[Senate Hearing 116-456]
[From the U.S. Government Publishing Office]
______
S. Hrg. 116-456
OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
SECOND SESSION
ON
RECEIVING UPDATES FROM THE CHAIRMAN OF THE SECURITIES AND EXCHANGE
COMMISSION REGARDING THE AGENCY'S WORK AND AGENDA
__________
NOVEMBER 17, 2020
__________
Printed for the use of the Committee on Banking, Housing, and Urban Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
______
U.S. GOVERNMENT PUBLISHING OFFICE
44-820 WASHINGTON : 2023
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA McSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Laura Swanson, Democratic Staff Director
Jen Deci, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, NOVEMBER 17, 2020
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 31
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 3
Prepared statement....................................... 32
WITNESS
Jay Clayton, Chairman, Securities and Exchange Commission........ 6
Prepared statement........................................... 34
Responses to written questions of:
Chairman Crapo........................................... 63
Senator Brown............................................ 64
Senator Cotton........................................... 66
Senator Tillis........................................... 69
Senator Kennedy.......................................... 71
Senator Cramer........................................... 74
Senator Warren........................................... 77
Senator Cortez Masto..................................... 91
Senator Sinema........................................... 97
(iii)
OVERSIGHT OF THE SECURITIES AND EXCHANGE COMMISSION
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TUESDAY, NOVEMBER 17, 2020
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:01 a.m., via Webex, Hon. Mike
Crapo, Chairman of the Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. Good morning. This hearing will come to
order. This hearing is another remote hearing by video, and a
few videoconferencing reminders again.
Once you start speaking, there will be a delay on your
screen, so do not be bothered by that, before you are displayed
on your screen.
To minimize the background noise, I again remind you to
click the mute button until it is your turn to speak or ask
questions.
If there is a technology issue, we will move to the next
Senator until it is resolved. And I remind all Senators again
that the 5-minute clock still applies. You should have a box on
your screen labeled ``Clock'' that shows how much time is
remaining. But we have had some trouble, and I have had
Senators tell me they just cannot find that box or do not see
it. And so, in fact, last hearing one of the Senators asked me
to give a reminder. I am going to do that this time for
everybody. So at 30 seconds left on your clock, there will be a
tone, a bell ring, to remind Senators and the witnesses that
the time has almost expired. And then at the end of the 5
minutes, another bell will ring. That way we can all know how
the clock is working, even though we do not find it on our
screens.
Today we will receive testimony from Securities and
Exchange Commission Chairman Jay Clayton regarding the work and
agenda of the SEC.
I thank you, Chair Clayton, for your appearance before the
Committee today, which is essential to our oversight of the
SEC, and welcome.
You last appeared before this Committee in December of last
year.
The COVID-19 pandemic hit the United States shortly after
that hearing, and the SEC has taken many important steps to
help limit the economic shock to our markets as Governments
have attempted to confront this unprecedented event.
The SEC used tools, such as the marketwide circuit
breakers, for the first time since their adoption, when markets
dropped 7 percent from the previous day's closing price of the
S&P 500 Index.
There were a number of uses of ``limit down'' circuit
breaks when overnight stock futures hit their 5 percent limit,
which resulted in halting of all further downward trades
Despite the high levels of volatility, it is my
understanding that the current mechanisms in place served their
intended purposes of increasing market stability.
Additionally, in order to comply with CDC guidance, you
oversaw an unprecedented temporary closure of physical trading
floors. This business continuity measure supported orderly
trading, while ensuring the health and safety of market
participants.
The SEC has continuously pursued enforcement actions,
including a number of actions against those seeking to take
advantage of investors during this vulnerable time.
Remarkably, all of this has been done while the SEC staff
is working remotely.
It is commendable that despite the COVID-19 disruptions,
you have continued to advance the items on your regulatory
agenda which are the result of many months, and sometimes
years, of diligent staff work.
The SEC finalized amendments to update and improve the
definitions of ``accredited investor'' and ``qualified
institutional buyer,'' which will now take into consideration
education and expertise, ultimately increasing investor
participation in private offerings and expanding access to
capital markets.
The SEC recently modernized the exempt offering framework,
which will be a lifeline to small and medium-sized companies
navigating the previously complex system.
These clear and concise rules will allow smaller companies
to focus on getting their businesses back on track while
improving the consistency of investor protections.
Commissioner Roisman engaged investors and market
participants in crafting modernized shareholder proposal
thresholds and proxy voting rules.
These modernizations no longer permit a small number of
individuals with limited stakes to consume corporate boardrooms
and will allow companies to better focus their efforts on
COVID-19 recovery.
The SEC improved the readability and streamlined the
information collected for Regulation S-K disclosures. It had
been more than 30 years since these disclosures had been
reviewed.
Last year, the SEC finalized a package of rulemakings
including Regulation Best Interest, Form CRS Relationship
Summary, and two interpretations under the Advisers Act.
Compliance with these rules began on June 30. Since June,
the SEC has been reviewing firms' compliance efforts and
identifying additional areas for compliance improvements
through a staff roundtable and other stakeholder engagement.
Another modernization effort underway at the SEC is the
creation of the Strategic Hub for Innovation and Financial
Technology. This important initiative is critical in the
interagency
coordination and dissemination of information to the public
regarding initial coin offerings and other cryptocurrency
matters.
Clearly, the SEC has been busy, and I commend you for
balancing emergency COVID-19 responses while advancing critical
rulemaking initiatives, risk-based inspections, enforcement
actions, and issuer and fund filings.
I look forward to continuing to work with the SEC to ensure
that U.S. markets come back from the COVID-19 disruptions
stronger, more liquid, and more dynamic than ever before.
In closing, I also thank Chairman Clayton for his service
and wish him the best of luck in his future endeavors as he
departs the Commission in the coming weeks.
The will and drive you brought to this job allowed you to
bring about many significant improvements that were long
overdue, and I wish you the best of luck in your future
endeavors and, again, thank you for your service.
Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. Chairman Crapo, I
believe this is your last hearing, I think, and if it is, thank
you for the relationship we have had and our ability to work
together and your cooperation even when we obviously had major
disagreements, but thank you for that.
Chair Clayton, thank you for your service to our country.
In this election, voters rejected this Administration and
its ``Wall Street first'' attitude. Across the country, it is
clear that people want financial watchdogs who look out for
them, not make life easier for American CEOs. It is time to
turn the page on this failed Administration, by at least 5
million votes, we know, and to work together to build an
economy that actually works for everyone.
That means an economy where all workers can save and invest
their hard-earned money for a downpayment, to help send their
kids to a community college, and to retire with dignity. That
is how we grow the middle class, and it is time that everyone
had the chance to join it.
That means finally working in a real way to eliminate the
racial wealth gap. It means we have to enlist everyone in our
Government in this project, including the SEC.
This year the dedicated public servants at the Commission
have done important work in the middle of a public health
crisis and an economic crisis--we thank you and all of them for
that--monitoring for fraud and misconduct related to the
pandemic while continuing their work to protect investors,
maintaining orderly markets, and promoting capital formation.
Those efforts help working families saving and investing
today and build confidence in our markets for the future.
But I believe we aim higher or should aim higher than
simply making markets more stable. We can do better than just
preventing crashes and outright fraud. We need to make markets
actually work for working people.
Over the years, I have raised concerns about how your
leadership has left behind the people whose savings are at
stake in our markets--denying them the ability to hold
executives accountable and withholding critical information
about how companies are run and how they affect the environment
and their communities.
You have tried to reduce transparency; you have tried to
undermine the protections we do have--even in the face of
strong opposition from large and small investors, from
advocates, and from experts.
From employees across the country scrimping and saving to
put money in their retirement accounts to pension managers
investing for a generation of workers, they are all in a worse
place since you have been in office. That does not even include
those who want to save for their family and their retirement,
but just cannot because their paycheck is not enough. The
wealthy get wealthier and the middle class shrinks.
You pushed for what you call ``Regulation Best Interest''--
your term--a new standard that applies when brokers give advice
to clients, but it does not put mom-and-pop customers first. A
few weeks ago, you discussed the SEC's initial reviews after
the standard went into effect in June.
Even though you said firms are making, again, your words,
``good-faith efforts'', your staff reported shortcomings in
compliance and failures to fully disclose disciplinary history
to clients. In fact, it does not seem like you have any way to
tell if this rule will help at all. Not an especially
auspicious beginning.
The SEC's final rules on proxy advisers and shareholder
proposals are really clear examples of the Administration
taking the side every single time in this Committee--we talk
about this every single time--we know this. Every single time
people get in line to do this, the Administration taking the
side of corporate interests over Americans saving and investing
for the future.
Over the years, shareholder engagement has forced important
conversations to happen in boardrooms. We need to push
companies to focus on improving diversity, implementing better
governance, and addressing climate change risks. Yet your
agenda has attempted to stifle these important conversations.
I am not the only one who is worried about your agenda.
Last week, the North American Securities Administrators
Association wrote you because 30 of its members--State
watchdogs, including from Ohio--are concerned about a recent,
broad rule with few safeguards that, in their words, ``would
facilitate unlicensed intermediaries in the private market.''
That is a polite way of saying they are very concerned
about rampant fraud.
Not only are they worried that you are putting their
constituents at risk; they are upset that they did not even get
a heads-up.
While you were advancing one bad rule after another, always
tilted toward corporate interests, you did not take the
opportunity to make sure public companies disclose the risks
that climate change poses to their businesses. You did the
opposite, watering down corporate financial disclosures.
When you tried to improve corporate workforce disclosure,
it still fell short, failing to address basic concepts like
employee turnover or to identify the numbers of full-time
workers compared to part-time workers.
We are never going to be able to undo the corporate
business model that treats workers as expendable if we cannot
even get companies to put out accurate information on the
workers who make their businesses successful.
While the pandemic posed challenges for the Commission's
enforcement work, it also revealed how applying additional
resources to the whistleblower program delivers results. And
congratulations on that. By reallocating staff to review
whistleblower tips, you managed record results. I hope that my
concerns about the uncertainty created by your recent changes
to the rules do not undermine the obvious successes of that
program.
More broadly on enforcement, although the SEC has
aggressively pursued COVID-related scams and frauds, the last
year of enforcement shows more of the same--a few big cases
create a big topline number, but looking under the hood, you
see too many cases without individual accountability.
Last week's announcement that the SEC charged Wells Fargo's
former CEO and consumer bank head for deceiving investors as
part of the fake account scandal that was uncovered in 2016 is
a rare and long overdue case--again, 2016--where your agency
has actually held someone accountable for breaking the law and
ripping people off at a big bank or corporation.
Back when you were a nominee, you assured us, your words
again, that ``individual accountability drives behavior more
than corporate accountability.'' Well, you do not get better
behavior by taking years--years. We have been talking about the
Wells Fargo scandal for almost half a decade--by taking years
to hold top executives individually accountable for
intentional--and God knows it was intentional--deception.
American voters sent a clear message in this election,
about 80 million of them: They are tired of an economy where
big corporations and their wealthy CEOs play by a different set
of rules than people who work for a living.
With each rollback of important safeguards or each
disenfranchisement of shareholders, you claimed to be
reforming, modernizing, or updating the rules.
People are tired of that political spin. When you say
``reform,'' it seems you mean make things a little easier for
the biggest guys. When you say ``modernize,'' you seem to mean
make it that much harder to actually hold powerful CEOs
accountable. When you say ``update,'' you seem to mean further
entrench the Wall Street business model that exploits workers.
And we know they do.
Eighty million Americans rejected your agenda in this
election. I hope we can reverse it.
As you prepare to leave the Commission, you have changed
the rules so much, even you will need to relearn fundamental
elements of securities law when you return to what I assume
will be a lucrative private practice.
I have said it before. Protecting workers' hard-earned
savings should begin with a simple concept: putting their
interests first.
I am disappointed, Chair Clayton, you do not see it that
way. A decisive majority of the country surely does.
Thank you.
Chairman Crapo. Thank you, Senator Brown.
And now we will turn to you, Chairman Clayton. You may make
your opening statement.
STATEMENT OF JAY CLAYTON, CHAIRMAN, SECURITIES AND EXCHANGE
COMMISSION
Mr. Clayton. Thank you, Chairman Crapo and Ranking Member
Brown and Senators of the Committee. I appreciate the
opportunity to testify today about the work of the women and
men at the Securities and Exchange Commission over the past
year, including our work to address the effects of the COVID-19
pandemic.
To begin, I want to thank you for the support and
assistance that you have provided the SEC during my tenure. I
have enjoyed the thoughtful and candid engagement, and,
importantly, you have provided adequate and additional
resources to help us expand and modernize our investor-oriented
efforts.
I do wish circumstances would have allowed us to get
together in person, and I hope to reach out to all of you
bilaterally in the time that I have left.
Working alongside the dedicated women and men of the
Commission has been the privilege of a lifetime. I am honored
to call them colleagues and friends, and I could not be more
proud of the work they have done each and every day on behalf
of investors, especially this year in the face of incredible
professional and personal challenges. Their dedication,
combined with our strong, time-tested, and flexible regulatory
framework, allowed the SEC to respond quickly to the health,
economic, and other unexpected challenges we face this year. I
am pleased to report that while the pandemic significantly
impacted how we do our work, it did not negatively impact the
work itself.
With respect to COVID-19, the SEC responded quickly by,
one, providing targeted regulatory relief to ensure the
continued operation of our markets; two, dedicating significant
resources to COVID-related enforcement and examination efforts;
three, increasing investor-focused oversight and engagement in
key areas of stress; and, four, working closely with our
domestic and foreign regulatory counterparts to monitor and
mitigate the impacts of COVID-19.
Here I must thank the Treasury, the Federal Reserve, and
Congress for their swift action to intervene in our markets and
provide liquidity and provide support for our economy more
generally through the CARES Act.
In addition, our traditional mission-oriented work
continued with vigor, rigor, and transparency. During my
chairmanship, recognizing the value of our time-tested
regulatory framework, the agency has focused on modernizing the
rules and regulations that implement that framework, some of
which had not been meaningfully updated in many, many decades.
As just a few examples, this year the Commission moved forward
on a number of initiatives to: one, improve the proxy voting
and shareholder proposal process; two, facilitate access to
capital in our public and private markets and, in particular,
with respect to our small and medium-sized businesses; three,
modernize the fund disclosure and regulatory framework with an
investor-oriented approach; and, four, improve and modernize
our equity market structure.
Despite our mandatory telework environment, we have also
continued our strong enforcement and examination programs,
focusing on areas that are most impactful to Main Street
investors, including through our teachers and military
servicemembers initiatives and dedicating resources to address
COVID-related frauds and other matters.
In addition, by leveraging technology, we have continued
our robust outreach, education, and engagement initiatives to
investors, entrepreneurs, and an array of market participants.
Finally, the importance of diversity, inclusion, and
opportunity to the Commission, the financial industry, and our
society more generally was brought into stark relief by the
events of 2020. Building on a strong foundation provided by,
among other things, our Office of Minority and Women Inclusion
and our Diversity and Inclusion Strategic Plan, we have
continued to advance initiatives to further our collective
commitment to these principles and to each other here at the
Commission.
Thank you again for the opportunity to testify about the
work of the Commission, the fantastic work of the women and men
at the Commission, and I look forward to your questions.
Chairman Crapo. Thank you, Chairman Clayton. And, again,
thank you for the service that you have given as the Chairman
of the SEC.
As I remarked in my opening statement, I am impressed by
the rules that you have been able to modernize and improve
during your tenure as Chairman. Your regulatory agenda has been
and continues to be ambitious. You mentioned in your remarks
that there is much work left to be done. Are there areas where
you think the SEC should continue to focus or areas where you
think Congress should take a closer look at the statute?
Mr. Clayton. Senator, let me tick off a few. First is
corporate hygiene. I think in the pandemic and the stress, we
have seen areas where corporate hygiene could be better. We
need to remove any uncertainty that corporations are operating
with transparency and rigorous governance. A few of those are
10b5-1 plans, option pricing, and what I call the ``8-K
information gap.'' I think that these are things that most--my
views in this area are things that most good corporations
follow. I have put this information out there, had discussions
with Members of Congress. I think that is an area that we can
learn from.
We also can learn a lot from our mandatory telework
environment and not only the efficiency but the importance of
electronic communications. We need to move our regulatory
framework forward for all investors to an electronic framework.
If people had not had--if this had happened 10 years ago, we
would have had a problem. We would have had a real problem
communicating particularly with our retail investors.
Not to take too much of your time, but I also think the
proxy process needs improvement. Our 13(f) proposal revealed
that companies do not have efficient access to their
shareholder base. We need more efficient access to our
shareholder base for companies. It benefits both companies and
shareholders.
And, finally, in the area of ESG, we need to be rigorous in
our approach to this disclosure area. I welcome the report from
GAO on these components. I have discussed this in detail and
look forward to doing so in the future.
Chairman Crapo. Well, thank you. I appreciate that summary
of where you think the SEC should focus, some of the issues
that need to be focused on, as well as what Congress needs to
be paying attention to. I appreciate that.
Along those same lines, the SEC was quick and decisive in
taking action in response to the COVID pandemic and the tools
that were used, such as the marketwide circuit breakers,
oversight of the physical floors of the Nation's stock
exchanges being closed in order to comply with CDC's guidance,
undertaking swift enforcement actions to protect investors from
fraud and illicit schemes and other misconduct, and providing
temporary relief in a number of other areas.
The question I have is: As you reflect on the actions the
SEC has taken in response to the pandemic, how do they shape
the way the SEC should move forward? Specifically, are there
temporary relief actions that you believe the Commission should
consider making permanent?
Mr. Clayton. The short answer is, ``Yes, many.'' The shift
to a mandatory telework environment across our critical market
infrastructure again showed the importance of being able to
conduct business electronically and remotely. We provided a
host of relief. We are assessing whether that relief in any way
degraded investor protection or market integrity, and where it
has not--and I think in many cases it increased it. Where it
has not, we should make it permanent. It is that simple.
That said, I want to make a specific--there are people who
do prefer paper at the end of the day, and I think that for
those retail investors, we should continue to provide access to
paper to the extent they want it. But investors are better off
and the system is better off if we are all on a level
electronic communication playing field.
Chairman Crapo. All right. Thank you. And my last question
is too long to get out and get an answer to in this, so I am
going to ask you this question, but then you can please respond
in writing. It has to do with the Uyghur Forced Labor
Prevention Act, which passed the House by a vote of 406, and
there is a similar bill, Senate bill 3471, that contains a
number of restrictions intended to punish those responsible for
the horrific human rights violations occurring in China's
Xinjiang Uyghur Autonomous Region.
