirmed, I look forward to working with my fellow
Commissioners, Enforcement Division staff, and other
authorities in the U.S. and abroad to coordinate enforcement of
the FCPA and other anti-corruption laws. In particular, I
believe that coordination with the Department of Justice is
integral to effective enforcement of the FCPA.
Q.2. CFIUS: Mr. Clayton, the Committee on Foreign Investment in
the United States is an inter-agency committee who reviews
transactions that result in the control of American businesses
by foreign entities. The CFIUS review examines the potential
effects that foreign investment could have on national
security. In the SEC space, a Chinese company is in the process
of purchasing a U.S. Stock Exchange. Now the SEC Chair is not a
permanent member of CFIUS, but often plays a role, when an
entity under its purview is under consideration by CFIUS.
My question to you is will you commit to working with CFIUS
in a vigorous manner to ensure that Americans' financial
information is not placed into harm's way?
A.2. While it would not be appropriate for me to comment on a
specific proposal pending before the Commission, I can confirm
to you that I am aware of the important role of CFIUS and, if
confirmed as Chair, look forward to working with CFIUS in
matters of overlapping jurisdiction to facilitate its mission.
Q.3. Given your history in mergers in acquisitions, you have
obviously seen and participated in transactions involving
foreign investment into the U.S.
Do you believe our financial markets and investors here in
the U.S. are at an increased risk lately with increased foreign
investment, particularly from Chinese entities, looking to
steal proprietary information?
A.3. I am aware of policy and competitive concerns that have
arisen in the context of foreign investment in U.S. capital
markets, including market-related and investor protection
concerns as well as other issues which overlap with other
authorities and extend beyond the scope of the SEC's authority
and mandate.
If confirmed, I will engage with my fellow Commissioners
and the SEC staff regarding these market-related and investor
protection issues, and, as noted in connection with your
question regarding CFIUS, engage with other authorities on
issues of common interest, including, but not limited to,
issues related to protection of proprietary information.
Q.4. Priorities/Consensus Building: Mr. Clayton, I know you
have a long history in the mergers and acquisitions space, but
I am curious about what is most important to you today.
If confirmed, what will be your priorities be as SEC Chair?
A.4. If I am confirmed, I will focus my efforts on advancing
the Commission's tri-partite mission of protecting investors,
maintaining fair, orderly, and efficient markets, and
facilitating capital formation. For example, as I stated at the
hearing, I firmly believe that (1) well-functioning capital
markets are important to every American; (2) all Americans
should have the opportunity to participate in, and benefit
from, our capital markets on a fair basis, including being
provided accurate information about what they are buying when
they invest; and (3) there is zero room for bad actors in our
capital markets. I also intend, if confirmed, to assess the
actions of the Commission through the lens of what is in the
interest of Main Street investors. If confirmed, I will work
with my fellow Commissioners and the SEC staff to pursue these
and other goals that are consistent with the SEC's mission.
Q.5. When I think about strong nominees, I think about folks
who are willing to put partisanship aside to work together on
issues.
How will you work with the other commissioners to more
effectively promulgate rules on a timely basis, including on
difficult issues that will require consensus building among
Commissioners?
A.5. As I stated at the hearing, an important aspect of my job
over the past two decades has been to facilitate consensus. It
is my experience that consensual decision making often has
lasting value, including that it facilitates future,
constructive engagement. I recognize that there are situations
in which individuals will have fundamental disagreements, but
if confirmed, I plan to work constructively with my fellow
Commissioners to advance the SEC's tri-partite mission as an
independent agency. I am hopeful that we will be able to reach
consensus on the many important issues facing the Commission,
including those that are yet to be identified.
Q.6. How will you work to implement regulations, including
those that you may have been outspoken about in the past, but
carry a Congressional mandate?
A.6. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law and that such rulemakings should be pursued on a basis that
is timely and feasible. If confirmed, I look forward to working
with my fellow Commissioners and the SEC staff to carry out the
statutorily mandated rulemakings.
Q.7. Corporate Political Disclosure: Mr. Clayton, I am a strong
proponent of transparency around our campaign finance system
and I strongly believe we have to do something to slow the
flood of dark money into campaigns which undermines our
democracy. On a number of occasions, I and many others on this
Committee has been pushing the SEC to promulgate a rule which
would require corporate political spending disclosure.
Unfortunately, the Appropriations Committee prevented the SEC
from doing anything for the last few years.
In the future, if Congress were not preventing the SEC from
promulgating a rule, would you support such a rule as Chair?
A.7. I am aware that issues related to corporate disclosure of
political spending have generated significant interest and
divergent views. As I stated at the hearing, I believe that
materiality is the touchstone with respect to disclosure.
I understand that through shareholder engagement, a number
of companies have elected to provide information regarding
their political spending activities. In addition, under the
SEC's shareholder proposal rule, Rule 14a-8, investors can
submit proposals to be included in a company's proxy materials
that would require specific disclosure of items regardless of
whether they meet the materiality threshold. Publicly available
data indicates that shareholder support for political spending
and lobbying disclosure proposals under Rule 14a-8 has averaged
close to but less than 25 percent in recent years.
If confirmed, I would expect to engage with the staff, my
fellow Commissioners, and market participants to further
consider this issue.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM JAY CLAYTON
Q.1. Two entities that you have represented, Valeant and
Pershing Square, have come under significant legal scrutiny for
potential insider trading in connection with the Allergan bid
in 2014. In fact, a Federal judge in California ordered
Pershing Square and Valeant to make additional disclosures on
their shareholder documents, including that he had found their
alliance may violate insider trading rules and practically
begged the SEC to bring a case against the entities. To date,
the SEC has not done so. If confronted with a situation in
which a Federal judge indicates insider trading has occurred,
will you take the Federal judge's plea as a cue to investigate
and if warranted bring a case?
A.1. This is in response to Questions 1 through 4. I appreciate
your recognition that my ability to discuss the matter that is
the focus of Questions 1 through 4, the proposed Valeant/
Allergan transaction, which is the subject of ongoing legal
proceedings, is constrained by ethical duties and other
obligations.
Valeant's initial proposal to combine with Allergan was
announced in April 2014, and my firm represented Valeant. I was
not part of the transaction team or involved in, or to my
recollection aware of, the proposal prior to its public
announcement.
On certain occasions in June 2014, months after the initial
announcement of the proposed combination, I was consulted by
other lawyers at my firm on certain discrete legal issues. The
aggregate time I recorded on this matter was less than 3 hours.
I am not in a position to comment further on the matter.
Please see my response to Question 5 below regarding
insider trading laws generally.
Q.2. You have disclosed that you represented Valeant and
Pershing Square. Can you please describe for us what exactly
your representation entailed without violating confidentiality?
Specifically, were you involved in helping either or both
entities launch a hostile tender offer for Allergan?
A.2. Please see my response to Question 1 above.
Q.3. The decision in the California case, Allergan Inv. v.
Valeant Pharms, Inc., recognizes that a major loophole exists
in insider trading law. A strategic bidder can tip a hedge fund
provided that it had not yet taken a ``substantial step''
towards making a tender offer. In Allergan, the defendants
claimed that they had only agreed to propose a merger and not a
tender offer. Do you agree that the distinction between
planning a merger and planning a tender offer from the
shareholder's perspective is very thin and meaningless in terms
of materiality of information?
A.3. Please see my response to Question 1 above.
Q.4. Do you believe entities should be able to escape liability
for insider trading by virtue of calling themselves ``co-
bidders'' and then exchanging information? If so, please
explain why; if not, please explain how you would approach that
scenario.
A.4. Please see my response to Question 1 above.
Q.5. As Prof. Jack Coffee has written, the 2nd Circuit's United
States v. Newman decision may create a new legal safe harbor to
engage in insider trading that can be called ``Don't Ask, Don't
Tell.'' Under Newman, a tippee cannot be convicted unless it is
proved ``that the tippee knew an insider disclosed confidential
information and that he did so in exchange for a personal
benefit,'' which significantly narrows the scope of insider
trading prosecution. Do you agree with the court's analysis in
Newman? If not, would you support legislation to eliminate the
need to prove a ``personal benefit'' to the tipper in order to
prove an insider trading case?