My question to you, which, again, I would like you to
answer in writing, is: This legislation creates essentially a
new disclosure regime at the SEC to deal with this issue. I am
concerned about whether that is the right approach rather than
utilizing existing pressure channels available to the
Departments of Treasury, Commerce, State, Defense, and others.
Is it your view that the SEC should establish a new disclosure
regime rather than focusing on our existing regimes for
punishing this behavior?
Again, I would ask you to answer that question in writing,
but it is a very critical issue that I think Congress needs to
get right, and I would like your advice on that.
Mr. Clayton. I am happy to do so.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thanks, Mr. Chairman, and I echo the
Senator's request on that question. That is an important
question. Chair Clayton, thank you for the response that you
will give.
When a broker borrows stock from a customer's account,
Chairman Clayton, it has to provide collateral under the
Customer Protection Rule, correct?
Mr. Clayton. That is correct.
Senator Brown. OK. Last month, though, the SEC issued a no-
action letter to FINRA acknowledging that certain brokers are
failing to provide collateral as required, violating, we think,
the SEC's Customer Protection Rule, and said it was OK as long
as they fixed it within 6 months. Was that what that no-action
letter said?
Mr. Clayton. I think it is much more nuanced than that,
Senator, but, look, for purposes of this discussion, that is a
fair way to say it. We gave a 6-month period for people to
adopt practices that were clearly in line with the Customer
Protection Rule, and this was particularly motivated by
ensuring that SIPC protection applied in this case.
Senator Brown. So how widespread is this problem in your
estimation? Or why do firms need 6 months to do this when in
the past they had not?
Mr. Clayton. It is not clear that they need 6 months to do
it, but what is needed is a time for those types of
transactions, stock out on loan and the like, to be unwound in
what I would say is an orderly way so it will not adversely
affect customers or the market itself.
Our staff in the Division of Trading and Markets, in
consultation with FINRA, made an assessment that this was not a
particularly--a situation where people were particularly at
risk, but that, to use my word, we needed better hygiene across
the stock-borrowing, what I would say, ecosystem.
Senator Brown. Well, I understand what you said. I think
it, again, plays into the belief that the SEC and this
Government is a deeper swamp than it was 4 years ago. People
feel that--folks on Main Street feel like the odds are stacked
against them.
Let me switch here----
Mr. Clayton. Well, look, I could just quickly respond to
that in that as soon as I became aware of this, it was days
when this action was taken.
Senator Brown. OK. Thank you.
Let me turn to stock buybacks, Chairman Clayton. The SEC
recently brought a case against a company for doing stock
buybacks while management had inside information about a
merger, insider trading by most definitions. You called it a
``failure of internal controls,'' even though the Legal
Department signed off on the buybacks. Congress has called on
you to revisit the stock buybacks rules. Many in Congress have.
Doesn't it make more sense to have clear standards for
companies to follow and avoid abuses instead of expending
resources on weak enforcement activities?
Mr. Clayton. Yeah, let me say this about stock buybacks and
10b5-1 plans. As I mentioned in my response to Chairman Crapo,
I think additional hygiene in this area is appropriate,
Senator. Buybacks provide a very efficient way from a company's
standpoint to manage their capital allocation and balance
sheet. But I think it should be applied with good corporate
hygiene, including policies and procedures to ensure that when
they are put in place or restarted, a company does not have
material nonpublic information. And for executives, I am a
proponent of a cooling-off period, and that is that when you
put your 10b5-1 plan in place, say you do it in June, there are
no purchases or sales--in most cases it is sales with an
executive 10b5-1 program--for a period of time. Now, whether
that period of time is 3 months or 6 months or whatever it is,
that gives everybody comfort that timing was not planned ahead,
you know, that fortuity was not intent, and I think that is
something that we should all explore.
Senator Brown. OK. Thank you. I have worked on
legislation--it is a little late in this session and under your
tenure--that would create guardrails and prevent these kinds of
failures and abuses. I think your comments were appropriate
that we allow companies to still do buybacks, but they would
have to provide real transparency, which they do not always,
and would have to reward workers, not just shareholders. That
is what I think the real solution is.
I will just close briefly with a bit of a statement. We saw
earlier this year the pandemic crushing our families and
hospitals and the economy, how the markets seized up. The SEC's
recent report on interconnectedness in the market offers some
insights but no real policy recommendations. I know that you
and Vice Chair Quarles and Deputy Treasury Secretary Muzinich
should have come and that the money market reforms from the
last crisis were not good enough. But it is clear that your
successor, the next banking regulators, the next FSOC Chair
will need to reduce risks from interconnectedness and excessive
leverage. The economy may in the future depend on it.
Thank you, Chair Clayton. Thank you, Mr. Chairman.
Chairman Crapo. Senator Toomey.
Senator Toomey. Thank you, Mr. Chairman. And, Chairman
Clayton, welcome back on what I gather is your final appearance
before our Committee, and let me just take a moment to say I
really appreciate the excellent work that you have done and the
leadership you have provided at the SEC. In my mind, you have
clearly advanced the mission that the SEC is responsible for,
protecting investors and maintaining fair, orderly, and
efficient markets, and facilitating capital formation. I
particularly appreciate your efforts to expand investment
opportunities for average investors. I appreciate the work you
have done to create an environment where it is easier for
companies to go public. And I also want to take a moment to tip
my hat to you and your colleagues for the extraordinary, really
extraordinary accomplishment of how we got through the
unprecedented period where we shut down our economy; we sort of
voluntarily closed our economy; we forbid people from going to
work. And yet during that period of time, during the worst of
that period of time, after a brief period where they completely
froze up but then in response to our legislation, our capital
markets reopened. They thrived. We actually set all-time
records in debt issuances across the credit quality spectrum.
We had no settlement problems. We had an amazingly efficient--
in fact, we returned to being the world's deepest, most liquid,
most efficient capital markets by far, and we did it with
everyone working from home, the SEC working from home. And
while there are a lot of people that deserve a lot of credit
for it, I think you deserve your share as well, Mr. Chairman,
so thanks for all that you have done for your service to the
country.
I have got two big questions for you, if I could, and the
first is about companies going public. As we all know, there
are fewer of them than there once was, right? Companies wait
until longer--they delay going public as long as they can, it
seems. It seems that IPOs now are more often a liquidity event
than they are a capital-raising event. We have far fewer
investment opportunities for investors because we have fewer
publicly traded companies, and we have fewer options for
capital raising on the part of companies that feel like that is
not a viable option.
So my question for you, Mr. Chairman, just a couple of
brief thoughts if you have them: Is there more that we can be
doing in Congress to create an environment where it is more
attractive to go public earlier so that that is a viable option
for growing businesses and it is a viable investment option for
more investors? What else can we be doing to restore even more
vibrancy to our public markets?
Mr. Clayton. Well, thank you, and thank you for the really
kind words about the work of the Commission. I think if the
American people saw what the women and men here did in that
month of stress, they would be extremely impressed.
Your question is one that is kind of front of mind for me
at all times. We have taken the JOBS Act, which was a terrific
piece of legislation which did facilitate the move from being a
private company to a public company, providing an on-ramp, and
we have expanded access to the JOBS Act to companies, and I
believe that has made a difference over time in the choice
between staying private and becoming public.
I am not going to take a victory lap yet, but, you know, we
are up on IPOs. You know, that may be market driven. It may be
a result of our efforts. It may be a result of a lot of
different things. But I am hoping that that choice was a better
one.
I think that we have to recognize that one size does not
fit all from a disclosure and regulatory perspective. I have no
problem with many of what people would call ``burdens,''
``frictions,'' whatever you want, in our system for large
public companies. You know, can they be adjusted here and there
and are we doing that? Sure. But for medium-sized companies--
and I am going to say this, companies $100 million to a couple
of billion or more--the same rigor and life that applies to a
company with a $500 billion market cap just does not make
sense, and we need to recognize that.
Senator Toomey. Well, thanks. I am going to run out of time
here, Mr. Chairman, but, again----
Mr. Clayton. Sorry.
Senator Toomey. That is quite all right. I would suggest
the JOBS Act has been remarkably successful. The vast majority
of companies that go public actually use the emerging growth
avenue that we created. I think we want to expand that avenue
so that more companies can take advantage of it.
I also think we want to be very careful about the extent to
which activist groups are trying to use corporate governance as
a way to advance a social and political agenda that really
ought to be advanced through the accountable elected branches
of Government. But thanks for your service. I look forward to
continuing the discussion.
Chairman Crapo. Thank you.
Is Senator Menendez with us? I think he may have had to go
off-line for a minute. All right. Then let us move on to
Senator Warner.
Senator Warner. Thank you, Mr. Chairman. I appreciate this
hearing.
And, Mr. Chairman, before I turn to questions, I also want
to take a moment and thank the Chair for his service. Chairman
Clayton has been someone that I have had a great working
relationship with for 3\1/2\ years--can you hear me all right?
Am I coming along, Mike?
Chairman Crapo. Yeah.
Senator Warner. OK. And while we have not always agreed by
any means, I appreciate the partnership that we have worked on,
on issues like improving the SEC enforcement tools, the Kokesh,
which I want to get to at the end of my comments. But I really
want to zero in on something that I first talked to you as you
came into this job, and that is the question which I think is
fundamental and will be one of your legacy items about human
capital reporting.
You know, I think we all know that we have seen, even
prepandemic, a fundamental transformation in overall investment
strategies. We have seen that companies are investing much less
in tangible goods and much more in intangible goods, and
oftentimes those intangible goods are human capital.
We have talked about the need for potentially doing tax
accounting, reporting transition. I may be a little further
down the path than you on some of those issues, but I really
appreciate the fact that you have taken this issue on with
seriousness and rigor and really laid down the first step, and
you did that by putting forward your revised Reg. S-K
regulations that finally for the first time--and I would argue
for the first time and we have more to go--requires some level
of human capital metrics for companies to report when you talk
about--every CEO I know talks about their assets being their
workforce, yet there is no place that that is reflected on
their balance sheet. There is no place that is reflected in
their SEC filings. I think by these revised S-K rules, you are
starting us down this path toward a more worker-centric
management structure. And my hope is, while you have, I think,
taken this on as a principles-based approach, that we will see
both an increase in the quantity of this reporting as well as
the quality, and I think it is terribly important that we
ultimately get enough data in place where there is allowed to
be a baseline that would allow some comparison between
industries on this important topic, and I know we had to start
someplace, and you have started that discussion.
I say you have noted in your written testimony that you
believe the principles-based approach will lead to quantitative
disclosure by firms and deem the information to be material.
Can you talk about how you see that occurring in practice and
then how we make sure that this is just not nice to have but
that more and more firms will actually believe this human
capital component falls into the materiality category and that
they will take it with the kind of seriousness that I know you
do and that I hope we will see the whole business community
move toward?
Mr. Clayton. Yes, thank you, and I believe that the
disclosure requirement that we put in place will facilitate
both qualitative disclosure, how do we look at our workforce,
and like you said, in a number of industries, it can be the
entire company. It can be 30, 40 percent of the value on the
balance sheet. Depending on the industry, I would expect
turnover, turnover in particular areas, to be a metric that
people might show. Now, in some industries that is not very
relevant, but in others it is. What I would say with sector-
specific within skill sets, engineers, how many engineers are
people actually bringing onboard. How difficult is it to hire
them? So there will be qualitative and quantitative disclosure.
We should understand what management believes drives the
value of the business from a human capital perspective, and
that is the core requirement. And I think it is--look, it is
the way I look at things at the SEC. What is our turnover? You
know, and from a topic that is current today, from a diversity
and inclusion standpoint, we are tracking those metrics at the
SEC, and I have them front of mind. If I were a public company,
I would expect to disclose them.
Senator Warner. Well, one of the things--I appreciate that
and, again, you had to be the guy to set the framework, to get
this out of the discussion stage, to start having companies
putting this reporting in place. You have heard and my
colleagues on this Committee have heard I think we need to go
further. I always point out the problem, you know, in terms of
tax and accounting, you know, a company buys a robot, you get
an R&D tax credit, that robot is an asset on your balance
sheet. The accountants have recognized that. If the same
company invests in two human beings being more efficient than
the robot, they are not given the same tax treatment, and that
investment is not viewed in a category on the balance sheet as
an asset class. And I know you are coming down to your last
meeting or say, and, Jay, I do not want to get you further out
over your skis, but I told you I wanted to push you on this a
little bit. You know, my hope would be that you would say you
are at least open to ongoing engagement with FASB. I think the
Commission has a role of overseeing FASB, that we ought to at
least reopen the discussions or start discussions about
accounting treatment of investment in human capital. I think we
ought to look at tax treatment of investment in human capital.
Do you think we are--you know, we have taken the first step by
having at least de minimis reporting. I think the next step
ought to be tax and accounting review, and I would love in my
last minute or two for you to make a comment on that.
Chairman Crapo. Actually, you are about 2 minutes over,
Senator Warner.
[Laughter.]
Senator Warner. Where is your clock, Mike? I thought you
were going to put a clock up here. I was trying to--I will let
Chair Clayton, since we have had this discussion repeatedly,
take that one for the record. But I would love to--you know, if
you will let me help draft your answer so I can share it with
Chairman Crapo and some of the others afterwards so I can nudge
him on a going-forward basis. But let me just again say, Jay,
thank you for your service, and I think you have done a great
job and I look forward to continuing the discussion.
Chairman Crapo. Thank you. And the tone that I told
everybody we were going to play does not appear to be working.
Senator Warner. I know. I was waiting for the exit music,
Mike. I got nothing. I have got somebody in my ear saying,
``That is a great question, Warner. Keep''----
[Laughter.]
Chairman Crapo. I guess I will just have to try to remember
to tap the clock or something, but please, folks, watch the
clock. We are trying to solve this. Thanks, Mark.
Senator Warner. Thank you.
Chairman Crapo. Senator Scott.
Senator Scott. Thank you, Mr. Chairman, for my 12 minutes
that I have now.
[Laughter.]
Senator Scott. Thank you so much for my time. I will use
every minute plus 15 on top of that. Thank you so much.
Chair Clayton, thank you for your service to our country.
Without any question, having had the opportunity to work with
you, I know that your agency's focus has been on Mr. and Mrs.
401(k). The average investor in our country through their
retirement funds may not appreciate the way that you have
really focused on simplifying some of the language and making
it easier for the investor to engage. You know, Mr. and Mrs.
401(k) or the Main Street investor may not be able to pinpoint
exactly which amendment to the 1934 Act or the tweak to the
1940 Act that allowed them to safely and affordably access the
advice or products needed to meet their investment goals, but I
am glad you and your team at the SEC have been so diligently
focused on protecting these investors. That is a really big
key, and you think about the fact that only half of U.S.
households own stock at all and the average portfolio is about
$40,000, that is a really important engagement when the average
investor can understand and appreciate in a simplified manner
what they are investing in and the rules of the road, so to
speak. You take that number and you cut it down by 31 percent
for minority investors, Hispanics and African Americans, that
number drops precipitously.
Fortunately, technology and innovation has recently
improved the availability of simple, low-cost investment
platforms that can be accessed by investors with a smartphone
and as little as $20 now to see their dreams come true. A broad
chunk of young and diverse Americans are now more engaged in
the stock market, including many millions who are doing so for
the very first time.
Can you, Chairman Clayton, please discuss the benefits of
the increased participation and if the Commission's regulations
are keeping up with the pace of innovation?
Mr. Clayton. Thank you, Senator Scott. I believe and I know
the people here believe--and the pandemic demonstrated this--
that being connected to our financial system, having a bank
account, having an investment account is essential to
participation in our society. We saw this in the CARES Act
relief. You could get relief faster to people who were
connected. We want to increase those connections, preserving
investor protection, and as you mentioned, driving down costs.
Look, we are hell-bent to get at fraud and prevent fraud,
and we have, you know, a thousand people in the Enforcement
Division, 1,300 there, actually a thousand of people in
Inspections, that is their job. But if we can reduce costs for
the average American by 25, 30, 50 basis points over the course
of their retirement, the benefits to society are astronomical.
And technology should be enabling us to do that. So get
connected, get educated, and get the frictions down.
Senator Scott. And, Chair Clayton, I will just end with
this note, trying to respect my minute and 30 seconds that we
have left. Access, as you just discussed, is so critical. It
has never been more accessible than it is today. I was talking
with my nephew, who is a resident, and his friends are now
engaging in investments using multiple platforms in a way that
was unimaginable and, frankly, cost-prohibitive 10 years ago,
15 years ago. So we are moving to a place where the average
family, the average person, will have access to the stock
market, and the most important point with that increased access
is having integrity in the system. So thank you for spending
quality time insulating those smaller investors by making sure
that there is lots of integrity and, in my opinion, a synonym
to integrity in this case would be transparency, and
digestible, making sure that the language is such that the
average person that is investing--I heard the bell, so does
that mean that Senator Warner just ignored the bell?
[Laughter.]
Senator Scott. But it is important to continue to work
really hard at making sure that the average investor has
confidence in the system. And I appreciate your office taking
the average person's perspective on something that is very
complicated and sometimes hard to understand.
With that, I yield back my last 3 seconds.
Chairman Crapo. Thank you, Senator Scott.
Senator Menendez.
Senator Menendez. Chair Clayton, thank you for your service
and best of luck as you move forward. The last time you were
here, we discussed how foreign actors could evade the
beneficial ownership disclosure requirement under Section 13(d)
and the negative effects that could have on publicly traded
companies, particularly in the media and technology sectors,
their investors in the U.S. national security overall.
Given the ongoing pandemic and the ensuing economic crisis,
we need to continue to be vigilant against any malign foreign
actor that could be looking for an opportunity to purchase a
significant stake of a distressed company without filing the
requisite disclosures.
So has the SEC made any improvements to your 13(d)
oversight, as we discussed this last year? And have you
identified any statutory impediments that prevent the agency
from sufficiently monitoring or enforcing potential 13(d)
violations?
Mr. Clayton. So, Senator, I agree with you, and I think our
friends at the Treasury would agree with you, that
understanding beneficial ownership and whether there is any
evasion of 13(d) is very important. We did take a recent
measure that I want to highlight for you. We just put out what
I would call guidance, but you can also call it, you know, good
hygiene in brokerage accounts--foreign omnibus accounts,
accounts that mix ownership of different parties outside the
United States, and then trade, what I will say, through a
single pipe into the United States. I believe that they have
been used to mask ownership, and we need to ensure that the
U.S. broker-dealers, particularly--and this guidance comes out
in the area of thinly traded and low-priced securities--are
doing the appropriate diligence on those foreign omnibus
accounts. So what I can do is assure you that we are focused on
this area, and we are not just studying it; we are doing things
about it.
Senator Menendez. Well, I appreciate that, and I am
particularly concerned about media and technology companies
that are responsible for delivering unbiased and objective
reporting of current events to the American public. And in
these times, they play a special role in disseminating critical
public health information so we can get the pandemic under
control. I hope that your successor and the rest of the members
will continue to prioritize this.
I have seen elements of foreign entities purchasing and
having significant controlling interest, and, you know, in and
of itself that is not a terrible thing, but understanding the
nature and having the disclosure so we know who is affecting
these public information channels I think is incredibly
important.
Let me turn to another topic. Studies have consistently
found that greater diversity on executive teams have led to
greater profitability and, therefore, better outcomes for
shareholders. McKinsey's most recent diversity report found
that companies with more gender diversity on their executive
teams were 25 percent more likely to have an above average
profitability than companies with nondiverse teams. That same
report found that companies that with the most ethnically
diverse executive teams are 33 percent more likely to
outperform their peers on profitability.
So do you agree with these statistics that find companies
with more diverse executive teams as more profitable?
Mr. Clayton. Well, I have looked at that report, and let me
just say what we do here at the SEC. We do believe and have
acted on diversity and inclusion not only as the right thing
but as value-enhancing, and I have seen firsthand, as we have
increased inclusion here, that it has led to better
performance.
Senator Menendez. Well, I appreciate that, but I would like
us to go beyond that. I think that in a marketplace, forgetting
about doing the right thing, that simply in a marketplace where
you have a trillion-plus dollars of domestic spending in the
Hispanic community, for example, younger by a decade than the
rest of the American population, more brand-loyal than any
other group, and spends more of their disposable income, as a
business proposition I would like to be on them like white on
rice, understanding, however, the nature of the community
having seen your people on corporate boards and senior
executive management, good for the bottomline.
My final question. Section 956 of Dodd-Frank requires the
OCC, the Federal Reserve, FDIC, NCUA, FHFA, and the SEC to
jointly propose an executive compensation rule to prohibit
unsafe and unsound compensation plans.
During your time as the SEC Chair, have all six regulators
sat down together to discuss this rulemaking?
Mr. Clayton. Yes, we have. If you consider conference calls
sitting down together, yes, we have.
Senator Menendez. OK. And what did these discussions
ultimately lead to? Have you decided to move forward with a
proposed rule?
Mr. Clayton. Well, all I can say is we were at advanced
stages on--I will say it this way, kind of corporate-speak. We
were at advanced term sheet stages. But, you know, bandwidth
has been constrained in some areas, particularly that kind of
coordination, bandwidth is constrained by the events of the
day.
Senator Menendez. Yes, well, I would just say that it seems
that sometimes the bandwidth on things we do not really want to
deal with seems the most constraining, but thank you, and good
luck in your future.
Mr. Clayton. Thank you, Senator.
Chairman Crapo. Senator Cotton.
Senator Cotton. Thank you, Senator Crapo. And thank you,
Chairman, for your appearance before us today, which I assume
will be your final appearance. I am sure you hope so.
[Laughter.]
Senator Cotton. I want to thank you for 3\1/2\ years of
service to our country at the SEC, and thank you for being a
good partner to my office when we agree, and especially when we
do not agree, and the open lines of communication you have had
and representing the people of Arkansas.
I would like to speak today about a topic that we have
discussed in the past, both at these hearings and directly one
on one, and that is the concept of regulation by enforcement.
This is something that became infamous under President Obama.
It is the act of using court rulings or administrative
decisions to make changes in the rules as opposed to the notice
and comment rulemaking process under the Administrative
Procedures Act. It often means that enforcement decisions are
based on things that regulators may or may not like, things
that remain opaque and sometimes even unknown to regulated
players in the market.
Do you agree that enforcement actions should only be taken
when an actor in the market violates rules, rules that have
either been written by Congress in law or passed into
regulations by an agency like yours?
Mr. Clayton. Senator, I do. I want to qualify that by
saying, you know, some rules rely on facts and circumstance
application, but to the extent you are asking me should we
expand authority or regulation without going through notice and
comment, no, we should not. We should do that.
Senator Cotton. I think it is a fundamental principle of
the rule of law, which in some way predates the concept of
self-government that it is hard to have an ordered society
without clear and established rules known in advance that all
citizens can obey and uphold. And that is irrespective of
whether or not you agree with the laws or not. It is so vital
that we have established written rules in advance.
One example that we discussed before and that I want to
discuss here today is the SEC's Share Class Selection
Disclosure Initiative. Under that initiative, several firms
were fined partly because they did not list three items in
their disclosure: one, that a firm received 12b-1 fees; two,
that cheaper shares of the same fund were available; and,
three, that purchasing fund shares that paid 12b-1 fees when
cheaper share classes were available would adversely affect the
client's return.
Again, these may be best practices for financial
disclosures, but that is not exactly what we are talking about
here. We are talking about having clarity in advance of any
enforcement decision.
Can the SEC cite a public document where all three of those
elements were listed in advance of any of these enforcement
actions, Mr. Chairman?
Mr. Clayton. Let me put it like this: I do not have a
document like that to hand, but I understand the issue very
well. This was investment advisers engaged in their clients.
They have a duty to those clients not to put the investment
adviser's interest ahead of the client. They also have a duty
of candor.
Let me give you a stark case. You tell somebody, ``I am
going to put you in the best option for you from a cost
perspective, and you have two choices. One has a higher cost;
one has a lower cost. But otherwise they are exactly the
same.'' There is no doubt that that is a violation of that
obligation.
The Share Class Disclosure Initiative, what we tried to do
was efficiently deal with what we saw was a widespread practice
that was inconsistent with law. But, Senator, these are all
facts and circumstances situations, and I understand that some
people felt that they were within the bounds of the law when we
felt they were not.
I am hopeful that there has been clarity brought to this,
more clarity brought to this, but I am also comfortable that
the Enforcement Division pursued this believing and having that
belief based on rigorous analysis that they were on the right
side of the law. But I very much take your point that we should
not, you know, use ambiguities or uncertainties in the law to
our advantage.
Senator Cotton. Well, let me conclude, Mr. Chairman, about
the Enforcement Division action in this case, something that
Commissioner Peirce said. The Division used prior settlements
which have never been tried before a judge as precedents that
advisers violated the disclosure obligations. In effect, the
agency short-circuited the required rulemaking process by
adopting a regulation through enforcement rather than through a
rulemaking. I take it you disagree with Commissioner Peirce on
that point?
Mr. Clayton. Well, I agree with part of what she said, and
that is, I believe using our administrative courts for matters
like this, we need to do so cautiously, if at all. And I wish
that precedent were in an Article III court.
Senator Cotton. OK. Well, I will cut it off there since we
are hearing bells ringings, but since we are going into the
Christmas season, maybe that means an angel is getting its
wings every time a Senator runs over his time.
Chairman Crapo. Yeah, that is right. You may not have been
on when I announced that I am having a tone rung at 30 seconds
and at the end of the 5 minutes, because Senators do not seem--
some Senators do not seem to be able to find the clock on their
screen.
With that, Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
So the SEC's job is to protect our economy by ensuring that
investors have the basic information they need to make good
investment decisions, and that is why the SEC requires publicly
traded companies to disclose things like outstanding lawsuits
or pay for top executives. You know, if a company looks like a
bad bet, then an investor could decide to put her money
somewhere else.
Now, in order for the SEC to make sure that companies stay
honest, disclosure rules have to keep up with changes in our
economy. And one of the biggest changes bearing down on our
economy is climate change. Extreme weather events, rising sea
levels, increasingly scarce resources--these all pose huge
risks that big companies must navigate. Policies moving us
toward clean energy are going to have a big impact on companies
that are still dependent on dirty energy.
So while the crisis has gotten worse, the SEC under your
leadership has done nothing, and that has resulted in multiple
problems. So I just want to go over the list. I thought we
might do this together. Uniform standards for climate risk
reporting. Chairman Clayton, has the SEC established a
mandatory uniform standard for reporting on climate risk so
that investors can compare companies head to head?
Mr. Clayton. If you mean a standard metric, like, you know,
a carbon emission metric applied across our 6,000--whatever the
number is----
Senator Warren. No. I mean a mandatory uniform standard,
however you do it. I just want to know. Have you got a
mandatory uniform standard?
Mr. Clayton. To the extent that climate-related risks are
material to the company's performance and prospects, they have
to be disclosed, and we have outstanding guidance to guide
companies on how to----
Senator Warren. I understand you have some guidance, but I
have read that guidance. That guidance does not establish a
standardized framework. I am asking about a mandatory uniform
standard, and I think your answer here--one word, yes or no?
Mr. Clayton. It depends on what you mean--we do have a
materiality standard.
Senator Warren. You do not know what a mandatory uniform
standard----
Mr. Clayton. Well, I do not know what you are----
Senator Warren. You have no uniform standards for
reporting. What about----
Mr. Clayton. No, I disagree.
Senator Warren.----at least mandating that companies report
something? Chairman Clayton, has the SEC mandated that all
publicly traded companies report something about climate risk
so that investors can compare those companies head to head?
Mr. Clayton. To the extent it is material to an investment
decision----
Senator Warren. No, that is not what I asked. I asked the
question about requiring all publicly traded companies to
report something. They may decide to report that they have no
risk at all, but do you require that?
Mr. Clayton. We do not require them to report that they
have no risk at all.
Senator Warren. OK. So right now, we have got these huge
gaps in the SEC's disclosure rules that basically allow a
company, either to conceal or to downplay climate risk from
investors. So how do the investors feel about that? How do the
pension funds and the university endowments that are trying to
make long-term investments or socially responsible investments
feel about the SEC's failure to require full and consistent
reporting of climate risk?
Well, this summer, 40 major investors who collectively
manage over $1 trillion in assets joined with nonprofits,
businesses, and former regulators in sending you a letter
arguing that the climate crisis is material and a systemic
threat to our economy and asking the SEC to mandate corporate
climate risk disclosure.
And then, just last week, the Federal Reserve's Financial
Stability Report stated that, ``Increased transparency through
measurement and disclosure could improve the pricing of climate
risks.'' In other words, more information on climate risk is
good.
So, Chairman Clayton, how do you explain to these
investors, these businesses, these nonprofits, and even your
fellow regulators that they are somehow better off with less
information about climate change?
Mr. Clayton. Well, that is not what I would say to them. I
would say, ``You are better off with good information.'' I can
tell you that I was up early this morning for a lengthy
discussion with my IOSCO friends Mark Carney and others that
has been ongoing as to how to actually address--and I am
supportive of the Federal Reserve's report--how to actually
address this issue in a meaningful way. And I----
Senator Warren. So let me just ask----
Mr. Clayton. I am happy to----
Senator Warren.----I am getting letters from investors
asking for climate risk information. Now, obviously, they are
not getting it, or they would not be asking. So I want to know:
Have you been getting letters from climate--from people
representing over $1 trillion in investments? Have they sent
you public letters asking you to shield them from getting
climate risk information?
Mr. Clayton. No, but they have asked me to get them good
information, good decision----
Senator Warren. I would like to see those letters from
those who say they do not----
Mr. Clayton. It is not--no, I----
Senator Warren. You know, I----
Mr. Clayton. What people want is decision useful
information.
Senator Warren. Yes, that is why they sent you letters
asking for climate risk information. You know, I have a bill
with Representative Casten that would force you to do your job
and require publicly traded companies to disclose information
about their
climate risks. But the SEC does not have to wait for Congress
to pass a law. You already have the authority to require
companies to provide this information, and you have refused to
ask.
Chairman Clayton, climate risk--climate crisis is an
existential risk. We need a new SEC Chair who will put this
climate crisis at the top of the agency's agenda.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
First, Chairman Clayton, let me begin by saying
congratulations on the upcoming end of your tenure as Chairman,
and thank you for all the hard work that you did while serving
at the SEC. You have accomplished a great deal as Chairman, but
one positive development that I would like to highlight is the
SEC's expansion of people and entities that qualify as
``accredited investors'' under Regulation D. In particular, I
was pleased that the SEC expanded Regulation D to include
Native American Tribes. These reforms will make it easier for
Tribes to participate in investment opportunities while also
putting Native American Tribes on more equal footing with other
investors and market participants.
In considering the changes to Reg. D, particularly as it
relates to Native American Tribes, are there additional ways
the SEC and Congress can help level the regulatory playing
field for Tribes?
Mr. Clayton. The short answer is yes, and this is an issue
I was not aware of when I arrived here, but I had a nice
meeting with representatives of a number of Tribes and realized
that they were not being treated fairly under our credit
investor definition and some of our other definitions that
provide access and opportunity for institutional investors.
In short, they should be treated like any other
institutional investor, like a pension fund or the like, and I
believe we are going to be doing that going forward.
Senator Rounds. Great. Thank you. Look, I appreciate that.
I know that the Tribes in South Dakota have an interest
specifically regarding that, so I appreciate the work that you
have done.
I am also sure that you have been closely following the
conversations in State legislatures and city councils about
imposing a financial transaction tax on security trading. These
developments concern me for several reasons, chief among them
because it would hurt both Main Street investors and
institutional investors like the South Dakota Retirement Fund.
South Dakota is a low-tax, business-friendly State, and I would
like to say to any of the businesses that may fall victim to a
financial transaction tax, health fund in the United States,
whether you are an exchange in Manhattan, a data center
operator in Syracuse, or a commodities trader in Chicago, you
are welcome in South Dakota.
Chairman Clayton, how do you see our securities market
evolving if one or more State and local jurisdictions impose a
financial transaction tax?
Mr. Clayton. You know, a couple things just to highlight to
think about. One is that transaction taxes, whether they are in
financial services or other places, the incidence, you know,
largely falls on the end user, so in our case the investor.
Some of the frictions are absorbed by intermediaries, but at
the end of the day, experience shows that. So they should be
approached with that in mind, that the incidence in the tax
falls on the person who uses the investor at the end of the
day.
The other thing is if we do have a piecemeal approach to a
transaction tax, you are going to have critical infrastructure
moving in response. You know, tax policy causes adjustments,
and if we have our critical infrastructure moving from one
jurisdiction to another for more favorable tax treatment, from
my perspective that creates operational issues that we need to
think about.
Senator Rounds. Thank you.
With regard to proxy advisory firms, there have been
discussions about their impact, whether or not there should be
more disclosures. Just in broad terms, in the time I have left,
what are your thoughts regarding any regulatory activity that
should involve proxy advisory firms? And where are we at right
now, in your opinion? Are there other issues, are there
concerns that you would like to express to this Committee
regarding the firms, the impact they have, and whether or not
additional regulatory activities should occur regarding them?
Mr. Clayton. Let me try levels at this and a perspective
going forward. I am sorry I am not going to be here in the
future, but the proxy process is designed to approximate the
quintessential shareholder meeting, and if you have somebody,
you know, at that shareholder meeting who is soliciting votes
one way or another, you want to know their interests.
Now, just what we have done in our rulemaking is apply that
concept to the proxy advisory firms and said to the extent you
have material--and, again, material, not absolute--material
conflicts that a reasonable person would believe would affect
your advice, you should tell them. I think with that paradigm,
you know, virtual shareholder meeting is a good way to look at
it. Also, try to provide an opportunity for engagement so that
shareholders can hear both sides or multiple sides or diverse
views and make an informed decision. That is how I look at it.
Senator Rounds. Thank you. Thank you for your service, and
thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman. And, Chairman
Clayton, I want to thank you for your public service. Our
engagements have always been good and respectful, and sometimes
we even find areas of common ground.
I want to follow up a little bit on our ongoing
conversation about climate risk. Last year, we discussed the
SEC's enforcement of its 2010 guidance on climate-risk
disclosure. You and Senator Warren had a brief exchange about
that about 15 minutes ago. Where is the Division of Corporation
Finance on the enforcement efforts? Could you give me an
update?
Mr. Clayton. So here is where we are, Senator, and I want
to make it clear that this is an area where, for certain
sectors and certain companies, you know, we all believe
disclosure is required. It is material. Different sectors,
different ways.
What we have been doing--like I said, I just got off a long
conference call this morning with IOSCO, you know, Task Force
on Climate-Related Disclosures. How do we drive the standards
that are meaningful? And I think we are all gravitating toward
the view that these need to be sector-specific. It is very
hard--this is all forward-looking information. I am sorry I am
going to take so much time, but I need to say this. It is
really hard to make forward-looking disclosure that is going to
be accurate over time. We all know that, anybody who has been a
securities law. We need something to disclose against, and
whether that is carbon neutral by 2050, you know, how am I
going to get my company carbon neutral by 2050, whether it is
some other regulation, you need something to disclose against.
We are working on that, and I believe, for example, in the
property and casualty industry and in certain industries, you
can start to see metrics where people will gravitate toward--
you know, as regulation changes. But this is a vexing issue. We
are on it.
Senator Schatz. Sure, and I think the area of common
ground--and this is really worth lingering on, at least for a
moment--is that these risks are material. The FTC does not need
additional statutory authority to require these disclosures,
but--and this stuff is hard, and we are going to need some
uniform platforms and disclosure requirements so that it is not
sort of everybody inventing their own disclosure technique,
either by sector or even by individual company. So we actually
have a fair amount of common ground here.
As you know, the United Kingdom announced last week it
would require companies to disclose the financial impacts of
climate on their businesses by 2025, and this is where we may
have a disagreement, because it is not just against potential
regulation; it is against what is currently happening. Right?
You have physical----
Mr. Clayton. It is both. It is what we see now and what we
see in the future.
Senator Schatz. Right, but this is not just about
regulatory risk, political risk. This is about physical risk to
property, to farms, to aviation, to tourism, whatever it may
be. The question I have for you is: How deeply are you engaging
bilaterally with your international counterparts on their
plans? I think it is fair to say other countries and other
regulators are a little further along. They are going to get
wrapped around the axle on that particular question. But how
deeply are you engaged in your international counterparts? And
what is the next step for the SEC?
Mr. Clayton. Deeply as in we--let us say monthly if not
weekly at a very substantive level, because we need to be
humble about this. Let me give you a financial comparison:
backlog. A company discloses backlog. That is a forecast of how
much they are going to be able to sell in the next 2 years.
Backlog numbers usually prove to be meaningful but somewhat
inaccurate. We need to try and get disclosure that people
recognize is that forward-looking, gives you an assessment of
the risks, but people are not going to be held to precision.