A.5. I recognize that this is an issue that has received
attention, particularly in light of the Newman case and other
recent high profile court cases, which have created some
uncertainty regarding the contours of various aspects of
insider trading under our securities laws. As a general matter,
and without commenting on a particular matter or proposal, I
support efforts for clarity in this area. With regard to the
effects of the Newman case, and this area of the law more
generally, I am also aware that in Salman v. United States, the
United States Supreme Court clarified some of the uncertainty
that had been presented by the Newman decision, holding
unanimously that a tippee can be held liable for trading on
material, nonpublic information received from an insider
relative or friend even where the tipper received no direct
financial benefit from disclosing that information. If
confirmed, I will actively work with the Enforcement Division
staff and my fellow Commissioners to follow that decision and
enforce our securities laws, including, importantly, insider
trading laws.
Q.6. Last year, I saw a stunning graphic from RBC Capital
Markets that charted 839 different fee schedules that are
composed of 3,729 separate fee variables. When one examines
these variables in detail, it appears that exchanges are using
their ``fee engineers'' to put together ``bespoke'' pricing
terms for one or a small handful of customers in order to
attract and retain order flow--essentially catering to high-
frequency traders. Given this incredible complexity, it is
likely very difficult for market participants to know whether
they are getting best execution and the benefit of a ``fair and
orderly'' market. Hence, Sen. Crapo and I have called for the
SEC to engage in an access fee (or maker-taker) pilot, which
would collect data and hopefully create better insight into how
to deal with potential conflicts in order routing. If
confirmed, will you pledge to work with us to design and
implement equity market structure pilots in a timely fashion?
A.6. Promoting fairness and efficiency in our markets is a core
element of the SEC's tri-partite mission, and I recognize
concerns with respect to transparency of the equity markets and
fees, and with respect to potential conflicts of interest in
routing orders. I understand that the SEC staff has been
looking at a review of structural market issues, and that the
Equity Market Structure Advisory Committee and its Regulation
NMS Subcommittee have proposed a framework for an access fee
(or maker-taker) pilot and made other significant
recommendations. If confirmed, I look forward to discussing the
status of the pilot and other efforts to ensure that the
Commission is pursuing its mandate effectively in the area of
market structure with the staff, my fellow Commissioners, and
this Committee.
Q.7. The last time a real case for Treasury manipulation was
brought was in 1991, after the Salomon Brothers scandal. I
suspect that is because the SEC has no idea manipulation is
occurring because regulators don't have access to the trading
data. After the Flash Rally on October 15, 2014, when yields
plummeted 37 basis points in the 10-year Treasury over 12
minutes, the Fed had to request data from the banks and
electronic brokers to reconstruct what happened. That led the
Treasury Department to announce that the public sector will
begin collecting data on Treasury trade reporting in 2017, but
for regulatory purposes only. Public trade reporting rules
create substantial transparency for the market and apply to
equities, mutual funds, corporate bonds, municipal securities,
options, futures, and swaps--when can they apply to U.S.
Treasuries? Will you support public trade reporting rules for
U.S. Treasuries?
A.7. I understand that the SEC recently approved a FINRA
proposal that will require non-public reporting of certain
transactions in U.S. Treasury securities to FINRA's Trade
Reporting and Compliance Engine (TRACE). I recognize that there
are competing views on whether this data, like data on other
securities reported through TRACE, should be made public. For
example, I understand that some commenters have expressed
concern about the potential impacts on market liquidity,
particularly in the context of certain types of trades. At the
same time, I also understand some commenters have advocated for
making trade reporting data public in an effort to, among other
things, improve price transparency and reduce information
asymmetry in the marketplace. I have not had the opportunity to
consult with the SEC Commissioners, staff or other market
participants on this issue, but, if I am confirmed, I look
forward to exploring this further with them.
Q.8. In the 1960s about half of corporate profits were
reinvested back into the business--in R&D, in new services, or
in investments in the workforces that built these businesses.
Yet today around 95 percent of corporate profits are paid out
to shareholders in dividends or stock buybacks, fueled by an
increasing focus on the short-term. Do you agree with me that
we should promote policies that further incentivize American
businesses to invest in themselves for long-term growth,
innovation, and job creation--and try to curb the preoccupation
with short-term profits and stock prices that detracts from the
investments that have historically made American businesses
great?
A.8. I fully support measures to facilitate job growth and
investment in the future of America. In addition, consistent
with the Commission's tri-partite mission, including capital
formation, I believe the Commission should be receptive to
considering proposals that facilitate job growth and investment
in America. I am aware of various important policy concerns
that have arisen in the context of stock buybacks, including
employment issues that can have far-reaching adverse effects
and market-related and investor protection issues such as stock
price manipulation and insider trading. I also recognize that,
depending on the circumstances, businesses may determine that
returning capital to investors in an appropriate and efficient
manner, including Main Street investors, is in the best
interests of shareholders.
If confirmed, I intend to engage with my fellow
Commissioners and the SEC staff regarding these issues and the
issue of facilitating capital formation and investment more
generally.
Q.9. Would you be interested in looking at things like stock
buybacks, quarterly reporting, and proxy access with me to see
where the SEC might play a role in helping businesses re-orient
themselves towards long-term value creation?
A.9. If confirmed, I would look forward to working with you and
other Members of the Committee on these important issues, being
mindful of the importance of long-term value creation.
Q.10. Financial Services institutions have numerous regulations
and guidance that address cyber security and specifically
encryption of data; however, according to breachlevel.com, only
4 percent of breaches are secure breaches where encryption was
in use and the data was rendered useless. As SEC Chairman and a
member of the Financial Stability Oversight Council, how would
you ensure that the SEC's regulated entities are implementing
best practices necessary to account for and guard against cyber
threats? How will you enable the Commission, along with the
financial institutions that it regulates, to leverage
innovation in the IT space to protect financial data?
A.10. I share your concern about cybersecurity from a
regulatory perspective with respect to the companies and
markets regulated by the SEC, from a systemic perspective with
respect to potential threats, and from the perspective of the
Commission itself and the proprietary and market-sensitive data
it holds. If confirmed, I expect to view this issue as a
priority and look forward to working with my fellow
Commissioners and the staff, and consulting with market
participants and industry experts, to address the issue of
cybersecurity in these contexts. For example, I look forward to
learning more about the staff's experience in administering
Regulation SCI, which requires certain critical market
infrastructure participants to, among other things, implement
policies and procedures reasonably designed to ensure that
their systems have sufficient levels of capacity, integrity,
resiliency, availability, and security.
I also understand that cybersecurity remains an examination
priority for the Office of Compliance Inspections and
Examinations, and I look forward to learning more about the
results of those examinations. In addition, if confirmed, I
look forward to understanding the perspective of the staff on
the issue of whether companies should be disclosing more about
their potential cyber-related risks and senior-level expertise
to address those risks.
Q.11. Since 2009, the SEC has required public companies to
report their financial statements twice--once as a plain-text
document, then again as searchable data, using the XBRL data
format. In 2015, now-Chairman Crapo and I sent a letter to
Chair White asking for the SEC to end this duplicative system
and instead adopt a single format that is both human-readable
and machine-readable, so that companies only need to file a
single document, with electronic tags embedded within it. On
March 1, 2017, the two current Commissioners unanimously
proposed new rules to accomplish exactly this goal. Do you
agree with Commissioners Piwowar and Stein that corporate
disclosure should be both human-readable and machine-readable?
Would you have favored proposing new rules to accomplish this
goal for corporate financial statements?
A.11. Although it would not be appropriate for me to comment on
a pending rulemaking before the Commission, as a general
matter, I believe that the Commission should be actively
looking for ways to improve efficiency in disclosure practices
and our markets as a whole, including through the use of
technology. There may well be a number of instances in which
the Commission can use technology, or direct the use of
technology, in an efficient manner to improve the accessibility
of disclosures to the public.
Q.12. Although the SEC does collect corporate financial
statements in a machine-readable format, most other corporate
disclosures are not machine-readable. For example, the cover
pages of corporate disclosure forms require public companies to
``indicate by check mark'' which category they fall into. These
check marks are text, not searchable data fields, and companies
express these simple categories in over 500 different ways.
Both the SEC and market data companies must manually rekey this
information into databases, or else use unreliable parsing
software, to track the categories of public companies. Do you
agree that corporate disclosures in general, and these cover
page items in particular, should be expressed using machine-
readable data instead of plain text? Would you support reforms
to modernize corporate disclosure requirements to replace
documents with data?
A.12. As a general matter, I believe that the Commission should
be actively looking for ways to improve efficiency in
disclosure practices and our markets as a whole, including
through the use of technology. And, while I am not in a
position to comment on this specific matter, it is my general
view that, in today's marketplace and in light of technological
advances, there are few areas where the manual reentry of data
should be required.
Q.13. Mr. Clayton, the mutual fund industry prints and mails
about 240 million shareholder reports in paper a year, which
means 2 million trees killed every year. According to industry
estimates, that costs investors $308 million a year. The
Commission failed to move forward last year on a proposal to
allow funds to mail them a brief notice with the website where
the report is available online, along with a postage-paid reply
form and toll-free number that they could use to opt back in to
a hard copy. If confirmed, will you commit to take a fresh look
at this proposal and do what you can to reduce the cost and
environmental impact of investing?
A.13. Without commenting on any proposal specifically, if
confirmed, as a general matter I look forward to working with
the staff and my fellow Commissioners to explore potential
disclosure reforms, including reforms that may be able to
reduce costs and environmental impacts while preserving
investors' access to information.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM JAY CLAYTON
Q.1. At your nomination hearing, you reiterated that you want
the SEC to focus on holding individuals accountable for
violating securities laws. One major way to create more
individual accountability is to make sure executives don't have
compensation packages that let them get rich by bending the
rules, skirting the law, hurting people, or crashing the
economy. That's why Section 956 of Dodd-Frank directs the SEC,
along with several other regulators, to work together to
``prohibit any types of incentive-based payment arrangement . .
. that the regulators determine encourages inappropriate
risks.''
It took 6 years, but the agencies, including the SEC,
finally proposed a rule last April. But the rule has not been
finalized yet.
Given your stated desire to increase individual
accountability, can you assure me that you will direct the SEC
to prioritize working with other agencies to complete this rule
within 6 months after you're sworn in?
A.1. Rulemaking, both mandatory and discretionary, is a
critical function of the SEC. I believe it should, among other
things, reflect the Commission's tri-partite mandate, include
effective economic analysis, seek clarity over complexity
wherever practicable, reflect input from a diverse array of
affected parties and market participants and proceed as
efficiently as practicable. If confirmed, I look forward to
engaging with my fellow Commissioners and the staff regarding
these issues and working to carry out the statutorily mandated
rulemakings in accordance with applicable law and on a basis
that is timely and feasible.
Q.2. Near the beginning of her tenure as SEC Chair, Chair White
announced that the SEC would seek more admissions of fault in
its settlement agreements, rather than allowing settling
parties to ``neither admit nor deny'' liability.
Do you share her position that the Commission should seek
more admissions of fault in its settlement agreements?
A.2. I agree that pursuing admissions from defendants in
enforcement proceedings in appropriate circumstances should be
a key consideration for the Commission. As I stated at my
nomination hearing, I strongly believe in the deterrent effect
of enforcement proceedings that include individual
accountability. However, I also recognize the SEC's interest
in, where appropriate, avoiding drawn-out proceedings that
strain the resources of the Enforcement Division staff and
lengthen the time it would take for resolution, including for
investors to receive restitution. I believe each matter should
be decided based on its own facts and circumstances, including
analysis of whether the added deterrent effect of securing
admissions will be offset by other relevant factors. If I am
confirmed, I look forward to developing my views on this issue
further in consultation with my fellow Commissioners and the
staff, including in the Enforcement Division.
Q.3. If you are confirmed, can you provide me an annual update
on the number of settlement agreements the SEC entered into
that year, the number if those agreements that included an
admission of fault, and a copy of all non-confidential
settlement agreements that included an admission of fault?
A.3. Enforcement actions are intended to have a deterrent
effect. One aspect of deterrence is ensuring that market
participants are aware of the Commission's actions with respect
to enforcement. If confirmed, I would look forward to working
with Congress, my fellow Commissioners, and SEC staff to ensure
that information regarding the Commission's enforcement
proceedings and settlements is compiled and publicized on a
basis that should have such a deterrent effect and facilitates
analysis. At the same time, I would not discount the deterrent
effect of publicity surrounding the initiation of enforcement
proceedings brought by the Commission, whatever settlements or
conclusions are reached.
Q.4. Mutual funds are sold to individual investors using a
``pay to play'' business model in which broker-dealers and
other intermediaries are compensated to sell certain funds to
their customers, despite the merits of investing in these
funds.
Large brokerage firms use this model to take advantage of
individual mutual fund investors by charging them many
different types of fees for selling mutual fund shares and
keeping track of those shares in an investor's account. Rule
12b-1 fees, account maintenance charges, and revenue-sharing
payments are extracting billions of dollars each year out of
the pockets of the 96 million individual investors who rely on
mutual funds for their savings goals. These fees are in
addition to sales commissions imposed on the purchase or
redemption of mutual fund shares.
If confirmed to lead the SEC, what will you direct the
Commission to do to address excessive brokerage fees and better
protect individual investors?
Would you support an SEC rule that requires broker-dealers
who provide personalized investment advice of any type to
register as investment advisers and follow a fiduciary standard
of care (instead of a suitability standard of care)?
A.4. Based on my experience, I believe that as a general matter
it is important that our regulations be reasonably designed to
ensure that Main Street investors making an investment decision
are well informed. If confirmed, I would expect to approach
regulation in this area with that perspective. It would be
premature for me to take a position on a particular rule
without fully exploring the issue with the Commissioners and
the SEC staff. If confirmed, I look forward to working with my
fellow Commissioners and the SEC staff, and consulting with
market participants and other interested parties, to ensure
that the interests of Main Street investors are protected,
including with respect to whether the Commission should proceed
with rulemaking and, if so, in what manner those investors'
interests might most effectively be served.
Q.5. One of the fees being charged in the broker-dealer ``pay
to play'' model is called ``revenue-sharing.'' These are
payments being made by mutual fund management companies to
broker-dealers and other intermediaries based on the amount of
fund shares that are being sold to investors. These payments
are not disclosed properly to mutual fund investors because the
payments are not being made directly from fund assets.
If confirmed, are you prepared to either (1) limit these
payments, or (2) require more specific disclosure of the amount
of these payments and their potential impact on mutual fund
performance?
A.5. I have not yet had an opportunity to engage with the
Commissioners or the staff regarding this issue. If confirmed,
I would be interested in working with my fellow Commissioners
and the staff, including the Division of Investment Management,
to understand current practices in this area and consider the
adequacy of existing disclosure rules in this area.
Q.6. A number of fees being charged by large broker-dealers are
for investor services already required to be performed under
existing SEC and FINRA rules. These services include providing
account statements to customers, internally tracking individual
investment positions, and sending transaction confirmations and
tax statements to customers. Mutual funds are the only issuer
of securities required to pay these servicing fees, as issuers
of equities, bonds, and exchanged-traded funds (ETFs) do not
pay any distribution or recordkeeping fees. Outside of the
mutual fund industry, brokers and other intermediaries are
compensated directly by their customers through commissions,
account charges, and advisory fees.
If confirmed, what will you do to correct this inequitable
treatment, so that mutual fund investors are only subject to
the same fee structures as equity, bond, and ETF investors?
A.6. If confirmed, I would seek to gather more information from
the SEC staff, including from the Division of Investment
Management, regarding these issues, including the comparability
of services provided and expenses incurred in various
circumstances. If appropriate, I would also look forward to
engaging with my fellow Commissioners and the SEC staff
regarding any potential reforms with respect to this issue.
Q.7. In July of 2016, the Treasury Department issued final
regulations requiring country-by-country reporting of profits,
losses, income taxes paid, accumulated earnings and total
number of employees of multinational enterprises with over $850
million in revenue. Review of these country-by-country reports
would allow investors to assess the risk of foreign tax
liability applied to accumulated earnings held overseas by a
multinational enterprise.
Do you believe investors should have access to the country-
by-country reports of multinational enterprises that file such
reports with the IRS?
If confirmed, will you require companies that file country-
by-country reports to the IRS to also disclose such reports to
their investors?
On April 12, 2016, the European Commission proposed a new
directive requiring public, country-by-country reporting of
annual profits and taxes by EU and non-EU multinationals. Do
you believe the SEC should impose a lower standard of investor
protection than the European Commission?