They are not going to be held to metrics. And that is a very
important way to approach this. This is not how did you do last
quarter or what were the effects. This is what are you thinking
about going forward, because I was an advocate for--I believe
we will get better disclosure and move this forward if we have
a safe harbor that--you cannot fraud, you cannot lie, you
cannot do those kinds of things, but people need to know that
if they miss their forecast, they are not--you know, in a good-
faith way, we need that forecast information. We cannot deter
it with, you know--anyway, you know what I am saying.
Senator Schatz. Yes, I do get it. The one thing I will
close with here is that we have actually moved along pretty
nicely over the last several years on this question because we
have gotten to the point where we can all agree, I think, this
stuff is hard. It is highly technical. There is work that needs
to be done through the network, the financial system, the Bank
of England, what you are doing, what the Fed is doing. All of
this stuff is not easy. But where we were, I think, 3 to 5
years ago was because this stuff is difficult, it is,
therefore, unknowable and it is, therefore, permissible to book
the risk at zero. The risk may be difficult to quantify, even
in terms of ranges, but everybody knows that the risk is not
zero, and so we have got to put pen to paper and do the hard
work, and I appreciate your partnership with us.
Chairman Crapo. Thank you.
Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. And, Chair
Clayton, thank you for being here. I want to first just thank
you for what I think has been excellent work in your tenure,
and my staff have high regard for the people that they have had
an opportunity to work with over there.
Before I ask you a few specific questions, when you were
first moving into this role, I was really trying to emphasize
regulators that were going to go out, take a look at the
organization, and right-size some of the either regulatory or
guidance requirements that your particular agency is
responsible for. Can you tell me a little bit about what you
have just done internally, what you have taken on yourself, and
the things that you are most happy with under your tenure?
Mr. Clayton. Well, it is nice of you to ask that question.
We have looked across the landscape of our rules and seen which
ones have not been touched in years and tried to modernize them
and bring rationality to them. And, you know, in some cases we
have increased regulation. We have increased the regulation of
broker-dealers when they deal with customers significantly. And
in some cases we have cut red tape. The patchwork system that
is our exempt offering framework, that it was built up over 30
years, you know, we made the seams between the patches a lot
less rough. And so you do not need an army of lawyers to figure
out how to get clearly qualified investors into an investment.
Senator Tillis. Well, I for one think you have done a great
job, and there are some specific things you and I have had more
than one conversation over. The one in particular was the rule
back in July over proxy advisers. Can you explain why you think
that was worthwhile and important to people who may be watching
this?
Mr. Clayton. Well, I think anytime you have a participant
in our marketplace who is soliciting votes or providing, you
know, investment advice, understanding their conflicts is
important, their material conflicts. So I think that is very
important. And to the
extent that you are participating in a shareholder meeting, you
want that engagement at a shareholder meeting to be as
meaningful as possible.
So I think in many ways we codified best practices, brought
transparency, and I hope it will lead to better decisionmaking
by investors.
Senator Tillis. I want to actually touch a little bit more
on the shareholder process. I appreciate the work you did
there. But you have also worked on updating the rules regarding
the shareholder proposal process. Do you mind expanding on the
steps the SEC has taken under your leadership on this issue?
Mr. Clayton. Sure. That process, parts of that process,
material parts of that process have not been updated since the
1950s, so, you know, almost 70 years ago. And those were the
days of the mails and the like. So what we did was on the
proposal process, we looked at what a demonstration of a
meaningful stake in the company is such that you can take up
the time and attention of the other shareholders, such that one
shareholder--I mean, this is an amazing system. You can be one
shareholder having $2,000 or more, and if you have held it--
under our new rules, if you have held is for 3 years, you can
take the time and attention of all other shareholders on your
proposals. You know, that is part of our system. But what is
the amount you need to do to demonstrate the level of
commitment that allows you to demand that time and attention of
the other 20,000, 30,000, 40,000, 50,000 shareholders for them
to go through the proxy?
We updated that. We said you have $2,000, OK, that is a
good minimum threshold, but a demonstrated commitment is 3
years. If you have held it less, you know, you need a little
bit more of a financial commitment, because, you know, you are
proposing changes for the long term, you should demonstrate
that you are in there with those other shareholders.
And then on the resubmission thresholds, they were
outdated. It was that if you--you know, you could get less than
10 percent of shareholders--you know, more than 90 voting
against it, you still had the opportunity to resubmit. If you
got more than 10 percent after a few times, you could submit
it, you know, for lack of a better term, into perpetuity. We
tiered those, but we did not say you are out forever. We said
you have got to take a time-out. So I think we did a very good
job.
Senator Tillis. And just a final question. I have some
other ones I may try and submit for the record. But what is
next? What else should we expect in your remaining weeks on the
job?
Mr. Clayton. Well, continued focus on COVID and the
integrity of our markets. We have a few more rulemakings on our
agenda, but just business as usual.
Senator Tillis. Well, again, Chair Clayton, I appreciate
the great work you have done. I especially appreciate how
accessible you have been, and I am sure that I join the
majority of my colleagues thinking it has been a great run, and
I appreciate your service.
Thank you, Mr. Chair.
Mr. Clayton. Thank you.
Chairman Crapo. Thank you.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I too want to
start by thanking you, Chairman Clayton, for your public
service, for the open lines of communications that we have had,
whether we agree on an issue or disagree on an issue.
I want to talk about a couple of areas where I think we
agree, but I have been, you know, frustrated that we have not
made more progress recently and maybe tee up some action items
for all of us, including the SEC going forward. And these are
all designed to do what I think we all want, which is to
provide accountability for insiders and corporate executives
and transparency for investors.
So on the issue of accountability and making sure that
insiders are not exploiting unfairly information they have, you
mentioned already the SEC rule 10b5, which allows executives an
affirmative defense to insider trading if they essentially
provide a schedule for their stock sales. But we have seen a
number of incidences recently which, at the very least, I think
undermine public perception that people are not using insider
information. Most recently was the Pfizer time stock, the CEO
of Pfizer, as you know, the stock sale occurred on the very
same day that they announced their breakthrough on a COVID-19
vaccine. That stock sale had been scheduled in August when the
CEO changed their plan, their scheduled sales plan. And I heard
you mention earlier, you know, putting guardrails up against
this, maybe 3 months or 6 months. I really think we need to
act. We also saw a similar situation with Moderna where, after
announcing their progress toward a COVID-19 vaccine, their
stock price increased, and then certain Moderna executives
changed their 10b5-1 plans and as a result made an additional
$4.8 million in profit.
Again, this is currently legal, but I do believe it
undermines public confidence in the system. And I want to know
if you agree and whether you would encourage us to work to put
up tighter guardrails against potential abuse and certainly a
public perception that undermines confidence.
Mr. Clayton. So I want to be very clear I am not commenting
on any particular case, but as a general matter, I agree. And I
do think that how we craft it, you know, people have different
views, but for--let me just say it this way: For senior
executive officers using 10b5-1 plans to sell stock, I do
believe in a cooling-off period from the time that the plan is
put in place or it is materially changed until the first
transaction is appropriate. And whether that is 4 months so
that you cover a full quarter or it is 6 months, you know, I
can make arguments for either. I do think we should do it.
Senator Van Hollen. I appreciate that. Well, Senator
Fischer and I have a bipartisan bill that we have introduced to
encourage the SEC to look at this and do a rulemaking. It
passed on a bipartisan basis in the House. I am going to ask
Chairman Crapo if we can look at it and maybe even pass it
before the end of this year.
Let me ask you a question regarding transparency in
country-by-country reporting, because you stated at a hearing
in the House on June 25th that, ``I want to be clear. It''--you
were referencing country-by-country reporting--``is becoming an
increasing part of how sophisticated investors are looking at
companies.''
And we have seen that 100 percent of investors managing a
total of $2 trillion in assets who weighed in with the
Financial Accounting Standards Board urged the Board to include
country-by-country reporting on GAAP. Is this an area where you
also would agree that more transparency would help investors?
Mr. Clayton. Yeah, let me say this: I am not sure I can
give you as absolute and as specific answer as I did to the
last one. But to the extent that in the management and the
boardroom people are looking at drivers on a country-by-country
basis, I would hope that in the MD&A section of disclosure that
companies would be disclosing that to their investors. So it is
much more a company-specific issue, but yes.
Senator Van Hollen. Right. Another area where, again, there
is legislation to provide that kind of transparency, which it
seems to me that it is hard to argue providing investors with
that useful information.
Mr. Chairman, I will follow up with a question for the
record regarding something that Senator Brown raised regarding
stock buybacks and insider trading, and I have talked with
Chairman Clayton about this issue before. One of his former
colleagues, Commissioner Jackson, was involved in this, and
since his findings, Lenore Palladino at the Roosevelt Institute
issued a paper finding a very, very clear correlation between
stock buyback activity and insiders selling their own shares. I
think this is another area that we have got to look at going
forward. Maybe even after you leave public service, Mr.
Clayton, we can work with you on that and get your input.
Mr. Clayton. Thank you. I love markets, so love investors.
Happy to help.
Senator Van Hollen. Thank you.
Thank you, Mr. Chairman.
Senator Brown [presiding.] Thank you, Senator Van Hollen.
Senator Kennedy is next. Chairman Crapo is voting, so,
Senator Kennedy?
Senator Kennedy. Thank you, Mr. Chairman. I am in a
Judiciary Committee hearing and, of course, we are in the
middle of a vote, so I just wanted to use this opportunity,
rather than to ask questions, to make a short statement
specifically to Chairman Clayton.
I want to thank you for your service, Mr. Chairman. We
understand that you will be leaving your post at the end of
December. I want to just give you my point of view. You have
been one of the best SEC Chairmen our country has ever had. You
have been fair. You clearly care about investors. You also care
about the investments. You have exercised power intelligently
and materially, Jay.
You have always been responsive. You have been frank with
all of us. If you think our ideas have merit, you say so. If
you think our ideas do not have merit, you say so in a very
tactful way. And we are going to miss you, Mr. Chairman. And I
just want to say that it has been a genuine honor and a genuine
privilege to serve with you, Jay.
Thank you, and best wishes to you as you go back to the
private sector and sort through what I am sure are your many
opportunities there.
Mr. Clayton. Thank you, Senator Kennedy. Working with you
and your staff has been tremendous, and in particular, I want
to thank the Stanford victims for being willing to continue to
engage with us to try and get them at least something back, and
I--you are too nice to say it here, but we did not do a good
job for them. But that will not happen again.
Senator Kennedy. Godspeed, Jay.
Mr. Clayton. Thank you.
Senator Brown. Thank you, Senator Kennedy.
Senator Cortez Masto.
Senator Cortez Masto. Thank you, Ranking Member Brown. I
too, Chairman Clayton, want to thank you for your service. It
is not an easy task under the current environment. We have not
always agreed on policy, but I too so appreciate your service
to the country.
Let me ask a question. I know you are leaving at the end of
this year. We are going to have a change in the Administration
with new President-elect Biden. What is it that you are
preparing for right now with that transition? Are you
undertaking any type of work with the transition team or
coordinating with them in any way whatsoever? And if you are,
can you talk specifics?
Mr. Clayton. So in terms of transition to a new Chair and
the like, let me just say this: I will be available. My
predecessor was available to me. In terms of the ongoing work
of the Commission, we are very transparent. We have four other
Commissioners. We have an agenda that is transparent. And when
the time comes in terms of legal restrictions and ability to
engage with folks, we will do so.
Senator Cortez Masto. Thank you. Thank you for that
response. Clearly it sounds like no transition is happening
until you get through the legal restrictions set by this
current Administration.
Let me ask you about 13(f), the proposed rule that has been
very controversial. Is the SEC planning to finalize this
rulemaking prior to your leaving by the end of the year?
Mr. Clayton. The short answer to that is no, but if I can
elaborate, this proposal has taught us something. The proposal
goes to 13(f), which was there for a market integrity point of
view. Let us find out how much institutional investors have in
particular stocks and how that changes from quarter to quarter
and whether there is market integrity. It is an outdated way to
do that. We looked to modernize the threshold, but what we
found was people were using 13(f) for two things it was not
intended for. One was so that companies could find their
shareholders. It is an incredibly inefficient way for that to
happen, so we need to fix our proxy system, our OBO, NOBO--
those are fancy terms for got to go through intermediaries--
system to make it easier for companies to access their
shareholders.
Then the other thing people are using it for is to track
people's trading strategies, so you have XYZ fund manager,
someone looks at their 13(f) reports, and tracks their trading
strategies. Two things. I am not sure that we want regulation
that is there to facilitate trading strategy tracking. That is
proprietary. Maybe we do, maybe we do not. That certainly was
not the intent. But if we do, 13(f) is a pretty inefficient way
to do it. It is there. It has only long positions. I can go
into all the technical things, but investors should understand
if they are looking at 13(f) as a robust indication of trading
strategies, in many cases it is not.
Senator Cortez Masto. Chairman Clayton, let me jump to
another issue that is a concern of mine as well. I understand
Senator Scott talked to you about this, and I have a Rules
Committees going on as well, so I have been trying to attend
both of them. It is the investor protection for unsophisticated
investors, and it goes to the issue of too many young people
being able to trade online in this kind of environment where it
is trading on platforms, no fee, really kind of gamifies the
stock market into a playful environment. We have seen horrific,
horrific coverage of a young man, a college student who was
trading on an online platform while home due to the pandemic,
and then he received a text message from that platform that he
understood to mean he had a negative cash balance of $730,000,
and fearing financial ruin, I understand from the reporting
that he was do distraught he committed suicide.
This is horrific, and this is an area where we need to
understand what is happening with these platforms, and really
young adults, who are not sophisticated enough really to be on
these platforms and thinking there is some sort of a gainful
environment going on.
So my question to you is: What has the SEC done to avoid
such financial devastation for investors? And what are you
doing to respond to some of these platforms that are no-fee
online that kind of incentivize that gamified kind of
environment?
Mr. Clayton. Yes, let me say this: We have long allowed
direct access for investors to what we call ``self-directed
accounts.'' It has been that way for a long time. But to the
extent that what I would say is technology has facilitated that
and then people home with the pandemic, and you have people
what I would say is trading, not investing, that risks go up,
and, in particular, when they are options or other complex
products. And one specific thing we have done recently is we
have put out guidance, Commission guidance, and are looking at
other ways to do this, to tell people, not only broker-dealers
but investor advisers but those platforms, you need to make
sure your people who are trading those instruments have the
capability to understand those instruments.
So long and short, you should not be playing around in
leveraged investments and options where you can lose your shirt
unless you can clearly understand them.
Senator Cortez Masto. Well, clearly, there needs to be more
education around this and really more involvement from the
platforms and responsibility for young adults. So I think more
needs to be done definitely.
Thank you again. I know my time is up. I appreciate your
service.
Mr. Clayton. Thank you.
Senator Brown. Thank you, Senator Cortez Masto.
I still see Senator Crapo on the floor awaiting the second
vote to start. The next people in line are Senator Moran. Is he
here by chance? Or Senator Jones? Or Senator Smith?
[No response.]
Senator Brown. I will ask, is anybody here who wants to ask
a question?
[No response.]
Senator Brown. I do not know quite what to do.
Mr. Clayton. Do you want to ask a question?
Senator Brown. Greg, if you would respond somehow to me
whether I should wrap the hearing up or Senator Crapo would
like to return? I assume there may be a couple of Members--
well, let us do this, Chair Clayton. Anybody that did not get
to ask because of the votes will send you questions in writing
as we always do.
Senator Brown. Thank you for always being responsive with
that. You have been a good public official and public servant
that way.
Then probably we should wrap the hearing up, and I will
just close it out. I just had one short statement I wanted to
make that, of course, I cannot find now. I guess I will not be
able to find it. Give me about 30 seconds.
Let me just close with a statement, and then we will wrap
this hearing up, Chair Clayton, and I am sorry it is just you
and me here, but these things sometimes happen.
As I said in my opening statement, your agenda in my view
has limited transparency and hurt investor protection. The
increase of the shareholder proposal thresholds will result in
less shareholder engagement and management accountability. The
new requirements on proxy investors will raise costs for
institutional investors and make proxy voting harder.
Regulation Best Interest that we talked about earlier in my
earlier comments and statement does not put Main Street
customers first. The proposal that enables unregistered finders
to act without oversight hurts investor protection. Your
proposal to shut down transparency reports for 90 percent of
institutional investors would leave companies and investors in
the dark and eliminating financial disclosures, while ignoring
calls for climate risk in response to a couple questions you
got that that was brought out, too, ignoring calls for climate
risk disclosure ignores what investors have been asking for.
It is quite a run. I know you and others will argue that
less is more and that all these rollbacks are improvements. But
to me, it is more likely that less is, well, just less.
Thank you, Mr. Chairman. Thanks for coming in front of our
Committee many times. Good luck as you pursue your interests in
the private sector, and this Committee is adjourned. Thank you.
Mr. Clayton. Take care.
Senator Brown. All right. You, too. Thanks.
[Whereupon, at 11:41 a.m., the hearing was adjourned.]
[Prepared statements, responses to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO
Today we will receive testimony from Securities and Exchange
Commission Chairman Jay Clayton regarding the work and agenda of the
SEC.
I thank you for your appearance before the Committee today, which
is essential to our oversight of the SEC. Chairman Clayton, welcome.
You last appeared before this Committee in December of last year.
The COVID-19 pandemic hit the United States shortly after that
hearing, and the SEC has taken many important steps to help limit the
economic shock to our markets as Governments have attempted to confront
such an unprecedented event.
The SEC used tools, such as the marketwide circuit breakers, for
the first time since their adoption, when markets dropped 7 percent
from the previous day's closing price of the S&P 500 Index.
There were a number of uses of ``limit down'' circuit breaks when
overnight stock futures hit their 5 percent limit, which resulted in
halting of all further downward trades.
Despite the high levels of volatility, it is my understanding that
the current mechanisms in place served their intended purposes of
increasing market stability.
Additionally, in order to comply with CDC guidance, you oversaw an
unprecedented temporary closure of physical trading floors. This
business continuity measure supported orderly trading, while ensuring
the health and safety of market participants.
The SEC has continuously pursued enforcement actions, including a
number of actions against those seeking to take advantage of investors
during this vulnerable time.
Remarkably, all of this has been done while the SEC staff is
working remotely.
It is commendable that despite the COVID-19 disruptions, you have
continued to advance the items on your regulatory agenda which are the
result of many months, and sometimes years, of diligent staff work.
The SEC finalized amendments to update and improve the definitions
of ``accredited investor'' and ``qualified institutional buyer,'' which
will now take into consideration education and expertise, ultimately
increasing investor participation in private offerings and expanding
access to capital markets.