A.7. As I stated at the hearing, I believe that materiality is
the touchstone with respect to disclosure. If confirmed, I will
want to study this issue with my fellow Commissioners and the
SEC staff. This will include exploring the potential impacts of
any such proposal and whether such a proposal would further the
SEC's tri-partite mission, including, but not limited to,
investor protection.
Q.8. Stock buybacks can be used to increase a company's
earnings per share (EPS) even in years where net income has
gone down. Because many companies use EPS to determine a CEO's
compensation, executives have an added incentive to use stock
buybacks to increase EPS in years where underlying earnings are
flat or negative.
Should companies be able to inflate earnings per share
through the use of stock buybacks?
Should companies be able to game performance pay metrics
through the use of stock buybacks?
Should companies be required to calculate and disclose any
increases in EPS that are attributable to stock buybacks?
If confirmed, what will you do to prevent executives from
using stock-buybacks to manipulate performance pay compensation
metrics?
A.8. I am aware of various important policy concerns that have
arisen in the context of stock buybacks, including market-
related and investor protection issues such as manipulation and
insider trading. I also recognize that, depending on the
circumstances, businesses may determine that returning capital
to investors, including Main Street investors, in an
appropriate and efficient manner is in the best interests of
shareholders. If confirmed, I intend to engage with my fellow
Commissioners and the SEC staff regarding these issues.
Q.9. Investors should be able identify companies that invest in
the U.S. economy and American workers. If confirmed, will you
require companies to annually disclose how many manufacturing
properties a company has opened or closed, whether those
properties were in the United States, and the number of jobs
lost or created as a result?
A.9. I am aware of various important policy concerns that have
arisen in the context of manufacturing and job creation (or
loss), including market-related and investor protection issues
as well as other issues which extend beyond the scope of the
SEC's authority and mandate. If confirmed, I intend to consult
with the staff and my fellow Commissioners regarding these
market-related and investor protection issues, including
disclosure.
Q.10. I was critical of former SEC Chair White for the high
number of Well-Known Seasoned Issuer (WKSI) waivers that were
granted by the SEC under her tenure. These waivers allowed
numerous companies that violated securities laws--sometimes
multiple times--to take advantage of special regulatory
privileges. Under Chair White's watch (as of March 2015),
institutions that sought WKSI waivers received them in the
majority of cases, and SEC returned to a decade-old policy that
allowed institutions found guilty of criminal misconduct to
receive these waivers.
Are you concerned with the ease with which institutions
received WKSI waivers under Chair White's watch?
A.10. I have a great deal of respect for Chair White. I was not
privy to the Commission's discussions regarding this issue.
Consequently, it would not be appropriate for me to comment on
the Commission's decisions.
Q.11. WKSI waivers may only be granted ``upon a showing of good
cause.'' What criteria do you believe should be considered in
this determination?
A.11. I have not yet had the opportunity to engage with the
Commissioners and the SEC staff regarding the issue of waivers.
But, I will commit to exploring this issue if I am confirmed.
As a general matter, I believe that the question of whether a
waiver is appropriate in a particular situation would be
dependent on the facts and circumstances of that situation,
including, without limitation, the relationship between the
misconduct and the activity targeted by the disqualification,
other aspects of the settlement and the matter more generally,
the recommendation of the relevant SEC staff and whether a
waiver would be consistent with the Commission's tri-partite
mission to protect investors, maintain fair, orderly and
efficient markets, and facilitate capital formation.
Q.12. Will you continue SEC policies that allow companies that
have been found to be guilty of criminal violations to receive
WKSI waivers?
A.12. I have not yet had the opportunity to engage with the
Commissioners and the SEC staff regarding the issue of waivers,
including in the context of a criminal conviction. But, I will
commit to exploring this issue if I am confirmed.
Q.13. Do you believe institutions that have repeatedly violated
SEC rules should remain eligible to receive WKSI waivers?
A.13. I have not yet had the opportunity to engage with the
Commissioners and the SEC staff regarding the issue of waivers,
including in this context, but will commit to exploring this
issue if confirmed.
Q.14. At your nomination hearing, you acknowledged that you
would have to recuse yourself for 2 years from any matter
involving a former client of your or any matter in which your
former law firm, Sullivan & Cromwell, represented a party.
Given your extensive client list and Sullivan & Cromwell's
active SEC practice, it is likely that you will have to recuse
yourself from a number of matters. Unfortunately, there appears
to be no public record of SEC Commissioner recusals.
Will you commit to publicly and promptly disclosing your
recusals so that this Committee and the public can assess how
your recusals are affecting the functioning of the SEC?
A.14. The final votes of SEC Commissioners on the Commission's
decisions, orders, rules and similar actions generally are
available publicly on the Commission's website at https://
www.sec.gov/about/commission-votes.shtml. This disclosure
includes whether a Commissioner did not participate in that
vote. If confirmed, I would expect this approach to continue
and will commit to exploring whether additional disclosure is
appropriate.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR DONNELLY FROM JAY
CLAYTON
Q.1. Stock Buybacks: Mr. Clayton, in 1982, the SEC provided a
"safe harbor" from market manipulation liability to
corporations on certain stock buybacks. Since then, SEC
oversight of stock buybacks has been lax.
Do you believe the SEC should take another look at Rule
10b-18? Do you believe the SEC should step up its oversight of
the buybacks?
Former Chair White publicly stated last year that the SEC
was looking into when and how often companies should tell
investors about share purchases. She was presumably referring
to the SEC's ``concept release'' to solicit the public's views
on financial disclosure requirements in Regulation S-K.
Currently, corporations only have to report stock repurchases
quarterly. Requiring immediate or daily disclosure would be a
step in the right direction.
Do you believe more transparency and disclosure is needed
in the area of stock buybacks? Can you commit to looking at
this as the SEC continues its review?
A.1. With respect to both of these questions, I am aware of
various important policy concerns that have arisen in the
context of stock buybacks, including market-related and
investor protection issues such as stock price manipulation and
insider trading. I also recognize that, depending on the
circumstances, businesses may determine that returning capital
to investors, including Main Street investors, in an
appropriate and efficient manner is in the best interests of
shareholders.
If confirmed, I intend to engage with my fellow
Commissioners and the SEC staff regarding these issues.
Q.2. Outsourcing: Mr. Clayton, as the SEC continues reviewing
financial disclosure requirements under Regulation S-K, I hope
you will consider whether corporations should disclose country-
by-country employment data. This would help investors determine
which companies employ American workers and better understand
where outsourcing and offshoring has occurred.
Are you willing to consider a country-by-country employment
disclosure as part of the SEC's broader review?
A.2. If confirmed, I would want to study the issue of
disclosure of country-by-country employment data with my fellow
Commissioners and the SEC staff.
As I stated at the hearing, I believe that materiality is
the touchstone with respect to disclosure requirements. As a
general matter, the question of whether a particular disclosure
would be material to an investment decision can be complex and
often depends on the individual facts and circumstances of an
issuer. This likely would be true for disclosures of employment
data beyond that currently required under existing rules.
Before taking a position on a particular proposal related to
this disclosure issue, I would want to explore the potential
impacts of any such proposal and whether such a proposal would
further the SEC's tri-partite mission, including, but not
limited to, investor protection.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM JAY CLAYTON
Q.1. Prioritizing Finalizing Remaining Dodd-Frank Rules: There
are 20 regulations mandated by Dodd-Frank that the SEC has not
yet drafted or finalized--that is more than 20 percent of those
required by law. It is now 7 years since Dodd-Frank became law.
Acting Chair Michael Piwowar has publicly stated that the SEC
will halt all work on Dodd-Frank related rules. At the hearing,
you stated: ``rulemaking should go forward with respect to
rules required under a statute,'' thereby acknowledging that
the SEC should finalize any rule required by law. You were
uncertain, however, as to why certain rules required under
Dodd-Frank have languished for the past seven years. As chair
of the SEC, you would be in a position to fulfill the mandate
of the law and bring this delay to an end.
As chair, will you prioritize finalizing rules required
under Dodd-Frank?
A.1. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law and that such rulemakings should be pursued on a basis that
is timely and feasible. The rulemaking process is important,
and in many cases demands significant resources. The
Commission's resources are limited and, accordingly, the
overall approach to rulemaking should reflect the Commission's
mandate and be the product of consultation among the
Commissioners, the staff and, in the case of multi-agency
rulemaking, other authorities, being mindful of the obligation
to proceed with mandatory rulemaking at a reasonable pace and
also being responsive to market developments. Rulemaking, both
mandatory and discretionary, is a critical function of the SEC.
I believe it should, among other things, reflect the
Commission's tri-partite mandate, include effective economic
analysis, seek clarity over complexity wherever practicable,
reflect input from a diverse array of affected parties and
market participants and proceed as efficiently as practicable.
If confirmed, I look forward to engaging with my fellow
Commissioners and the staff regarding these issues and working
to carry out rulemakings efficiently and effectively.
Q.2. High Frequency Trading: By some estimates, high frequency
trading accounts for half of all trading volume. The strategy
for high frequency trading is to make a tiny profit on a high
volume of trades by exploiting small differences in a stock or
derivative's price. Some high frequency trading practices are
troubling because they look similar to illegal front-running
and spoofing activities. These predatory forms of high
frequency trading harms retail investors and pensioners.
What will you do as chair to protect investors from abusive
high frequency trading?
A.2. I am aware that issues related to high frequency trading,
and equity market structure more generally, have generated
significant interest and divergent views. Certain trading
practices have faced questions as to whether they may work
against the interests of certain types of investors and
issuers. I am generally aware of the work and recommendations
to date of the Equity Market Structure Advisory Committee,
including proposed steps to gather more information about the
effects of our current approach to regulation such as the
maker-taker pilot. I am also generally aware that the
Commission has initiatives underway--and has worked with other
federal financial regulatory agencies--to capitalize on the
regulatory data that is available and to ensure that it has
sufficient information to facilitate its analysis of market
structure and market function. \1\
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\1\ See, e.g., Joint Staff Report: The U.S. Treasury Market on
October 15, 2014 (July 13, 2015), available at https://www.sec.gov/
reportspubs/special-studies/treasury-market-volatility-10-14-2014-
joint-report.pdf.
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If confirmed, I look forward to working with my fellow
Commissioners and the SEC staff to explore these issues,
including the important market-related and investor protection
issues related to high frequency trading that you cite.
Q.3. SEC Conflict Mineral Rule: In our one-on-one meeting, we
talked about rules and regulations that you think burden
capital formation and you highlighted your disagreement with
the SEC rule requiring disclosure of the use of conflict
minerals in a public company's supply chain. The SEC issued
this rule because Section 1502 of Dodd-Frank required it. While
this rule was repealed through the Congressional Review Act,
the SEC still has an obligation to fulfill the requirements of
Section 1502 of Dodd-Frank. This would place you in a position
of having to develop a new rule to implement a provision of the
law you personally do not agree with.
How will you square your personal views with the legal
requirements of your position as SEC chair?
A.3. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law and that such rulemakings should be pursued on a basis that
is timely and feasible and that reflects the SEC's mission. At
the hearing, and in my meetings with Senators, I discussed both
the importance of each aspect of the SEC's tri-partite mission
in rulemaking and the importance of consensus in the operation
of the Commission. In this regard, if confirmed, it will be my
duty to uphold the law. I commit to do so, and I recognize that
there are different approaches to pursuing the SEC's mission.
In this regard, on matters where views diverge, compromise may
be in the best interests of the SEC's mission. If confirmed, I
expect there will be circumstances where I will support, and
vote in favor of, a particular approach to a rule or other
issue that, while furthering the objectives of the Commission,
would not be the approach I would take if I were acting alone.
Q.4. Will you commit to upholding the law, even if you
personally disagree?
A.4. Yes.
Q.5. Will you commit to carrying out the mandate of Section
1503 of Dodd-Frank?
A.5. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law and that such rulemakings should be pursued on a basis that
is timely and feasible and that reflects the SEC's mission. I
understand that the SEC has adopted rules as required under
Section 1503 of Dodd-Frank, and I intend to support the
enforcement of rules that are in effect.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR VAN HOLLEN FROM JAY
CLAYTON
Q.1. Disclosure of Political Spending: During last Thursday's
hearing you said that touchstone for shareholder information is
materiality. What information would you consider to be material
to shareholders? Materiality is defined as relevant information
to investors. With that in mind, can you explain why a
disclosure regulation that has received the most investor
(institutional, retail, and pension) support (tenfold times any
other proposed rulemaking in agency history) could ever be
deemed immaterial? Do you believe reputational risk is material
information that shareholders and investors should know about?
Please describe how political spending could become a
reputational risk? Do you support requiring companies to
disclose their political spending to shareholders (please
explain your answer)?
A.1. I am aware that issues related to corporate disclosure of
political spending have generated significant interest and
divergent views. As I stated at the hearing, I believe that
materiality is the touchstone with respect to disclosure.
I understand that through shareholder engagement, a number
of companies have elected to provide information regarding
their political spending activities. In addition, under the
SEC's shareholder proposal rule, Rule 14a-8, investors can
submit proposals to be included in a company's proxy materials
that would require specific disclosure of items regardless of
whether they meet the materiality threshold. Publicly available
data indicates that shareholder support for political spending
and lobbying disclosure proposals under Rule 14a-8 has averaged
close to but less than 25 percent in recent years.
With regard to your questions on reputational risk, as a
general matter reputational risk can arise out of a range of
activities. There have been a number of circumstances in which
issuers have determined that potential reputational risks
arising out of certain aspects of their business could be
material and have disclosed those risks accordingly.
If confirmed, I would expect to engage with the staff, my
fellow Commissioners, and market participants to further
consider this issue.
Q.2. Fiduciary Duty: The Dodd-Frank Act mandated that the SEC
study whether there are regulatory gaps in the protection of
retail investors relating to standards of care for broker-
dealers and investment advisers. The Act also authorized the
SEC to set a uniform standard. In 2011, the SEC released a
study recommending that the Commission ``establishing a uniform
fiduciary standard for investment advisers and broker-dealers
when providing investment advice about securities to retail
customers.'' Two previous chairs of the SEC had expressed their
agreement with the findings and recommendations of the study.
Will you move forward with a uniform fiduciary duty rule under
Section 913?
A.2. I believe that investor protection, particularly
protection of Main Street investors, is a critical element of
the SEC's tri-partite mission. Based on my experience, I
believe that as a general matter it is important that our
regulations are designed to ensure that Main Street investors
making an investment decision are well informed. I understand
the current debate regarding the legal formulation of the duty
owed to these investors, including key issues raised by the
related fiduciary rule issued by the Department of Labor, such
as potential divergence of regulatory standards across account
types, potential uncertainty in application, the effects of
compliance costs, coordination among regulatory agencies,
potential limitations on investor choice and investment
opportunities, and, importantly, ensuring investor protection.
If confirmed, I look forward to working with my fellow
Commissioners and the SEC staff, and consulting with market
participants, to determine whether the Commission should
proceed with rulemaking and, if so, in what manner and, in any
event, with an eye toward clarity and consistency and with the
objective that the interests of Main Street investors are
protected, including that they have access to appropriate
investment opportunities.
Q.3. Working With State Securities Authorities: In February,
the North American Securities Administrators Association and
the SEC signed a memorandum of understanding (MOU) regarding
information sharing. The goal of the MOU was to improve better
information sharing between the SEC and State regulators. Under
the (MOU), Federal and State securities regulators will be
better able to monitor the effects of the new rules and also
guard against fraud. If confirmed, will you prioritize the
timely sharing between the SEC and the State securities
regulators as outlined in the MOU? If so how? If confirmed, how
do you plan to facilitate strengthened cooperation and
information between Federal and State securities regulators?
A.3. As I stated at the hearing, if confirmed, I look forward
to working with State securities regulators and other
regulators with jurisdiction over the securities markets. If
confirmed, I also look forward to learning more about the MOU
regarding information sharing and engaging with my fellow
Commissioners, staff from the Office of Compliance Inspections
and Examinations, the Enforcement Division and other areas of
the Commission, and State securities regulators, to discuss
ways to encourage efficient and effective coordination and
cooperation. In such discussions, I would be mindful to
identify areas where coordination can eliminate unnecessary
duplication, address areas in need of additional resources
(including in response to changes in the marketplace), and, in
so doing, enhance investor protection.