The SEC recently modernized the exempt offering framework, which
will be a lifeline to small and medium-sized companies navigating the
previously complex system.
These clear and concise rules will allow smaller companies to focus
on getting their businesses back on track while improving the
consistency of investor protections.
Commissioner Roisman engaged investors and market participants in
crafting modernized shareholder proposal thresholds and proxy voting
rules.
These modernizations no longer permit a small number of individuals
with limited stakes to consume corporate boardrooms and will allow
companies to better focus their efforts on COVID-19 recovery.
The SEC improved the readability and streamlined the information
collected for Regulation S-K disclosures. It had been more than 30
years since these disclosures had been reviewed.
Last year, the SEC finalized a package of rulemakings including
Regulation Best Interest, Form CRS Relationship Summary and two
interpretations under the Advisers Act.
Compliance with these rules began on June 30, 2020. Since June, the
SEC has been reviewing firms' compliance efforts and identifying
additional areas for compliance improvements through a staff roundtable
and other stakeholder engagement.
Another modernization effort underway at the SEC is the creation of
the Strategic Hub for Innovation and Financial Technology. This
important initiative is critical in the interagency coordination and
dissemination of information to the public regarding initial coin
offerings and other cryptocurrency matters.
Clearly, the SEC has been busy, and I commend you for balancing
emergency COVID-19 responses while advancing critical rulemaking
initiatives, risk-based inspections, enforcement actions, and issuer
and fund filings.
I look forward to continuing to work with the SEC to ensure that
the U.S. markets come back from the COVID-19 disruptions stronger, more
liquid, and more dynamic than ever.
In closing, I also thank Chairman Clayton for his service and wish
him the best of luck in his future endeavors as he departs the
Commission in the coming weeks.
The will and drive you brought to this job allowed you to bring
about many significant improvements that were long overdue.
I wish you the best of luck in your future endeavors and again,
thank you for your service.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you Chairman Crapo, and welcome Chair Clayton. Thank you for
your service.
In this election, voters rejected this Administration and its Wall
Street first attitude. Across the country, it is clear that people want
financial watchdogs who look out for them, not make life easier for
CEOs. It's time to turn the page on this failed Administration, and
work together to build an economy that actually works for everyone.
That means an economy where all workers can save and invest their
hard-earned money for a downpayment, and to help their kids go to
college or community college, and to retire with dignity. That's how we
grow the middle class--and it's time that everyone had the chance to
join it.
That means finally working in a real way to eliminate the racial
wealth gap. And it means we have to enlist everyone in our Government
in that project, including the SEC.
This year the dedicated public servants at the Commission have done
important work in the middle of a public health crisis and an economic
crisis, monitoring for fraud and misconduct related to the pandemic
while continuing their work to protect investors, maintain orderly
markets, and promote capital formation.
Those efforts help working families saving and investing today, and
build confidence in our markets for the future.
But I believe we can aim higher than simply making sure markets are
stable. We can do better than just preventing crashes and outright
fraud--we need to make markets actually work for working people.
Over the years, I have raised many concerns about how your
leadership has left behind the people whose savings are stake in our
markets--denying them the ability to hold executives accountable and
withholding critical information about how companies are run and how
they affect the environment and their communities.
You've tried to reduce transparency and undermine the protections
we do have--even in the face of strong opposition from large and small
investors, advocates, and experts.
From employees across the country scrimping and saving in their
retirement accounts, to pension managers investing for a generation of
workers, they are all in a worse place since you've been in office.
That doesn't even include those who want to save for their family and
retirement, but just can't because their paycheck isn't enough.
You pushed for what you call ``Regulation Best Interest,'' a new
standard that applies when brokers give advice to clients, but it
doesn't put mom and pop customers first. A few weeks ago, you discussed
the SEC's initial reviews after the standard went into effect in June.
Even though you said firms are making ``good faith efforts,'' your
staff reported shortcomings in compliance and failures to fully
disclose disciplinary history to clients. In fact, it doesn't seem like
you have any way to tell if this rule will help at all. Not a very
auspicious beginning.
The SEC's final rules on proxy advisors and shareholder proposals
are also clear examples of the Administration taking the side of
corporate interests over Americans saving and investing for their
future.
Over the years, shareholder engagement has forced important
conversations to happen in boardrooms across America. We need to push
companies to focus on improving diversity, implementing better
governance, and addressing climate change risks. Yet your agenda has
attempted to stifle these important conversations.
And I'm not the only one who's worried about your agenda. Last
week, the North American Securities Administrators Association wrote
you because 30 of its members--State watchdogs, including from Ohio--
are concerned about a recent, broad rule proposal with few safeguards
that in their words, ``would facilitate unlicensed intermediaries in
the private market''.
That's a polite way of saying they are afraid of rampant fraud.
Not only are they worried that you're putting their constituents at
risk, they are upset that they didn't even get a heads-up.
While you were advancing one bad rule after another, you didn't
take the opportunity to make sure public companies disclose the risks
climate change poses to their businesses. You did the opposite,
watering down corporate financial disclosures.
And when you tried to improve corporate workforce disclosure--it
still fell short, failing to address basic concepts like employee
turnover or to identify the numbers of full-time workers compared to
part time.
We are never going to be able to undo the corporate business model
that treats workers expendable, if we can't even get companies to put
out accurate information on the workers who make their businesses
successful.
While the pandemic posed challenges for the Commission's
enforcement work, it also revealed how applying additional resources to
the whistleblower program delivers results. By reallocating staff to
review whistleblower tips, you managed record results. I hope that my
concerns about the uncertainty created by your recent changes to the
rules don't undermine the obvious success of the program.
More broadly on enforcement, although the SEC has aggressively
pursued COVID-related scams and frauds, the last year of enforcement
shows more of the same--a few big cases create a big topline number,
but looking under the hood, you see too many cases without individual
accountability.
Last week's announcement that the SEC charged Wells Fargo's former
CEO and consumer bank head for deceiving investors as part of the fake
account scandal that was uncovered in 2016 is a rare and long overdue
case where your agency has actually held someone accountable for
breaking the law and ripping people off at a big bank or corporation.
Back when you were a nominee, you assured us that ``individual
accountability drives behavior more than corporate accountability.''
Well, you don't get better behavior by taking years to hold top
executives individually accountable for intentional deception.
American voters sent a clear message in this election: they're
tired of an economy where big corporations and their wealthy CEOs play
by a different set of rules than people who work for a living.
With each rollback of important safeguards or disenfranchisement of
shareholders, you claimed to be reforming, modernizing, or updating the
rules.
People are tired of that political spin. When you say ``reform,''
what you mean is: Make things a little easier for the biggest
corporations. When you say ``modernize,'' what you mean is: Make it
that much harder to actually hold powerful CEOs accountable. When you
say ``update,'' what you mean is: Further entrench the Wall Street
business model that exploits workers.
Eighty million Americans rejected your agenda in this election, and
I hope we can reverse it.
As you prepare to leave the Commission, you have changed the rules
so much, even you'll need to relearn fundamental elements of securities
law when you return to private practice.
I've said it before--protecting workers' hard-earned savings should
begin with a simple concept: putting their interests first.
I'm disappointed you don't see it that way, but a decisive majority
of the country does.
Thank you, Mr. Chairman.
______
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
RESPONSE TO WRITTEN QUESTION OF CHAIRMAN CRAPO FROM JAY CLAYTON
Q.1. In September, the House of Representatives passed H.R.
6210, the Uyghur Forced Labor Prevention Act by a vote of 406
to 3.
This bill, similar to S. 3471, contains a number of
restrictions intended to punish those responsible for the
horrific human rights violations occurring in China's Xinjiang
Uyghur Autonomous Region. Most notable among the restrictions
is the creation of a new SEC disclosure regime for issuers who
knowingly engage or transact with an entity involved in the
oppression of the Uyghurs. The bill also addresses the Uyghur's
situation by prohibiting certain imports, imposing sanctions,
and requiring reviews of strategy and reporting of tariffs.
After the initial broad bill passed the House, the House
voted on H.R. 6270, which contained solely the new SEC
disclosure regime. This bill passed the House along party
lines.
As Congress considers taking action to punish and isolate
those in this region for their heinous crimes, I have grave
concerns about creating a new disclosure regime at the SEC,
rather than utilizing the existing pressure channels available
to the Departments of Treasury, Commerce, State, Defense, and
others.
A.1. Does the SEC view that a new disclosure regime, which will
take years and billions of dollars in compliance costs to
establish is necessary in order to stop forced Uyghur labor in
China?
I personally appreciate the focus in Congress on addressing the
dreadful human rights abuses occurring in China's Xinjiang
Uyghur Autonomous Region. Stopping forced Uyghur labor in China
is an important and laudable goal that I support. I believe,
however, this goal would be much more effectively and
efficiently addressed through direct regulation of conduct
rather than indirectly through the Federal securities laws. In
my opinion, significantly more direct actions like restricting
imports and imposing sanctions for transactions that further
the abhorrent behavior in the Uyghur region are more likely to
alter behavior and would likely affect a much greater number of
companies and individuals than a new SEC disclosure regime for
U.S.-listed public companies. It also would focus Federal
action within agencies that have both the authority, as well as
the expertise, in resolving these important issues.
Disclosure is, of course, extremely important to investors
and our markets, and companies should closely monitor their
supply chains and provide investors with information about
supply chain risks that would be material to an investment
decision. In analyzing these risks, public companies should
carefully consider, for example, whether congressional action
designed to stop forced Uyghur labor in China or consumer
actions would be reasonably likely to materially affect their
business and supply chains, and if so,
provide disclosure about these evolving regulatory risks and
uncertainties.
More broadly, based on my 25-plus years' experience with
our securities laws and the securities laws of other countries
in the private and public sectors, it is my view that any use
of our Federal securities laws for purposes beyond the SEC's
core mandate should be approached with great caution. These
efforts have proven to be much less effective than anticipated
for a variety of reasons, including, in particular, in the case
of international and global issues, the limitation on the SEC's
jurisdiction and practical authority, as well as the
asymmetries in applicable law they often create (favoring those
to whom U.S. law does not apply). In short, in these instances,
the limits on the SEC's authority often serves to advantage
those outside its scope and, in my view, have rendered such
efforts ineffective when viewed on an international or global
basis.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JAY
CLAYTON
Updating 10b5-1 Trading Plans
Q.1. In your testimony, you stated that regulations and
policies applicable to corporate stock buybacks and executive
stock sales could be improved, including the use of ``cooling-
off'' periods. Please describe further the types of
requirements and prohibitions that you would recommend to
ensure that 10b5-1 trading plans are not abused or manipulated
and to avoid even the appearance of impropriety.
A.1. The importance of good corporate hygiene cannot be
overstated, nor can the importance of related controls designed
to prevent not only insider trading but also the appearance of
impropriety or misalignment of interests. Particularly in times
of heightened market volatility and uncertainty, the potential
for executives to possess material nonpublic information
increases, as we have witnessed during this time of COVID-19-
induced economic and market stress. While I believe many of our
public companies, as a general matter, have discharged their
responsibilities in the related areas of public disclosure and
corporate controls well, there are some specific measures that
would improve compliance, market integrity, and investor
confidence, including through a demonstrated commitment to good
corporate hygiene.
First, Rule 10b5-1 plans, when designed and administered
appropriately, can facilitate long-term interest alignment and
other principles of good corporate governance. There are
practices, however, that raise questions of interest alignment
and fairness, including, in particular, issues that arise when
plans are implemented, amended, or terminated and trading
occurs (or does not occur) around those events. I believe that
companies should strongly consider requiring all Rule 10b5-1
plans for senior executives and board members to include
mandatory seasoning, or waiting periods after adoption,
amendment, or termination before trading under the plan may
begin or recommence. In my view, such seasoning periods are
appropriate between the establishment of a plan and the date of
the initial trade, as well as between any modification,
suspension or termination of a plan and the resumption of
trading or entry into a new plan. These seasoning periods not
only help demonstrate that a plan was executed in good faith,
but they also can bolster investor confidence in management
teams and in markets generally.
In addition, many of my colleagues and I believe a well-
designed insider trading policy should have controls in place
to prevent senior executives and members of the board of
directors from trading once a company is in possession of
material nonpublic information, even if an individual officer
or director did not personally have knowledge of the
information. This includes the time period between the
occurrence of an event and the required disclosure of the event
to the public under Commission rules. In my view, such a policy
is not difficult to adopt or administer, making the integrity
bang for the compliance buck large. I also believe that our
Forms 4 and 5 related to compliance with Section 16 of the
Exchange Act should be modified so that disclosures of whether
a transaction has been made pursuant to a Rule10b5-1 plan are
made readily apparent. Adding a new box to these forms that
would be required to be checked in these circumstances, which
would be of little cost, would be sufficient, in my view, to
achieve this objective.
Finally, I believe that companies should consider, in
addition to their legal obligations, the wisdom of issuing
stock options to its executives while in possession of material
nonpublic information. Many equity compensation plans require
stock options to be granted with strike prices that are no less
than fair market value. Implicit in this structure is the
premise that equity awards are intended to incent performance
that will result in future increases in company value. When a
company grants an award based on the trading price of the stock
while the company is in possession of materially positive
nonpublic information, this premise is diluted to the extent
future increases in company stock value are attributable to the
release of positive information rather than future performance.
In addition, such a grant may not be consistent with the terms
of the incentive plan approved by its shareholders. Similarly,
such a grant may also be inconsistent with existing accounting
standards because, in short, the trading price of its stock is
not a good indicator of fair market value.
These are important corporate governance and policy
considerations that I believe public companies and boards, as
well as the Commission and Congress, should consider moving
forward.
Regulation of Money Market Funds
Q.2. In March of this year, the financial markets seized up
because cash was in high demand, and the dangers of the shadow
banking system became evident, in particular the risk when
money market funds face substantial redemptions.
You, Federal Reserve Vice Chair Randal Quarles, and Deputy
Treasury Secretary Justin Muzinich have all commented that the
money market fund reforms from the last crisis were not good
enough.
What safeguards or requirements can the SEC put in place?
A.2. After closely examining the events in March, I believe
that additional reforms are warranted to promote the orderly
functioning of short-term funding markets, which is essential
to the performance of the broader financial markets and our
economy more generally. In particular, SEC staff is actively
reexamining the Commission's prior reforms to money market
funds in light of the market stresses caused by the COVID-19
pandemic and analyzing the performance of these funds over the
recent period. This review is intended to provide a forward-
looking assessment and consider reforms that, as much as
possible, address vulnerabilities that have ultimately led the
Federal Government to intervene twice within past 12 years to
provide support. The Commission's Fall 2020 Regulatory
Flexibility Act Agenda includes an item on reforms related to
the regulation of money market funds.
The SEC is working closely with our domestic and
international regulatory counterparts as part of this process.
One element of this exercise that is noteworthy is ensuring
that the various markets underlying money market funds (e.g.,
the Treasury market, municipal finance market, and commercial
paper market) are examined separately and that any reforms
reflect the differences in these markets. In addition, the
President's Working Group on Financial Markets (PWG) recently
issued a report on money market funds, which includes an
overview of the market stress in March 2020 and a list of
potential reform options for prime and tax-exempt money market
funds.\1\
---------------------------------------------------------------------------
\1\ https://home.treasury.gov/system/files/136/PWG-MMF-report-
final-Dec-2020.pdf.
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JAY
CLAYTON
Q.1. In your testimony, you stated that the SEC should not use
ambiguity in the law to its advantage in an enforcement
context. You observed that while the Share Class Selection
Disclosure Initiative (SCSDI) was intended to efficiently
correct a widespread practice that was inconsistent with the
law, but also that industry members felt they were within the
bounds of the law when the SEC felt they were not. You
expressed the hope that more clarity has been brought to the
issue, but if it has been, it was done through enforcement
rather than through rulemaking. Why did the SEC not provide
clear notice to the industry that this ``widespread practice''
was inconsistent with its interpretation of the law before
beginning enforcement actions?
Q.2. Prior to the announcement of the SCSDI, what specific
means did the SEC use to communicate to the industry that an
investment advisors' duty of care and duty of candor required
disclosing that the firm received 12b-1 fees; that cheaper
shares of the same mutual fund were available to investors; and
that purchasing fund shares that paid 12b-1 fees when cheaper
share classes were available would adversely affect the
client's return? Please reference the specific text announcing
these elements of acceptable disclosures.
Q.3. What were the potential costs associated with providing
the industry with the specific guidance necessary to comply
with the SEC's disclosure expectations? By what means was it
determined that these costs outweighed the benefits of
providing the industry with the clarity necessary to comply?
Q.4. You noted that principles-based regulation relies on
facts-and-circumstances based application, but you asserted
that the SCSDI was based on investment advisors' duty of care
and duty of candor, which are well-established principles of
the Federal securities laws. If these disclosure requirements
were so well established, how did almost 100 firms, or
approximately 20 percent of dually registered firms (those
registered as both an investment adviser and broker-dealer),
miss them and why did the SEC allow that conduct to go on for
over a decade before taking enforcement action?
A.1.-A.4. The Share Class Selection Disclosure Initiative (the
Initiative) concerned advisers that directly or indirectly
received 12b-1 fees in connection with recommending,
purchasing, or holding 12b-1 fee paying share classes for its
advisory clients without adequate disclosure, including
disclosures that were inconsistent with the advisers' actual
practices. This voluntary initiative provided eligible advisers
with the opportunity to address issues with disclosures, make
distributions to clients harmed by the firm's undisclosed
conflicts, and to do so quickly, with less cost than a typical
investigation and without a civil monetary penalty. After
reviewing a self-reporting adviser's submission, the staff
asked follow-up questions and determined whether it believed
that the facts and circumstances merited recommending an
enforcement action and, if so, the appropriate scope of any
such recommendation. The Commission then considered the
recommendations and determined whether to initiate proceedings
against each firm.
The Commission's orders found that the investment advisers
failed to adequately disclose conflicts of interest related to
the sale of higher-cost mutual fund share classes when a lower-
cost share class was available. Specifically, the Commission's
orders found that the settling investment advisers placed their
clients in mutual fund share classes that charged 12b-1 fee--
which are recurring fees deducted from the fund's assets--when
lower-cost share classes of the same fund were available to
their clients without adequately disclosing that the higher
cost share class would be selected. The 12b-1 fees were
routinely paid to the investment advisers in their capacity as
brokers, to their broker-dealer affiliates, or to their
personnel who were also registered representatives, creating a
conflict of interest with their clients, as the investment
advisers stood to benefit from the clients' paying higher fees.