Q.4. State Securities Anti-Fraud Authority: In your testimony
you stated that you are ``100 percent committed to rooting out
any fraud and shady practices in our financial system.'' As you
know State securities regulators are on the front lines when it
comes to policing for violations of securities laws. According
to the North American Securities Administrators Association, in
2015 State securities regulators conducted 4,487 investigations
of alleged violations of State securities laws and took 2,074
enforcement actions.
Can you please share your perspective on the role of States
in protecting investors from fraud? If confirmed, how do you
plan to work with State securities regulators on enforcement?
A.4. I believe that States, and in particular State securities
regulators, play an important role in protecting investors from
fraud. I have seen firsthand the benefits and effectiveness of
State-Federal cooperation in enforcement matters, and have
experience working with State regulators. As I stated at the
hearing, if confirmed, I am very interested in working with
State securities regulators. If confirmed, I look forward to
including State securities regulators in discussions with the
SEC staff regarding steps that can be taken to encourage
efficient and effective oversight and enforcement.
In this regard, I believe that continued coordination and
cooperation with State securities regulators will enhance the
Commission's ability to deter and detect fraud and ensure that
individuals who break the law are held accountable. Also, if
confirmed, in such future discussions, among other things, I
would be interested in hearing ideas for more effectively
identifying and sanctioning fraudulent promoters of local,
nontransparent investment opportunities that have some of the
hallmarks of ``penny stock'' schemes, who in my experience
often are recidivists.
Q.5. Independence: Congress established the Securities and
Exchange Commission in 1934 as an independent agency in
response to the stock market crash of 1929. What is your
definition of an independent agency? If confirmed, how do you
plan to maintain the SEC's independence?
A.5. From my perspective, an independent agency is one that,
like the SEC, is empowered to pursue its mission in accordance
with its statutory mandate without undue influence or control
from outside sources. I believe that such independence is
fundamental to the tri-partite mission of the SEC and that
focus on that mission will facilitate the preservation of the
Commission's independence. If confirmed, I will be mindful of
protecting the Commission's independence in all areas. If
confirmed, I look forward to engaging with my fellow
Commissioners regarding this issue and believe that focusing
collectively and consensually on the SEC's core mission of
protecting investors, maintaining fair, orderly and efficient
markets, and facilitating capital formation will promote that
effort.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JAY
CLAYTON
Q.1. The Wall Street Journal reported that after Mr. Trump was
elected, you ``dashed off an email [to a longtime client]
explaining how Government could promote growth by easing what
[you] considered unnecessary regulations on raising capital.''
\1\ This email was reportedly shared with Trump advisers, and
you were henceforth nominated to lead the SEC. Can you provide
a copy of this email to the Committee?
---------------------------------------------------------------------------
\1\ Michaels, Dave. ``Trump's Man for the SEC: Time To Ease
Regulation''. Wall Street Journal, February 19, 2017. Available at:
https://www.wsj.com/articles/trumps-man-for-the-sec-time-to-ease-
regulation-1487505602.
A.1. My communication was related to a Sullivan & Cromwell LLP
memorandum authored by some of my colleagues, ``2016 U.S.
Presidential and Congressional Elections--Preliminary
Observations and Potential Implications for Financial Services
Legislation and Regulation'', with my commentary regarding
areas of the memo on which to focus. It would not be
appropriate for me to provide or discuss client communications.
Based on my recollection, the discussions I participated in
with members of the Trump transition team in advance of my
nomination regarding capital formation and related SEC
regulation were consistent with the views I have expressed at
the hearing on March 23rd, in my individual meetings with
Senators and in these responses, including, without limitation,
that: (1) U.S. public capital markets appear to be less
attractive today to both U.S. and non-U.S. companies than they
were 20 years ago. This may be hindering capital formation in
the public markets and reducing investor choice, and may be
adversely affecting the competitive position of the U.S. vis-a-
vis other countries. This also may be limiting investor
opportunities, particularly, on a relative basis, for Main
Street investors and, if Main Street investors increasingly
turn to private investments, may adversely affect investor
protection. (2) The costs and risks of being a public company
compared to remaining a private company are viewed as
significant by the owners and management of well-run private
companies and, in addition to out-of-pocket costs, include
regulatory and enforcement risks and other considerations that
are not easily quantifiable such as the pressure of quarterly
earnings disclosures and potentially costly procedural hurdles
that do not appear to foster investor protection. (3) There is
a perception that considerations beyond investor protection
have motivated certain public company securities regulation,
and that such regulation has not always focused on investor
protection, capital formation and the fair and efficient
operation of our markets. There is a similar perception
regarding the risk of enforcement actions against public
companies and related penalties, including, without limitation,
aspects of FCPA enforcement actions and whistleblower rules,
and that they may unduly harm shareholders who ultimately bear
the costs. (4) The JOBS Act has been viewed positively as a
general matter, including from the perspective of reducing the
burdens of becoming a public company without lessening investor
protection. (5) There are various other significant factors
driving the result that public capital markets are relatively
less attractive to private and non-U.S. companies than in the
past, including that private capital markets have become much
deeper and more efficient and compete effectively with public
markets for well-run companies. (6) Although many high-quality
companies continue to enter the public markets and there are
many others who aspire to do so, it is important to consider
these dynamics and anticipated future developments when
reviewing regulation and future policy initiatives focused on
capital formation. I also participated in discussion with the
members of the Trump transition team regarding other matters,
including, without limitation, regulation of small- and medium-
sized banks, market liquidity, including possible effects of
the Volcker Rule, regulation of smaller, private funds, and
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cybersecurity.
Q.2. You have previously written that ``the growing gulf
between our most and least fortunate'' is one of the most
pressing issues of our time. \2\ How will you address this
issue if confirmed to lead the SEC?
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\2\ Clayton, Jay, David N. Lawrence, Stephen Labaton, Matthew
Lawrence, and Carl J. Schramm. ``USA 10-K: Why America Needs an Annual
Report''. July 3, 2012. Available at: http://
knowledge.wharton.upenn.edu/article/usa-10-k-why-america-needs-an-
annual-report/.
A.2. If confirmed, one of the ways I will address this issue is
by working to increase the ability of Main Street Americans to
participate in investment opportunities, including through our
public markets. As I mentioned at my nomination hearing, a
large number of companies, including many of our country's most
innovative and high-profile growth companies, have chosen to
remain privately held. Although the growth and success of many
of these companies is driven by American consumers, most
Americans are unable to invest, or to invest as efficiently, in
these private companies during their growth stages, and
therefore may be missing out on the investment growth that they
themselves are helping to create.
I believe that all Americans should have a reasonable
opportunity to invest in America's growth. If we are able to
encourage more companies to enter our public markets, we will
be able to provide more investors with the opportunity to
invest efficiently in America's growth. I also am open to
exploring other avenues to achieve this objective and, if
confirmed, look forward to discussing this issue with the staff
and my fellow Commissioners and this Committee.
Q.3. As I asked you doing your hearing, in a speech made just
before he left the Department of Justice, former Attorney
General Holder described current law, saying, ``the buck still
stops nowhere. Responsibility remains so diffuse, and top
executives so insulated, that any misconduct could again be
considered more a symptom of the institution's culture.'' \3\
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\3\ Attorney General Holder Remarks on Financial Fraud
Prosecutions at New York University School of Law. New York City, NY.
September 17, 2014. Available at: https://www.justice.gov/opa/speech/
attorney-general-holder-remarks-financial-fraud-prosecutions-nyu-
school-law; an additional explanation of the Attorney General's
proposal can be found here: https://www.law360.com/articles/582045/doj-
proposal-shows-focus-on-individuals-in-corporate-crime.
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Yes or no, do you agree with former Attorney General
Holder?
If so, why?
If not, why not?
Does Congress need to change any statutes to ensure that
law enforcement can hold individual executives accountable for
misconduct?
A.3. As I stated at my nomination hearing, I strongly believe
in the deterrent effect of individual accountability. If
confirmed as Chair, I will work with my fellow Commissioners
and the Enforcement Division staff to enforce the law as it is
written. I also am interested in hearing from the Enforcement
Division staff, my fellow Commissioners, and other interested
parties regarding steps that can be taken, consistent with the
current law and the Commission's mandate, to enhance our
ability to ensure that individuals who break the law are held
accountable.
Q.4. As I mentioned during your hearing, former Attorney
General Holder suggested, before he left the Department of
Justice, that Congress change the law to provide for ``strict
liability'' for financial services executives. \4\ To
summarize, he recommended applying the ``responsible corporate
officer doctrine'' that currently applies under the Food, Drug
and Cosmetic Act to the financial services sector. As I said
during the hearing, former Attorney General Holder stated his
belief that executives should be criminally and civilly liable
for misconduct that occurs under their watch, whether or not
they had intent or knowledge of wrongdoing. I found your answer
to my question on this topic during the hearing to be unclear.
As such, can you clarify your thoughts on former Attorney
General Holder's proposal?
---------------------------------------------------------------------------
\4\ Attorney General Holder Remarks on Financial Fraud
Prosecutions at NYU School of Law. September 17, 2014. Available at:
https://www.justice.gov/opa/speech/attorney-general-holder-remarks-
financial-fraud-prosecutions-nyu-school-law.
A.4. The SEC does not have the authority to charge individuals
or firms with criminal offenses. If Congress changes the civil
liability standard, and if confirmed as Chair, I will work with
my fellow Commissioners and the Division of Enforcement to
enforce the law. However, with respect to the outlined
proposal, I believe that imposing civil liability and/or
penalties on a person without regard to his or her mental state
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could have far-reaching and unpredictable effects.
Q.5. President Trump has stated his desire to deport as many as
eight million people residing in the U.S., most of whom are
working. \5\ These workers tend to be concentrated in certain
geographies and industries.
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\5\ Bennet, Brian. ``Not Just `Bad Hombres': Trump Is Targeting Up
to 8 Million People for Deportation''. LA Times, February 4, 2017.
Available at: http://www.latimes.com/politics/la-na-pol-trump-
deportations-20170204-story.html.
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Could the deportation of as many as eight million workers
pose a material risk to investors in certain companies?
If so, which sectors may face such material risks?
If not, why not?
As the President's policy of mass deportation continues, if
confirmed, how will you ensure that companies are appropriately
disclosing the potential risks posed to their investors due to
disruptions in their labor force?
A.5. In my experience, company management and individual
investors generally are in the best position to assess the
effects and materiality of Government policies and actions. It
would not be appropriate for me to offer an opinion on any
specific company or situation, including the hypothetical
description above.
Q.6. When I discussed with you at the hearing your thoughts on
mandatory pre-dispute arbitration clauses and the SEC's ability
to study and limit their use per Section 921 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, you indicated
that it was something you ``don't know a great deal about'' but
that you'd ``work with the staff to learn more about it.'' Will
you commit to directing the SEC staff to study the use of
mandatory pre-dispute arbitration clauses by SEC-regulated
firms to determine if there exists evidence of harm to
investors?
A.6. If confirmed, I look forward to learning more about the
use and effects of these clauses, including through consulting
with the SEC staff regarding their work to date.
Q.7. In response to my questions at your hearing, you indicated
an openness to ``having a dialogue with the SEC Ethics Officer
and the people at the SEC who have experience'' with the laws
and policies around recusals, specifically as it relates to
transparency around when you have recused yourself from a
matter receiving a vote before the SEC. Can you please provide
me with more information on the feasibility of, and your
willingness to, provide information to the public about
instances when you've recused yourself, once a matter before
the SEC is settled and your public reporting would no longer
trigger the release of market-moving or sensitive nonpublic
information?
A.7. The final votes of SEC Commissioners on the Commission's
decisions, orders, rules, and similar actions generally are
available publicly on the Commission's website at https://
www.sec.gov/about/commission-votes.shtml. This disclosure
includes whether a Commissioner did not participate in that
vote. If confirmed, I would expect this approach to continue
and will commit to exploring whether additional disclosure is
appropriate.
Q.8. If confirmed, if you seek to undo, limit, or otherwise
adjust rules established by the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 during your tenure, will
you adhere to the same cost-benefit and/or economic analysis
requirements that the SEC abided by as they established these
rules in the first place?
A.8. Any rulemaking proceeding will be subject to the economic
analysis required by law.
Q.9. Please indicate the specific steps you plan to take to
increase employment diversity and inclusion at the SEC, if
confirmed. Please include specific benchmarks for increasing
diversity and inclusion, with specific deadlines by which you
hope to reach those benchmarks.
A.9. I have personally seen the benefits that diversity has
brought to my current firm and to many of our clients, and I
believe diversity has significant value. I have read the most
recent Annual Report to Congress by the SEC's Office of
Minority and Women Inclusion (OMWI) and am generally familiar
with its statistical measures and its principal conclusions. It
would be premature for me to consider specific objectives
without first consulting with the OMWI and my fellow
Commissioners. However, if confirmed, I look forward to working
to continue to promote diversity at the SEC.
Q.10. During her tenure, Chair White lamented the low level of
board diversity in the U.S.--noting that women comprise only 20
percent of Fortune 500 directors and racial/ethnic minority
director representation has stagnated at 15 percent. As such,
Chair White directed SEC staff to begin preparing a
recommendation to the Commission on how to improve corporate
disclosures on board diversity. What do you plan to do to
complete this work? \6\
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\6\ White, Mary Jo. ``Keynote Address, International Corporate
Governance Network Annual Conference: Focusing the Lens of Disclosure
to Set the Path Forward on Board Diversity, Non-GAAP and
Sustainability.'' June 27, 2016. Available at: https://www.sec.gov/
news/speech/chair-white-icgn-speech.html.
A.10. I believe diversity has value, including at public
companies and their boards. I have witnessed this first hand
and I know that many experienced investors share this view. If
confirmed, I will work with my fellow Commissioners, the staff
(including the OMWI), and the SEC's Advisory Committee on Small
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and Emerging Companies (ACSEC) to monitor this issue.
Q.11. Under Chair White, the SEC redirected resources away from
broker-dealer examinations to help cover the gap in adviser
exams because Congress failed to fully fund this program.
Nevertheless, because of dramatic growth in the industry, the
SEC's efforts have resulted in examinations for just 10 percent
of all advisers. \7\
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\7\ FY2017 Congressional Budget Justification for the Securities
and Exchange Commission. Available at: https://www.sec.gov/about/
reports/secfy17congbudgjust.pdf.
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Is a 10 percent exam record per year sufficient to
adequately protect investors?
What is your plan to increase investment adviser annual
exams, if confirmed?
A.11. I recognize this is an issue identified by Chair White
and others as requiring attention. I believe that this is an
important resource identification and allocation exercise and
that an effective examination strategy will require an
efficient use of resources and effective coordination with
others, including the self-regulatory organizations (SROs).
If confirmed, I look forward to working with OCIE staff, my
fellow Commissioners, the SROs, State regulators and others on
this issue.
Q.12. Some observers would like to point to the Sarbanes-Oxley
Act of 2002 or other regulations for why there has been a drop
in public companies since the mid-1990s. As a mergers and
acquisitions (M&A) lawyer, I'm sure you recognize that a flood
of private capital has caused M&A activity to increase
substantially. On top of that, Congress has passed a number of
reforms like the JOBS Act of 2012 that actually encourage
companies to stay private for longer.
Please discuss the relative importance of (a) regulations,
including the Sarbanes-Oxley Act of 2002 or the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010; (b) M&A
activity; and (c) the easing of rules facilitating private
capital formation in explaining the trajectory of U.S. IPOs in
the last 15 years.
A.12. In my experience, a number of factors may discourage a
private company from becoming a public company, including but
not limited to various immediate one-time costs and ongoing
incremental costs and risks compared with remaining a private
company. These costs may vary from company to company depending
on the facts and circumstances, including, for example, the
industries in which they operate, whether they have
international operations, and whether they have multiple
reporting segments.
With respect to whether M&A activity has had a negative
effect on IPOs, it is not clear to me that there is a
correlation between M&A activity and IPOs.
It is my understanding that the cited JOBS Act reforms were
principally driven by the desire to allow private companies
that may have been constrained in (1) capital raisings, (2) the
ability to allow for employee equity participation or (3) other
areas related to share ownership, to expand their shareholder
base. In my experience, the JOBS Act expansion has facilitated
these objectives but at this time I cannot state its
significance in the decision of whether or not to become a
public company.
Q.13. The Investor Advisory Committee (IAC) created under the
Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 has made numerous recommendations to the SEC, nearly all
of which have been unanimous. And yet most did not receive a
formal response from the SEC as required by law. If confirmed,
will you pledge to formally respond to all IAC recommendations,
in a matter transparent and accessible to the public, within 60
days of them being published?