Most of the advisory clients harmed by the disclosure practices
were retail investors, and the Initiative helped to put money
back into their hands and called for the advisers to take
remedial steps.
The Initiative and related cases were based on well-
established principles under the securities laws, which the
Commission applied to the specific circumstances of each firm
that chose voluntarily to participate in the Initiative. Passed
by Congress in 1940, the Investment Advisers Act establishes a
Federal fiduciary standard for investment advisers. For
decades, it has been recognized that the fiduciary obligations
of investment advisers include an obligation to eliminate or at
least make full and fair disclosure to clients and prospective
clients concerning their conflicts of interest, including
conflicts arising from financial incentives, and to act in
their clients' best interest. These fiduciary principles were
confirmed by the Supreme Court more than 50 years ago in
Capital Gains\1\ and are enforceable through the antifraud
provisions of the Advisers Act.\2\ Full and fair disclosures
about conflicts and other material facts are necessary because
they enable clients and potential clients, including retail
investors, to make informed choices when deciding whether to
hire or continue retaining an investment adviser.
---------------------------------------------------------------------------
\1\ SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).
\2\ The Commission also discussed the application of this principle
in the context of share class selection at least as early as 2006 in
the matter of IFG Network Securities, stating that where the only bases
for the difference in rate of return between mutual fund share classes
are the cost structures of those share classes, information about the
cost structure would be important to a reasonable investor.
---------------------------------------------------------------------------
In addition, Form ADV, which all registered advisers must
file and which has been adopted and amended in Commission
rulemakings after notice and comment, requires disclosure of
conflicts that an adviser has or is reasonably likely to have.
Form ADV specifically requires disclosure concerning the
compensation and fees that advisers and their supervised
persons receive, including from asset-based charges and other
fees received in connection with client investments. In
addition, Form ADV reminds advisers that, to satisfy their
disclosure obligations as fiduciaries, they may need to
disclose to their clients information about conflicts that is
not specifically required by the Form.
The conduct that resulted in the mutual fund share class
selection cases, including the cases brought through the
Initiative, involved violations of these long-standing
disclosure requirements and principles. Firms know or should
know what compensation they receive and whether the
circumstances under which they receive it create incentives
that give rise to actual or potential conflicts of interest.
The compensation at issue in these cases, 12b-1 fees and
revenue sharing, gave rise to conflicts related to, for
example, the types of investments, the fund families, the
particular funds and the share classes of individual funds that
the advisers recommended. For instance, when an adviser
receives, directly or indirectly, 12b-1 fees in connection with
mutual fund recommendations, it has a financial incentive to
recommend that a client invest in a share class that pays 12b-1
fees. The resulting conflict of interest is especially
pronounced when share classes of the same funds that do not
bear these fees are available to the client.
There are more than 13,000 registered investment advisers,
which offer a wide range of services and products through a
variety of business models. Moreover, market practices evolve
regularly, including with respect to compensation arrangements
and fund sales practices more generally. The Advisers Act is,
by design, a principles-based regime, which has helped enable
it to provide robust investor protection while establishing a
flexible framework that accommodates this variety and
development. The Initiative and the cases that preceded the
Initiative reflect a key fiduciary and investor protection
principle that is well-established and well-understood by
investment advisers--an adviser must provide full and fair
disclosure of its conflicts of interest and other material
facts and act in accord with its disclosures. Indeed, many
investment advisers appear to have recognized the kinds of
conflicts addressed in the Initiative and had previously
responded through practices designed to address them, including
through elimination, disclosure or a combination of disclosure
and mitigation.
The Commission will continue to look for opportunities to
provide its views to market participants regarding their
responsibilities, where needed and in an appropriate form. In a
recent example, last year, the Commission published an
interpretive release about the fiduciary duties of investment
advisers to reaffirm, and in some instances clarify, certain
aspects of the fiduciary duty that an investment adviser owes
to its clients under the Advisers Act.
Q.5. You have observed that staff statements and documents do
not have the force and effect of law (as only the Commission's
rules and regulations do). Is Enforcement staff relying on
other settled matters instead of litigated decisions as legal
support for bringing subsequent enforcement actions? If so, is
that appropriate given that settlements do not set legal
precedent and your testimony that matters like these should be
brought in administrative courts ``cautiously, if at all.''
A.5. Generally speaking, enforcement actions are not
recommended solely on prior actions--whether settled or
adjudicated. There is a basis in law for the alleged violation.
However, staff may point to particular cases to illustrate the
application of law to a set of facts and as evidence of how the
Commission has viewed similar matters in the past.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JAY
CLAYTON
Q.1. A bill I was the original cosponsor of, S. 3795, the
Registration for Index Linked Annuities Act of 2020, calls upon
the SEC to streamline the registration process for Registered
Indexed Linked Annuities (or RILAs) and improve access to this
innovative retirement savings product. As you are likely aware,
a RILA is an innovative product which allows investors a way to
protect their investment savings from losses due to stock
market volatility. This bill would require that a new form be
designed to specifically register RILAs rather than continue to
require the use of forms designed primarily for equity
offerings, requiring the disclosure of extensive information
that is not relevant to prospective annuity purchasers.
Would you commit to have your staff take a look at what's
been proposed the Registered Index Linked Annuities Act to see
if the actions called for in the legislation can be implemented
by the Commission?
A.1. Indexed annuities, much like structured notes, provide a
measure of the performance of a referenced instrument or index,
and represent a direct obligation of the insurer. I appreciate
the concern regarding registered indexed annuities as sales of
this investment product have grown as an increasingly popular
investment option for Main Street investors. I understand the
concerns expressed by the sponsors of the legislation and
recognize that the general registration form currently used to
register these products is not tailored to their unique
features and risks, and requires some disclosure that may not
be material to investors in these products. Further, I
understand the concerns that because
registered indexed annuities are issued through an insurer's
general account, rather than a separate account that is
registered as an investment company, the registration form for
variable annuities (which are issued by registered separate
accounts) is not well-suited either.
SEC staff have been in dialogue with market participants on
this issue and recently met with representatives of insurance
industry trade groups and issuers of registered indexed-linked
annuities to discuss the challenges in applying the
requirements of the current registration forms to these
products, as well as the potential for developing a more
tailored form. As staff continues to consider options for a
more tailored form for specific types of registered annuities,
I expect the dialogue with market participants to continue.
Staff has also provided technical assistance to Congress on the
legislation and will be available to provide further assistance
as requested.
Q.2. I have been interested in the issue of margin eligibility
for over-the-counter securities that have similar liquidity and
trading characteristics as those traded on exchanges. As you
know, holders of marginable securities can borrow against them,
which increases the utility of owning those securities,
improves market quality and increases the value for investors.
LShould holders of over-the-counter American
Depositary Receipts (ADRs) that have similar trading
and liquidity characteristics as ADRs traded on
exchanges be margin eligible?
LWouldn't it make sense for margin eligibility to be
the same for exchange-traded ADRs and over-the-counter
ADRs if they have similar trading, liquidity,
disclosure and other requirements?
A.2. Margin requirements for customers of broker-dealers are
primarily governed by the Federal Reserve Board's Regulation T
and self-regulatory organization (SRO) margin rules, such as
FINRA Rule 4210. Regulation T covers initial margin
requirements and specifies which types of securities are margin
eligible. There are about 2,260 ADRs trading in the United
States, of which some 360 are listed. U.S.-listed ADRs are
considered margin securities under Regulation T, and therefore,
margin eligible. Over-the-counter ADRs are generally not margin
eligible under Regulation T. SROs set margin requirements
(including maintenance margin requirements) for securities
through proposed rule changes filed with the Commission for
notice, public comment and Commission approval prior to
implementation.
It may be challenging initially to determine whether a
particular over-the-counter ADR has similar trading, liquidity,
disclosure and other requirements as listed ADRs for purposes
of determining margin eligibility. Moreover, this determination
would need to be made on a periodic basis. However, I believe
it is worth considering whether Regulation T should be amended
to expand the definition of margin security to include those
over-the-counter ADRs where the underlying are securities which
have been deemed to be marginable under Regulation T. To that
end, SEC staff are engaged with staff at the Federal Reserve
Board and discussing
potential updates to the scope of Regulation T that will
modernize the rule while maintaining important investor
protections.
Q.3. I commend the SEC for recently adopting amendments to
Exchange Act Rule 15c2-11, which is part of the over-the-
counter market regulatory structure.
Is the SEC prepared to grant exemptions to Rule 15c2-11
that would protect the substantial value of the nearly 2,000
Level 1 ADRs currently held by U.S. investors, and to allow
U.S. investors continued access to these important investment
opportunities?
A.3. In adopting the amendments, the Commission solicited and
considered comments from market participants, including
comments from persons concerned that certain securities may be
adversely affected by the amendments. Further, in its adopting
release, the Commission acknowledged that market participants
may have unique facts and circumstances as to how the amended
Rule affects their activities. Thus, in the adopting release,
the Commission stated that it will consider any requests from
market participants--including from those engaged in
transactions related to ADRs--for exemptive relief from the
amended Rule for OTC securities that may be affected by the
amendments to the Rule. In considering whether an exemption
from the Rule is necessary or appropriate and in the public
interest and is consistent with the protection of investors,
the Commission may consider a number of factors, such as
whether, based on data or other facts and circumstances, the
issuers and/or securities are less susceptible to fraud or
manipulation.
The Commission also stated it may consider, among other
things: (1) securities that have an established prior history
of regular quoting and trading activity; (2) issuers that do
not have an adverse regulatory history; (3) issuers that have
complied with any applicable State or local disclosure
regulations that require that the issuer provide its financial
information to its shareholders on a regular basis, such as
annually; (4) issuers that have complied with any tax
obligations as of the most recent tax year; (5) issuers that
have recently made material disclosures as part of a reverse
merger; or (6) facts and circumstances that present other
features that are consistent with the goals of the amended Rule
of enhancing protections for investors, particularly retail
investors.
The Commission encouraged any requests for exemptive relief
to be submitted expeditiously during the 9-month transition
period to avert potential interruptions in quotations in such
securities that may occur on or after implementation. Market
participants that may be concerned about such ADRs may want to
consider contacting Commission staff for further assistance
regarding potential requests for exemptive relief.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR KENNEDY FROM JAY
CLAYTON
NRSROs
Q.1. Given that the SEC has not recommended a new model for
NSROs and other CRAs since Dodd-Frank became law more than 9
years ago, why has the SEC not implemented an independent board
as prescribed by the Dodd-Frank Act's adoption of the
bipartisan Franken-Wicker Amendment?
Q.2. The makeup of the Board, as written in the Franken-Wicker
Amendment, leaves much of the structure up to the SEC. Are
there certain technicalities that could be adjusted as written
in the Franken-Wicker Amendment, which would make the
Commission more likely to institute an independent board?
Q.3. Are there concrete findings made by the Commission that
shows that an independent board would not curb inflated
ratings?
A.1.-A.3. NRSROs play a significant role in our domestic and
international credit markets. Many institutional and retail
investors rely, to varying extents, on NRSRO ratings and other
services in making issuer-specific and more portfolio-oriented
investment decisions. I take seriously the Commission's role in
overseeing NRSROs and other third-party market participants on
whom investors rely, such as investment advisers, proxy
advisory firms, auditors, and research analysts.
As a general matter, during this time of broad economic
stress during the COVID-19 pandemic, there is a renewed
regulatory interest in the influence of credit rating agencies
on market structure and market function. Before the recent
economic events, I suggested a few areas of focus for the
Commission's Investor Advisory Committee, including: (1) how
much retail investors rely on credit rating agencies; and (2)
how much ratings influence today's marketplace, such as the
potential risks and downstream effects of investment strategies
and mandates that reference ratings. This topic is even more
important now, and SEC staff, in coordination with our
international regulatory counterparts, is analyzing the
potential risks and downstream effects of investment strategies
and mandates that mechanically react to credit ratings,
directly or through index tracking. In addition, Commission
staff are exploring whether credit ratings actions may
contribute to procyclicality and have implications for
financial stability.\1\ My view is we must continue to strive
to advance the statutory goals of fostering accountability,
transparency and competition and disclosing and mitigating
potential conflicts of interest, without diminishing the
marketwide benefits of, but also recognizing the inherent risks
and limitations of unchecked reliance on, the credit rating
services currently provided.
---------------------------------------------------------------------------
\1\ See Credit Ratings, Procyclicality and Related Financial
Stability Issues: Select Observations (July 15, 2020) available at
https://www.sec.gov/news/public-statement/covid-19-monitoring-group-
2020-07-15.
---------------------------------------------------------------------------
With respect to compensation models, I share your concerns
about conflicts of interest in the rating agency compensation
models. By way of background, the ``issuer-pays'' business
model--in which the issuer pays for the services of the rating
agency in providing the ratings--is the dominant business model
among the NRSROs. Prior to 1970, an alternative business model,
the ``subscriber-pays'' model, dominated the ratings space.
Under this model, investors are charged for ratings by paying
the rating agency a subscription fee to access ratings, and
issuers receive their own ratings without charge. The
Commission's Office of Credit Ratings (OCR) has noted the
potential conflicts inherent in both business models.\2\ With
respect to the issuer-pays model, OCR has noted potential
conflicts in that the NRSRO may be influenced to determine more
favorable (i.e., higher) ratings than warranted in order to
retain the obligors or issuers as clients. Similarly, OCR has
noted that the subscriber-pays model may also be subject to
potential conflicts of interest, including where an NRSRO may
be aware that an influential subscriber holds a securities
position (long or short) that could be advantaged if a credit
rating upgrade or downgrade causes the market value of the
security to increase or decrease or if an NRSRO may be aware
that a subscriber wishes to acquire a particular security but
is prevented from doing so because the credit rating of the
security is lower than internal investment guidelines or an
applicable contract permit.
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\2\ See Annual Report on Nationally Recognized Statistical Rating
Organizations (Jan. 2020), available at https://www.sec.gov/files/2019-
annual-report-on-nrsros.pdf.
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I believe a new approach to addressing conflicts may be
needed. In this regard, I note that our staff is assessing the
recent recommendation from the Commission's Fixed Income Market
Advisory Committee (FIMSAC) regarding ways to mitigate some of
the perceived potential conflicts of interest associated with
the issuer-pay model. The FIMSAC recommended that the
Commission explore the following three elements to mitigate
potential conflicts: (1) increased NRSRO disclosure; (2)
enhanced issuer disclosures for corporate credit issuers and
securitized products; and (3) a mechanism for bondholders to
vote on the issuer-selected NRSROs.\3\
---------------------------------------------------------------------------
\3\ FIMSAC Recommendation Regarding Ways to Mitigate Conflicts of
Interest in Credit Ratings (Jun. 1, 2020), available at: https://
www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-
recommendations-credit-ratings-subcommittee.pdf.
---------------------------------------------------------------------------
The Franken-Wicker Amendment to the Dodd-Frank Act
contemplated the adoption of an independent ratings board in
which a board would assign qualified NRSROs to rate structured
finance products. In 2012, SEC staff submitted a report to
Congress on assigned credit ratings that includes a detailed
analysis of the potential benefits of the independent board.
This report also raised a number concerns including: (1) the
continuance of ratings shopping under the assignment system;
(2) the potential for new conflicts of interest and incentives
that run contrary to the goal of ratings quality; (3) the
challenges related to operational feasibility such as
uncertainty and cost to the market; (4) how to determine
whether a qualified NRSRO has the capacity and expertise to
produce quality credit ratings for particular types of
securities; and (5) whether the assignment system creates a
Government endorsement which would be inconsistent with efforts
to reduce reliance on credit ratings.\4\ I believe, as
highlighted in the 2012 Report, that these serious concerns
must be thoughtfully considered and resolved before moving
forward with the establishment of such a board. The 2012 Report
also includes recommendations for statutory changes that would
be required for the establishment of such a board.
---------------------------------------------------------------------------
\4\ See Report to Congress on Assigned Credit Ratings (Dec. 2012),
available at https://www.sec.gov/news/studies/2012/assigned-credit-
ratings-study.pdf.
---------------------------------------------------------------------------
China
Two years ago, the Commission worked with the Committee on
Foreign Investment in the United States (CFIUS) in deciding to
block the sale of the Chicago Stock Exchange to a group of
Chinese-led investors. The Commission said at the time that it
was concerned about the ability of a new, foreign owner to
``effectively monitor or enforce compliance,'' and there were
also significant concerns about how American's personal
information would have been protected if the sale had been
approved. Many Americans participating in investing for the
first time are doing so through companies and phone
applications designed, owned, and operated in some of the same
countries that will not comply with PCAOB audit requirements--
specifically, Chinese platforms like Webull (which has ties to
Xiaomi Technology) and Moomoo (which has ties to Tencent).
Q.4. Do American investors using these platforms benefit from
the full range of regulatory protections and assurances that
they would if using a U.S.-owned and -operated platform?
Q.5. Is the SEC concerned that American retail investors who
use these foreign trading platforms could face uncertainties
due to any change in the People's Republic of China's
regulatory regime?
A.4.-A.5. From a U.S.-regulatory perspective, the protections
that govern the operation of U.S. broker-dealers and SEC-
registered investment advisers apply and, as a general matter,
should not be affected by the ownership of that broker-dealer
or the regulatory regime of other countries. The platforms you
referenced, Webull Advisors LLC and Moomoo (whose securities
products and services are offered by Futu, Inc.), are
registered with the SEC, FINRA, and SIPC. These firms must
comply with all capital, market and investor protection rules
with respect to their business in the United States.
That said, registration and oversight as a broker-dealer or
investment adviser does not insulate obligations of individuals
or firms with respect to customer information. I have requested
that our Division of Examinations consider these issue in
connection with their examinations of investment advisers and
broker-dealers, including any concerns raised by a lack of
transparency in firm ownership.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAMER FROM JAY
CLAYTON
Q.1. Mr. Chairman, I have been following the proposed changes
to the 13F reporting that would raise the threshold for filing
for institutional investment managers from $100 million to $3.5
billion. I have heard opposition to this from various
stakeholders due to the reduction in transparency around
holdings. In fact, it is my understanding that 99 percent of
the comment letters filed with the SEC were opposed to the
proposed changes. Can you tell me what the status of the
proposal is? Do you expect the SEC to withdraw this proposal
given the overwhelming opposition to it?
A.1. The Commission proposed to raise the reporting threshold
to $3.5 billion, reflecting proportionally the same market
value of U.S. equities that $100 million represented in 1975,
the time that Congress enacted section 13(f) under the Exchange
Act. The legislative history of the 1975 statute indicates that
the reporting threshold of $100 million was intended to capture
the largest institutional managers. The proposed adjusted
threshold would provide relief to smaller managers who are now
subject to Form 13F reporting, while retaining data on over 90
percent of the dollar value of the securities currently
reported.
The Commission's proposal included numerous requests for
comment, including on the proposed threshold increase and
alternative approaches analyzed in the release. The Commission
has received over 2,000 comment letters on the proposal to date
from a broad range of interested parties, the vast majority of
which addressed the increase in the reporting threshold. Many
expressed one of two concerns: (1) the potential impact of the
proposal on the ability of publicly traded companies to engage
with their shareholders, and (2) the desire not to lose insight
into certain individual firm trading information. Notably,
there was little concern that the proposed amendments would
affect the objections of section 13(f).
As I noted during the hearing, I do not plan to finalize
the Form 13F proposal by the end of the year. The Form 13F
proposal was intended to modernize the threshold, but in the
process, commenters highlighted that the uses of Form 13F have
evolved beyond its intended purpose since the statute was
enacted. For example, public companies are using the data to
identify and engage with certain of their shareholders on
corporate governance issues. We appreciate the desire of
issuers to have transparency into their institutional
shareholder base or ensure that they are able to efficiently
reach their shareholders even if the shareholders wish to
remain anonymous. We are exploring ways to modernize our rules
on shareholder communications so that issuers can engage with
their shareholders more directly and efficiently. Currently,
however, information reported on Form 13F appears to fill a
gap--a gap I believe can be filled much more effectively and
efficiently through other means--in providing this information
to corporate issuers.
In addition, commenters stated that corporate issuers may
use Form 13F data to identify potential new investors based on
whether an investor's historical Form 13F disclosures show
holdings of similar issuers or reveal a relevant investment
strategy. Similarly, institutions seeking to hire money
managers asserted that they use 13F data to identify smaller
managers with attractive holdings and strategies. Form 13F data
may be particularly useful here because smaller managers
oftentimes are not able to engage in widespread marketing
efforts. However, 13F filings are an imperfect means to
understand how a professional manager manages portfolios. Form
13F can be filed up to 45 days after quarter end and is a
backward-looking snapshot of a manager's holdings. Also, the
filing only requires disclosure of certain equity securities,
and does not necessarily include all of a manager's
investments.
These and other issues raised by commenters require careful
consideration by the staff, and the involvement of multiple
divisions and offices within the Commission. We are focused on
examining these important issues before moving forward with
determining the appropriate threshold for the Form.
Q.2. Chairman Clayton, over 90 percent of American adults use
the internet, almost 89 percent file their Federal taxes
electronically, and most clients of financial firms prefer
electronic delivery for
investor communications. You've spoken about the importance of
modernizing the delivery of investor communications, especially
in the midst of the COVID-19 pandemic. Could you provide
clarity on how you think this could best be achieved, while
preserving a paper option for those who prefer it? Will the SEC
act on this initiative in the near-term?
A.2. The shift to a mandatory telework environment across our
entire economy, including our critical market infrastructure,
showed the importance of being able to conduct business
electronically and remotely and highlighted the need to move
our regulatory framework for all investors to an electronic
framework, while preserving a paper delivery option for those
who prefer it.
At the outset of the pandemic, the Commission and its staff
provided temporary relief to address operational issues arising
from COVID-19, including relief from in-person meeting, manual
signature and physical document-delivery requirements. I
believe in many instances, this relief enhanced investor
protection and market integrity, and staff are currently
assessing areas where permanent relief makes sense. In November
2020, the Commission adopted rules that will provide additional
flexibility in connection with documents filed with the
Commission to permit the use of electronic signatures in
authentication documents and facilitate electronic service and
filing in SEC administrative proceedings. Additionally, the
Commission's Fall 2020 Regulatory Flexibility Act Agenda
contains several items building on the SEC's COVID-19 relief.
Q.3. I'm concerned that Troubled Debt Restructuring (TDR)
guidance will soon expire. Is the SEC aware of this concern and
are you working with FASB to ensure existing regulatory
guidance on TDRs continue?
LWhat is the timeline for additional TDR guidance?
LIs there any opposition to extending TDR relief?
LIn your view, do you and other Federal agencies
have the authority to extend TDR relief? Does Congress
need to act?
A.3. Since the onset of the pandemic, the SEC staff has been
actively engaged with stakeholders relating to the application
of the TDR guidance. SEC staff have worked closely with the
Financial Accounting Standards Board (FASB) on TDR guidance,
and this collaborative approach will continue.
On March 22, 2020, the prudential banking regulators,
working together with the FASB, issued an interagency statement
on loan modifications for financial institutions working with
customers affected by COVID-19. The interagency statement
covered different relevant topics and specifically provided
that short-term modifications made on a good faith basis in
response to COVID-19 to borrowers who were current prior to any
relief are not TDRs. This interagency guidance did not include
an expiration date.\1\
---------------------------------------------------------------------------
\1\ Subsequent to the issuance of this guidance by the FASB and the
banking regulators, the CARES Act was signed into law. Section 4013 of
the CARES Act provided eligible institutions to suspend U.S. GAAP TDR
requirements for certain loan modifications meeting the criteria in the
CARES Act. The interagency statement and the provisions of the CARES
Act are similar; however, unlike the guidance published by the banking
regulators, the CARES Act provisions included an expiration date.
---------------------------------------------------------------------------
SEC staff have been in ongoing dialogue with the FASB,
banking regulators, financial institutions, and banking
industry groups to understand any challenges relating to the
accounting for loan modifications. While certain institution-
specific application questions have arisen, because the
guidance from the banking regulators and the FASB does not
include an expiration date, we believe market participants have
clarity on the approach they should utilize to account for loan
modifications. To the extent specific questions continue to
arise regarding the application and scope of this guidance
related to TDRs, I believe that the FASB is well positioned to
act. The SEC's Office of the Chief Accountant also stands ready
to assist, and I would encourage stakeholders to consult with
them on any specific issues they may have.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN FROM JAY
CLAYTON
Coronavirus Disease 2019 (COVID-19)
Q.1. Last month, I sent a letter to you and Commodities Futures
Trading Commission (CFTC) Chairman and Chief Executive Tarbert
urging the SEC and CFTC to conduct an insider trading
investigation following press reports revealing that Trump
administration officials privately gave dire warnings to
conservative allies and Republican donors about the risk from
the COVID-19 pandemic while President Trump was publicly
optimistic about the impact of the virus.\1\
---------------------------------------------------------------------------
\1\ Letter from Senator Warren to Securities and Exchange
Commission Chairman Clayton and Commodities Futures Trading Commission
Chairman and Chief Executive Tarbert, October 15, 2020, https://
www.warren.senate.gov/imo/media/doc/2020.10.15%20Letter%20to%20SEC%20
CFTC.pdf.
---------------------------------------------------------------------------
The letter cites news reports showing that senior Trump
administration officials indicated that certain investors
should ``[s]hort everything . . . betting on the idea that the
stock prices of companies would soon fall'' and that ``aspects
of the readout from Washington informed their trading that
week, in one case adding to existing short positions in a way
that amplified . . . profits.''\2\ My letter stated that
``Federal law bars individuals from `purchasing or selling a
security while in possession of material nonpublic
information'--in this case, high-level Administration
officials' dire views of the economic risks from the
coronavirus that were in stark contrast to the public
statements of the President and other top officials.''\3\
---------------------------------------------------------------------------
\2\ New York Times, ``As Virus Spread, Reports of Trump
Administration's Private Briefings Fueled Sell-Off'', Kate Kelly and
Mark Mazzetti, October 26, 2020, https://www.nytimes.com/2020/10/14/us/
politics/stock-market-coronavirus-trump.html.
\3\ Letter from Senator Warren to Securities and Exchange
Commission Chairman Clayton and Commodities Futures Trading Commission
Chairman and Chief Executive Tarbert, October 15, 2020, https://
www.warren.senate.gov/imo/media/doc/2020.10.15%20Letter%20to%20SEC%20
CFTC.pdf.
---------------------------------------------------------------------------
Please describe any action that the SEC has taken in
response to these or other reports or indications of insider
trading related to the COVID-19 pandemic.
A.1. As a matter of policy, the SEC conducts investigations on
a confidential basis and generally does not acknowledge the
existence or nonexistence of any investigation unless or until
charges are filed. Accordingly, I cannot comment specifically
on the matters you have cited as they relate to any specific
entity or person, but I assure you that the SEC's staff will
consider carefully the information included in your previous
correspondence in connection with our statutory and regulatory
responsibilities.
I also note that we are generally aware of the information
asymmetries and other consequences of COVID-19 that may
implicate our Federal securities laws, have publicly commented
on these matters and are incorporating this into our day-to-day
operations. For example, early on in the pandemic, the Co-
Directors of the Division of Enforcement released a statement
reminding market participants of the importance of maintaining
market integrity and following corporate controls and
procedures, especially during times of market volatility. Good
corporate hygiene cannot be overstated, nor can the importance
of related controls designed to prevent not only insider
trading, but also the appearance of impropriety or misalignment
of interests. Following this theme, in September, in a letter
to the House Financial Services Committee, I provided a series
of specific suggestions regarding corporate hygiene--including
the use of Rule 10b5-1 plans--that I believe companies should
follow and that could be the basis of legislation or future
rulemaking.
Private Equity
Q.2. Last year, I introduced S. 2155, the Stop Wall Street
Looting Act of 2019, to reform the private equity industry and
end abusive leveraged buyouts.\4\
---------------------------------------------------------------------------
\4\ Office of Senator Warren, ``Warren, Baldwin, Brown, Pocan,
Jayapal, Colleagues Unveil Bold Legislation to Fundamentally Reform the
Private Equity Industry'', July 18, 2019, https://
www.warren.senate.gov/newsroom/press-releases/warren-baldwin-brown-
pocan-jayapal-colleagues-unveil-bold-legislation-to-fundamentally
reform-the-private-equity-industry.
---------------------------------------------------------------------------
Private equity transactions are fueled by risky loans that
are immediately securitized and sold.\5\ A provision in my bill
would help protect the economy from risks stemming from
excessive debt imposed on private equity firms' target
companies. It would require arrangers of corporate loan
securitizations to retain risk by clarifying that managers of
collateralized debt obligations are subject to risk retention
requirements established in the Dodd-Frank Wall Street Reform
and Consumer Protection Act.\6\
---------------------------------------------------------------------------
\5\ Washington Post, ``The Shadow Banks Are Back With Another Big
Bad Credit Bubble'', Steven Pearlstein, May 31, 2019, https://
www.washingtonpost.com/business/economy/the-shadow-banks-are-back-with-
another-big-bad-credit-bubble/2019/05/31/a05184de-817a-11e9-95a9-
e2c830afe24f_story.html.
\6\ Securities and Exchange Commission, ``Asset-Backed
Securities'', October 23, 2014, https://www.sec.gov/spotlight/dodd-
frank/assetbackedsecurities.shtml.
---------------------------------------------------------------------------
Do you believe that arrangers of corporate loan
securitizations should retain risk to prevent dangerous loans
from being immediately passed onto unknowing investors?
If not, how, if at all, you would you mitigate risky
corporate lending and the ability of lenders to spread
irresponsible private equity debt across financial
institutions? How would you ensure that regulators have the
appropriate information to assess the exposure of financial
markets to leveraged loans?
A.2. Loan securitization vehicles are typically sold under an
exemption from registration under the Securities Act of 1933.
As a result, limited information is made available to the SEC
regarding these offerings, though consistent with the exemption
on which these vehicles rely, the purchasers of interests in
these vehicles are
typically institutional investors. SEC staff have coordinated
with domestic and international financial regulators on work to
explore and monitor the leveraged loan market and CLO markets.
SEC staff also continue to monitor these markets using publicly
available data, commercially available data and data reported
to the SEC, though as a consequence of the variety of
purchasers in these markets, no single data set contains
comprehensive information concerning the owners of leveraged
loans and CLOs. For example, as part of the SEC staff report
U.S. Credit Markets: Interconnectedness and the Effects of the
COVID-19 Economic Shock, staff reviewed how the leveraged loan
and CLO markets functioned in March 2020 in response to both
the COVID-19 induced economic shock and the related monetary
and fiscal policy responses. As discussed in more detail below,
I do not believe leveraged lending presents significant risks
to financial stability at this time. As noted in a December
2020 GAO report, ``leveraged lending activities had not
contributed significantly to the distress of any large
financial entity whose failure could threaten financial
stability. Large banks' strong capital positions have allowed
them to manage their leveraged lending exposures, and the
exposure of insurers and other investors also appeared
manageable.''\7\ The SEC will continue to monitor the CLO
market in coordination with our domestic and international
regulatory counterparts.
---------------------------------------------------------------------------
\7\ See Government Accountability Office, Financial Stability:
Agencies Have Not Found Leveraged Lending to Significantly Threaten
Stability but Remain Cautious Amid Pandemic (Dec. 16, 2020), available
at https://www.gao.gov/assets/720/711293.pdf.
---------------------------------------------------------------------------
Leveraged Lending
Q.3. In November 2018, I sent a letter to you, Treasury
Secretary Steven Mnuchin, Federal Reserve Chairman Jerome
Powell, then-Comptroller of the Currency Joseph Otting, and
Federal Deposit Insurance Corporation Chairman Jelena
McWilliams expressing concern about the rapid growth of
leveraged corporate lending, or lending to companies that are
already highly indebted.\8\
---------------------------------------------------------------------------
\8\ Letter from Senator Warren to Treasury Secretary Steven
Mnuchin, Federal Reserve Chairman Jerome Powell, Comptroller of the
Currency Joseph Otting, Securities and Exchange Commission Chairman Jay
Clayton, and Federal Deposit Insurance Corporation Chairman Jelena
McWilliams, November 14, 2018, https://www.warren.senate.gov/imo/media/
doc/2018.11.14 %20Lette%20to%20Regulator; https://www.sec.gov/
spotlight/dodd-frank/assetbackedsecurities
.shtmls%20on%20Leveraged%20Lending.pdf.
---------------------------------------------------------------------------
In a section addressed to you, I stated that the Volcker
Rule is intended to restrict bank involvement with external
funds and that trade associations have asked the SEC to
significantly loosen Volcker Rule controls. The SEC completed
its rollbacks of the Volcker Rule in September 2019, which you
strongly supported.\9\ In response to the rollback of the
Volcker Rule, SEC Commissioner Robert J. Jackson, Jr., stated,
`` `[r]olling back the Volcker Rule while failing to address
pay practices that allow bankers to profit from proprietary
trading puts American investors, taxpayers, and markets at
risk.' ''\10\
---------------------------------------------------------------------------
\9\ U.S. Securities and Exchange Commission, ``Statement on Volcker
Rule Amendments'', Public Statement by Commissioner Robert J. Jackson
Jr., September 19, 2019, https://www.sec.gov/news/public-statement/
statement-jackson-091919; U.S. Securities and Exchange Commission,
``SEC Adopts New Rules and Amendments Under Title VII of Dodd-Frank'',
press release, September 19, 2019, https://www.sec.gov/news/press-
release/2019-182.
\10\ U.S. Securities and Exchange Commission, ``Statement on
Volcker Rule Amendments'', Public Statement by Commissioner Robert J.
Jackson Jr., September 19, 2019, https://www.sec.gov/news/public-
statement/statement-jackson-091919.
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Your January response provided a procedural, but not a
substantive, explanation of the status of SEC's proposed
amendments to the Volcker Rule.\11\
---------------------------------------------------------------------------
\11\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, January 31, 2019.
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Do you view leveraged lending as a risk? If so, what
actions should the SEC take to mitigate the risks associated
with leveraged lending?
A.3. Leveraged loans account for a relatively small portion of
total debt outstanding in U.S. markets. Nonetheless, leveraged
loan and collateralized loan obligation (CLO) markets have
connections across a wide range of participants in U.S. capital
markets. The market for CLOs has grown rapidly in recent years,
with the market more than doubling since 2012, from $250
billion to $642 billion. Because these markets provide insight
into market function and have the potential to contribute to
certain market stresses, we have been following the CLO market
and the leveraged lending and high-yield debt markets with
increased attention since 2018. At that time, I asked SEC
staff, including our Division of Economic and Risk Analysis and
our Office of Credit Ratings, to review and closely monitor
these markets with two issues in mind: (1) whether there are
elements of these markets that could have systemic or other
spill-over effects in our capital markets and in particular,
undetected potential effects; and (2) whether these markets,
and in particular CLOs, are structured in a way, such that
changes in ratings of the securities could trigger substantial
selling into markets (e.g., below investment grade markets)
that historically have less liquidity.
CLO issuance in the United States was at an all-time high
before the COVID-19 economic shock to the global financial
system. As part of the SEC staff report U.S. Credit Markets:
Interconnectedness and the Effects of the COVID-19 Economic
Shock, staff reviewed how the leveraged loan and CLO markets
functioned in March 2020 in response to both the COVID-19
induced economic shock and the related monetary and fiscal
policy responses. The onset of the COVID-19 economic shock and
its widespread impact on a large number of borrowers had a
pronounced effect on the leveraged loan market, but despite a
sharp initial decline in March 2020, the market has since
stabilized. The COVID-19 economic shock to date has not
appeared to significantly impair the CLO market. Risk to the
financial system more generally appears to be mitigated as a
result of various factors, including because of the diverse set
of investors and numerous intermediators that are active in the
CLO market, and as a general matter, CLO structures have
features designed to match funding and absorb risk. As noted in
a December 2020 GAO report, ``leveraged lending activities had
not contributed significantly to the distress of any large
financial entity whose failure could threaten financial
stability. Large banks' strong capital positions have allowed
them to manage their leveraged lending exposures, and the
exposure of insurers and other investors also appeared
manageable.'' Additionally, present-day CLO securities appear
to pose less of a risk to financial stability than did similar
securities during the financial crisis, as they have better
investor protections, are more insulated from market swings and
are not widely tied to other risky, complex instruments.\12\
---------------------------------------------------------------------------
\12\ See Government Accountability Office, Financial Stability:
Agencies Have Not Found Leveraged Lending to Significantly Threaten
Stability but Remain Cautious Amid Pandemic (Dec. 16, 2020), available
at https://www.gao.gov/assets/720/711293.pdf.
---------------------------------------------------------------------------
I do not believe leveraged lending presents significant
threats to financial stability. However, while these markets
have fared reasonably well thus far with the disruption brought
on by the COVID-19 economic shock, there is a heightened level
of uncertainty in the leveraged loan and CLO markets.\13\ The
SEC staff will continue to monitor the CLO market in
coordination with our domestic and international regulatory
counterparts.