A.13. I have reviewed the IAC membership and believe the IAC is
composed of an impressive group of people who have significant
and diverse experience in our markets. I have also reviewed a
number of the IAC's recommendations on the SEC's website. Many
of these recommendations are the subject of, or relate to,
recent or current rulemakings.
If confirmed, I look forward to working with the staff and
my fellow Commissioners to continue to engage with market
participants, including the IAC, as part of the rulemaking
process.
Q.14. As SEC Chairman, you will receive many requests to meet
and to speak at conferences. Will you commit to engage with
individuals and groups representing the interests of investors,
particularly retail investors, at least as frequently as you
engage with individuals and groups representing the interests
of SEC-regulated entities?
A.14. As I stated at my nomination hearing, I strongly believe
that it is important to engage with market participants of all
types. Receiving information about what participants in our
capital markets--including, importantly, Main Street
investors--think about issues before the SEC, and the
functioning of our markets more generally, is an important part
of the job, and I look forward to engaging with those
participants if confirmed. I also expect to engage with Main
Street investors through the IAC as well as engaging with those
in the investment management industry.
Q.15. You have been employed for most of your career at a white
shoe law firm. You have no personal public service experience
and have never litigated a case on behalf of taxpayers. But you
will have the chance to select a Director of Enforcement. Will
you commit to selecting someone that has public service
experience as a prosecutor?
A.15. I regard this position as possibly the most important
appointment of the Chair and recognize that the position
requires a highly skilled and qualified individual who will
instill confidence in the Division. I do not believe it is
appropriate to have a ``litmus test'' for any particular role
at the Commission. Employing individuals with a broad range of
experience is important to further the SEC's mission, including
at the Enforcement Division, and prior service as a prosecutor
or within the Enforcement Division will be a very important
consideration.
Q.16. Please discuss your view on the role of proxy advisory
firms in supporting pension funds and other institutional
investors in carrying out their fiduciary duty to vote proxies.
Specifically, do you believe that further Federal regulation of
proxy advisory firms is needed? Please discuss your view of the
effectiveness of SEC Staff Legal Bulletin No. 20 from 2014 in
providing guidance about investment advisers' responsibilities
in voting client proxies and retaining proxy advisory firms.
A.16. I believe that this is an evolving industry that has seen
change, including in response to staff guidance to various
participants as well as industry commentary. I believe the area
requires continued scrutiny, including in light of the
importance and influence of these firms. I understand that,
following the release of the 2014 staff guidance, the SEC's
Office of Compliance Inspections and Examinations listed as a
priority the examination of certain proxy advisory firms with
respect to their process for making voting recommendations and
how they address potential conflicts of interest. If confirmed,
I look forward to studying these and other issues, including
the results of OCIE's examinations, and discussing them with
the staff and my fellow Commissioners.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATORS HEITKAMP AND HELLER
FROM JAY CLAYTON
Q.1. We appreciate your commitment to lowering any unnecessary
regulatory burdens on small companies looking to innovate and
growth their businesses. Last year we passed legislation that
establishes on Office of Small Business Advocate at the SEC.
The purpose of the bill is to provide small businesses with a
stronger voice when it comes to SEC rules. Given the rapid
technological changes occurring in the area of small business
capital formation, we believe having an independent voice with
practical small business experience at the SEC is an essential
element to helping small businesses effectively access public
and private markets.
Under the provisions of our legislation, the Commission is
required to appoint someone with extensive small business
experience to serve as the SEC's Small Business Advocate. It
would also require the Commission to appoint at least 10
individuals from across the country to serve on a new Small
Business Capital Formation Advisory Committee, which would meet
periodically and be required to report back to the Commission
what they're seeing in terms of on the ground innovations and
challenges small businesses face with attaining access to
capital.
If confirmed, do we have your commitment to move within a
reasonable time frame to set up the new office and appoint a
Small Business Advocate?
If confirmed, will you work to ensure that the Commission
appoints individuals to the new Small Business Capital
Formation Advisory Committee who understand the challenges
startups face in areas outside of the coasts, like Nevada and
North Dakota?
A.1. As I stated at the hearing, I believe the availability of
capital for small business is very important both locally and
more broadly. I understand that the SEC is already taking steps
to ``stand up'' the new Office of the Advocate for Small
Business Capital Formation and to begin the search for the new
Advocate. \1\ If confirmed, I look forward to working with the
staff and my fellow Commissioners to continue this effort, and
to explore ways in which we can promote capital formation for
small- to mid-sized businesses and help them access and
navigate both our public and private capital markets. I also
recognize the need for diverse representation on the Small
Business Capital Formation Advisory Committee by individuals
who understand the challenges faced by small businesses in
areas such as Nevada and North Dakota.
---------------------------------------------------------------------------
\1\ Opening Remarks of SEC Acting Chairman Michael Piwowar before
the SEC Advisory Committee on Small and Emerging Companies (Feb. 15,
2017), available at https://www.sec.gov/news/statement/piwowar-opening-
remarks-acsec-021517.html.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATORS HEITKAMP, TESTER,
AND DONNELLY FROM JAY CLAYTON
Q.1. Fiduciary Rule: Mr. Clayton, Dodd-Frank specifically gave
the SEC the authority under Section 913 to study the standards
of care between broker-dealers and investment advisors. Dodd-
Frank also gave the SEC the authority to promulgate a best-
interest standard after the study was complete, should there be
any gaps in the current structure.
Due to the SEC's inability to promulgate a rule, the
Department of Labor was able to write a rule, which is facing a
significant amount of uncertainty as of this moment. We
strongly support the SEC promulgating a best-interest standard
and at the very least have encouraged DOL and the SEC to ensure
that any rules are harmonized.
Do you support the SEC moving forward with a fiduciary
standard for investment advisors and broker-dealers and will
you help move efforts forward to ensure that any rules are
harmonized?
Do you believe the SEC should create a best-interest
standard for all brokerage accounts, not just retirement
accounts?
A.1. I am aware that this issue has generated significant
interest. I believe investor protection, particularly
protection of Main Street investors, is a critical element of
the SEC's tri-partite mission. Based on my experience, I
believe that as a general matter it is important that our
regulations are designed to ensure that Main Street investors
making an investment decision are well informed. If confirmed,
I look forward to working with my fellow Commissioners and the
SEC staff, and consulting with market participants, to
determine whether the Commission should move forward and, if
so, in what manner, always keeping in mind the interests of
Main Street investors.
I also recognize the importance of coordination and
discussion with other agencies and stakeholders generally and
with respect to these issues in particular. If confirmed, I
would encourage the SEC staff to pursue such coordination and
discussion.
Q.2. We seek clarification regarding your position on the SEC's
duty to implement statutorily required rules, specifically
those rules required under the Dodd Frank Act. Your testimony
before our Committee was unclear as to your intent to dutifully
carry out the statutory mandates set forth in Dodd Frank.
Please clarify your position on the following questions:
Does the SEC have the authority to refuse to implement a
rule required by law?
Do you intend to fully implement all statutorily mandated
rules under Dodd Frank, in a reasonable timeframe?
Do you believe that excessive delays in promulgating rules,
or reviewing rules, is tantamount to the SEC refusing to
implement the law?
A.2. I believe that the SEC is required to implement
rulemakings required by statute in accordance with applicable
law, and, if confirmed, I look forward to so carrying out
statutorily mandated rulemakings on a basis that is timely and
feasible.
The rulemaking process is complicated. In many cases, the
process of promulgating proposed rules, soliciting public
comments, and issuing final rules can take time. If confirmed,
I look forward to working with the staff and my fellow
Commissioners to carry out rulemakings in an appropriate and
feasible timeframe.
Additional Material Supplied for the Record
SEC SETTLEMENT ORDER FOR TRUMP HOTELS & CASINO RESORTS, INC., DATED
JANUARY 16, 2002
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
CORRESPONDENCE FROM THE TRUMP ORGANIZATION TO THE HONORABLE HARVEY L.
PITT, THE HONORABLE ISAAC C. HUNT, JR., AND THE HONORABLE LAURA S.
UNGER, DATED DECEMBER 14, 2001
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
CORRESPONDENCE FROM THE TRUMP ORGANIZATION TO THE HONORABLE HARVEY L.
PITT, DATED JANUARY 28, 2002
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]