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\13\ As noted in FSOC's most recent annual report, with cash-flows
impaired due to the COVID-19 pandemic, many businesses may be
challenged to service their debt. Since March, nearly $2 trillion in
nonfinancial corporate debt has been downgraded, and default rates on
leveraged loans and corporate bonds have increased considerably.
Q.4. Please explain the SEC's rationale for removing
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protections against excessive risks under the Volcker Rule.
A.4. The Volcker Rule was intended to constrain proprietary
risk-taking by banking entities and promote the safety and
soundness of the U.S. financial system. The Volcker Rule
generally prohibits banking entities from engaging in
proprietary trading and from owning or controlling hedge funds
or private equity funds, referred to as ``covered funds.'' It
is intended to restrict high-risk, speculative trading activity
by banking entities, while preserving their ability to engage
in important customer-oriented financial services, such as
underwriting, market making and asset management services. That
mandate is straightforward in concept, yet in our multifaceted,
highly interconnected, global and ever-changing financial
markets, it is challenging to design a rule that effectively
and efficiently implements this statutory mandate.
Since my response to your November 2018 letter, the
agencies responsible for implementing the Volcker Rule adopted
three sets of changes to the original rule: (1) amendments to
implement congressional directives consistent with the Economic
Growth, Regulatory Relief, and Consumer Protection Act (July
2019); (2) amendments to tailor and simplify the rule to allow
banking entities to more efficiently provide financial services
in a manner that is consistent with the requirements of the
statute (November 2019); and (3) amendments modifying and
clarifying requirements relating to covered funds (July 2020).
I believe that, collectively, these amendments will improve
application of the Volcker Rule in a number of respects. The
November 2019 amendments will improve application, in part by:
(1) tailoring compliance requirements more directly to a firm's
trading activity; (2) providing greater clarity and certainty
about what activities are prohibited; and (3) improving
effective allocation of compliance resources where possible.
The 2020 amendments similarly will improve application in part
by: (1) reducing the extraterritorial impact of the
regulations; (2) improving and streamlining the covered fund
provisions; and (3) providing clarity to banking entities
regarding the provision of financial services and the conduct
of permissible activities. These amendments are consistent with
the requirements of Section 13 of the Bank Holding Company Act
and are unlikely to materially increase risks to the safety and
soundness of banking entities or the financial system.
Additionally, these amendments reflect the experience
gained by banking entities and the agencies charged with
implementing the Volcker Rule, including through examinations.
Based on that experience, and in response to feedback received
in the course of administering the rule, we and the other
agencies identified opportunities--consistent with the
statute--for improving the regulations. In the November 2019
amendments, that improvement included tailoring implementation
based on the level of a banking entity's trading activity and
recognizing, in short, that to implement the Volcker Rule
effectively, one size does not fit all, and the terms of the
regulations should reflect our collective experience.
Similarly, the 2020 amendments will improve the regulations, in
part, by excluding from the ``covered fund'' definition certain
types of investment vehicles that do not present the risks that
the Volcker Rule was intended to address.
In short, the Volcker Rule is now better implemented to
achieve its objectives and ensure that it does not unduly
constrain liquidity and capital formation.
Q.5. Commissioner Jackson also stated, ``The Commission has
justified the rollback of the significant investor--and
taxpayer--protections in the Volcker Rule in the name of needed
improvements in `liquidity and capital formation.' Because the
facts and our own Staff's analysis offer no meaningful evidence
that the Volcker Rule has affected either, I respectfully
dissent.''\14\
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\14\ Id.
LPlease describe any evidence that the amendments
rolling back the Volcker Rule are beneficial to the
---------------------------------------------------------------------------
safety and security of securities markets.
LPlease provide any specific analyses indicating
that rolling back the Volcker Rule has improved
liquidity and capital formation.
A.5. As part of the process of adopting the amendments to the
Volcker Rule in both November 2019 and July 2020, the
Commission conducted an economic analysis focused on the
potential effects of these amendments on Commission
registrants, the functioning and efficiency of the securities
markets, investor protection, and capital formation and was
informed by comments received on the original regulations
implementing the Volcker Rule in 2013.
With respect to the 2019 Volcker amendments, the economic
analysis was informed by a body of academic research concerning
the effects of Section 13 of the Bank Holding Company Act and
the original Volcker Rule on dealer provision of liquidity and
on the risk of market dislocations in times of stress. In
particular, those comments and research focused on: (1) the
effects of the rule on risk-taking by banking entities; (2) the
degree to which the rule may have impacted conflicts of
interests between banking entities and their clients,
counterparties, and customers; (3) effects of the rule on
client-oriented financial services and market quality; and (4)
compliance burdens and competitive effects. With respect to
liquidity and capital formation, the Commission's economic
analysis referenced several studies that show significant
declines in various measures of liquidity after the financial
crisis and postcrisis reforms, including a recent study that
ties these effects to the Volcker Rule's underwriting
exemption. In addition, the Commission's economic analysis also
analyzed other costs and benefits of the rule, including its
effects on risk-taking, noting, in relevant part, that while
the Volcker Rule may have reduced exposure related to trading,
it is not clear it reduced the overall risk of individual
banking entities and potentially of banking entities as a
whole. Former Commissioner Jackson did not address these
matters in meaningful detail in the comments you cite.
I note that the bodies of studies in this area can
generally be classified as ranging from limited or no evidence
of adverse effects on liquidity and capital formation to
significant adverse effects on one or both of these important
Commission objectives. Through the great work of the staff, we
have advanced these issues without adversely affecting (and I
believe, furthering the risk-mitigating objectives) of the
Volcker Rule.
With respect to the 2020 Volcker amendments, the
Commission's economic analysis acknowledged that these
amendments could increase the ability of banking entities to
engage in certain types of activities involving risk, and, in
the abstract, increases in risk exposures of large groups of
banking entities could have negative effects. The analysis
highlighted three important considerations that could mitigate
those possible risks, including: (1) banking entities already
engage in a variety of permissible activities involving risk
and the activities of many types of funds excluded from the
``covered fund'' definition under the 2020 amendments largely
replicate permissible and traditional activities of banking
entities; (2) banking entities may also be subject to multiple
prudential capital, margin and liquidity requirements that
facilitate the safety and soundness of banking entities and
promote financial stability; and (3) the new exclusions from
the ``covered fund'' definition each include a number of
conditions aimed at preventing evasion Volcker Rule, promoting
safety and soundness, and allowing for customer oriented
financial services provided on arms-length, market terms. I
believe these considerations will effectively mitigate any such
risk exposures.
Inflated Bond Ratings
Q.6. In September, I wrote you a letter regarding troubling
reports of inflated bond ratings and the perverse incentives
within the bond rating industry and urged the SEC to take
immediate action to protect the economy from risky lending
propped up by conflicts of interest between bond issuers and
rating agencies.
My letter described the flows in the incentive structures
of bond ratings firms' through the ``issuer-pays'' model used
by major firms like S&P and Moody's. Under the issuer-pays
model, bond issuers pay the agencies for their assessments of
the products they hope to sell, ultimately giving the rating
firms an incentive to give better ratings, regardless of the
risk, since bond issuers might otherwise go to their
competitors.\15\ In your November response, you stated that you
shared my concerns about conflicts of interest in rating agency
compensation models and said that you are awaiting
recommendations or advice from various advisory committees.\16\
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\15\ Council on Foreign Relations, ``The Credit Rating
Controversy'', CFR Staff, February 19, 2015, https://www.cfr.org/
backgrounder/credit-rating-controversy.
\16\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, November 21, 2019.
LWhat is the current status of these
---------------------------------------------------------------------------
recommendations?
LHave senior officials the SEC instructed the
advisory committees that the SEC is consulting for
recommendations or advice on the role and activities of
bond rating agencies to produce any work products by a
certain date or timeline? If so, please explain the
SEC's instructions and any requested deadlines.
Additionally, please explain if these recommendations
or advice will be made public.
LPlease describe any updates from the advisory
committees that the SEC is consulting for
recommendations or advice regarding the role and
activities of bond rating agencies. Please describe any
communications you, or senior SEC staff, have had with
these advisory committees regarding any anticipated
timelines or deadlines for their conclusions.
A.6. In my November 2019 remarks to the Fixed Income Market
Structure Advisory Committee (FIMSAC), I noted the importance
of continually reviewing whether market participants who
substantially influence or are relied upon by investors are
appropriately disclosing, monitoring, and managing their
conflicts.\17\ In my view, the interests of credit rating
agencies are not fully aligned with that of investors, and I
have questioned whether there are alternative compensation
models that would better align their interests. The FIMSAC and
the FIMSAC Credit Ratings Subcommittee have been thoughtfully
deliberating this important question.
---------------------------------------------------------------------------
\17\ See Remarks at Meeting of the Fixed Income Market Structure
Advisory Committee (Nov. 4, 2019), available at https://www.sec.gov/
news/public-statement/statement-clayton-fimsac-110419.
---------------------------------------------------------------------------
The FIMSAC Credit Ratings Subcommittee held several
meetings to further discuss the matter. At the February 2020
FIMSAC meeting, the Subcommittee hosted a discussion on issuer-
pay conflict of interest. Along with the agenda for the
meeting, the FIMSAC published the Subcommittee's working
document that summarizes the various viewpoints on an
alternative compensation model and other potential initiatives.
At the June 2020 FIMSAC meeting, the Subcommittee presented its
``Preliminary Recommendation Regarding Ways to Mitigate
Conflicts of Interest in Credit Ratings'', which includes
increased NRSRO disclosures; enhanced issuer disclosures; and
exploration of a mechanism for bondholders to vote on issuer-
selected NRSROs.
In November 2019, I also suggested some topics and areas of
focus for the Investor Advisory Committee (IAC), including
questions relating to the influence of credit rating agencies,
their conflicts and compensation models and whether there are
alternative payment models that would better align the
interests of rating agencies with investors. The IAC hosted a
panel discussion regarding credit rating agencies at its
meeting on May 21, 2020. The SEC has dedicated pages on its
website to provide the public with information about the
important ongoing work of the FIMSAC and the IAC.\18\
---------------------------------------------------------------------------
\18\ See https://www.sec.gov/spotlight/fixed-income-advisory-
committee and https://www.sec.
gov/spotlight/investor-advisory-committee.shtml.
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I have benefited from the insight, perspective and
experience that advisory committees have brought to the SEC in
recent years. I appreciate the time and effort that advisory
committee members have devoted in supporting the SEC's mission
to protect investors, maintain fair, orderly, and efficient
markets and facilitate capital formation. I expect that the
advisory committees continue will provide informed, diverse
perspectives and related advice and recommendations, which will
inform the Commission's policy decisions.
It is also worth noting that the SEC, in response to the
current COVID-19 crisis, formed an internal, cross-divisional
COVID-19 Market Monitoring Group to assist the Commission and
its various divisions and offices in: (1) Commission and staff
actions and analysis related to the effects of COVID-19 on
markets, issuers, and investors--including our Main Street
investors; and (2) responding to requests for information,
analysis, and assistance from fellow regulators and other
public sector partners. The group was also formed to assist in
the SEC's efforts to coordinate with and support the COVID-
related efforts of other Federal financial agencies and other
bodies, including the President's Working Group on Financial
Markets (PWG), the Financial Stability Oversight Council (FSOC)
and the FSB, among others. Credit ratings have been a focus for
the Monitoring Group, and staff has been exploring whether
credit assessments and credit rating agency downgrades--and
market anticipation of, and responses to, those ratings
actions--may (1) contribute to negative procyclicality in
certain circumstances and (2) have implications for financial
stability. Together these projects are informing the
Commission's assessment of the risks facing the markets.
Q.7. Your response also referenced some work that the SEC has
done to respond to the conflicts of interest in the issuer-pays
model.\19\ An August Wall Street Journal report, however,
stated that ``Inflated bond ratings were one cause of the
financial crisis. A decade later, there is evidence they
persist. In the hottest parts of the booming bond market, S&P
and its competitors are giving increasingly optimistic ratings
as they fight for market share.''\20\
---------------------------------------------------------------------------
\19\ Id.
\20\ Wall Street Journal, ``Inflated Bond Ratings Helped Spur the
Financial Crisis. They're Back'', Cezary Podkul and Gunjan Banerji,
August 7, 2019, https://www.wsj.com/articles/inflated-bond-ratings-
helped-spur-the-financial-crisis-theyre-back-11565194951.
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Please explain why the SEC's efforts to respond to the bond
ratings agencies' conflicts of interest have failed to prevent
them from artificially inflating bond ratings.
A.7. As an initial matter, it is important to note that the
Commission is statutorily prohibited from regulating the
substance of credit ratings or the procedures and methodologies
by which an NRSRO determines ratings. Within these statutory
bounds, the Office of Credit Ratings (OCR) conducts an
examination of each NRSRO at least annually, covering eight
review areas mandated by statute, including conflicts of
interest and internal controls. Within the required review
areas, the staff identifies areas of emphasis and issues of
focus for the exams based upon a risk assessment. For example,
as discussed in the staff's most recent examination report, the
CLO market is an area of focus that the staff identified
through the risk assessment process and reviewed as part of the
NRSRO examinations. As part of the annual exam process, the
staff examines whether an NRSRO conducts its business in
accordance with and accurately discloses its policies,
procedures, and methodologies, and can also examine compliance
with the applicable regulatory requirements. The SEC makes
available to the public the annual examination report that
summarizes the staff's findings and recommendations from each
NRSRO examination.
OCR is engaging with users of credit ratings and other
market participants regarding potential improvements to
regulation, including evaluating the effectiveness of Rule 17g-
5(a)(3) of the Securities Exchange Act. OCR is also considering
whether additional disclosures, including disclosures regarding
ratings performance, economic stress assumptions, and
deviations from methodologies, would help in assessing credit
ratings.\21\
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\21\ See The SEC's Office of Credit Ratings and NRSRO Regulation:
Past, Present, and Future, Feb 24, 2020, available at https://
www.sec.gov/news/speech/speech-jessica-kane-2020-02-24.
Q.8. Your November response also stated, ``I expect to continue
to discuss issues related to the [collateralized loan
obligations], other credit funds and conditions in the credit
markets more generally in the near term with my national and
international regulatory colleagues, including through the
[Financial Stability Oversight Council] and the [Financial
Stability Board]. I will also request our staff in [the SEC
Office of Credit Ratings], as well as staff in the Division of
Investment Management and Division of Trading and Markets, to
keep the issues you raised in your letter in mind as they carry
out their examination and other responsibilities.''\22\
---------------------------------------------------------------------------
\22\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, November 21, 2019.
LPlease describe any near-term discussions you have
had with national and international regulatory
---------------------------------------------------------------------------
colleagues on this topic.
LPlease describe any communications you have had
with SEC staff or other SEC Commissioners regarding
these issues.
A.8. In the area of corporate debt issues and other topics, the
level of coordination among staff at the SEC and from the
Treasury, Federal Reserve, CFTC, OCC and FDIC has been strong
and helps all of us to better understand the broader trends and
market implications. This coordination often takes place
through the FSOC, where nonfinancial corporate credit and
leveraged loans have been topics of discussion, including in
the FSOC's 2020 annual report.
In terms of international work, I am a member of the board
of the International Organization of Securities Commissions
(IOSCO) and the Financial Stability Board (FSB) Plenary. In
both organizations over the past year, we have focused on
issues in corporate credit. The IOSCO board issued a report on
liquidity in corporate bond markets under stressed conditions,
and the FSB published a report on leveraged loans and CLOs.\23\
SEC staff also was involved in drafting both reports.
---------------------------------------------------------------------------
\23\ See IOSCO Board, Liquidity in Corporate Bond Markets Under
Stressed Conditions (June 2019), available at https://www.iosco.org/
library/pubdocs/pdf/IOSCOPD634.pdf; FSB, Vulnerabilities Associated
With Leveraged Loans and Collateralized Loan Obligations (Dec. 19,
2019), available at https://www.fsb.org/wp-content/uploads/P191219.pdf.
---------------------------------------------------------------------------
Additionally, as previously mentioned, the SEC formed an
internal, cross-divisional COVID-19 Market Monitoring Group to
assist the Commission and its various divisions and offices in
(1) Commission and staff actions and analysis related to the
effects of COVID-19 on markets, issuers, and investors; and (2)
responding to requests for information, analysis, and
assistance from fellow regulators and other public sector
partners.
At the Commission, staff have closely coordinated to ensure
that we are appropriately monitoring and assessing developments
in the leveraged loan and CLO markets, including with respect
to funds that participate in these markets. As previously
mentioned, SEC staff analyzed the leveraged loan and CLO
obligation markets as part of its interconnectedness and the
effects of COVID-19 on the credit markets. SEC staff has also
been utilizing public and nonpublic data to monitor holdings
levels and changes over time. The Division of Investment
Management staff also has a team dedicated to reviewing filings
by registered funds, including those that invest in leveraged
loans. The team has been especially focused on promoting clear
and concise disclosure of credit and liquidity risks, including
as it relates to extended settlement times.
Additionally, the COVID-19 Market Monitoring Group has been
the exploration of whether credit assessments and credit rating
agency downgrades--and market anticipation of, and responses
to, those ratings actions--may contribute to negative
procyclicality in certain circumstances and have implications
for financial stability. The interrelationships between ratings
actions, procyclicality and financial stability is a topic that
other members of the global financial regulatory community are
also examining, and we have benefited from our ongoing
coordination and sharing of analysis and observations with
them.\24\
---------------------------------------------------------------------------
\24\ See Credit Ratings, Procyclicality and Related Financial
Stability Issues: Select Observations (July 15, 2020), available at
https://www.sec.gov/news/public-statement/covid-19-monitoring-group-
2020-07-15.
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Climate Risk Disclosure
Q.9. In July, Representative Sean Casten (D-IL-06) and I
introduced H.R. 3623/S. 2017, the Climate Risk Disclosure Act
of 2019.\25\ Our bill would address the fact that investors
currently lack access to basic information about the potential
impact of the climate crisis on American companies, which
creates significant environmental and financial risks. The
Climate Risk Disclosure Act of 2019 would require public
companies to include uniform information about their exposure
to climate-related risks, which will help investors
appropriately assess those risks, among other benefits, in
their disclosures to the SEC.
---------------------------------------------------------------------------
\25\ Office of Senator Warren, ``Senator Warren, Representative
Casten Lead Colleagues Introducing a Bill To Require Every Public
Company To Disclose Climate-Related Risks'', press release, July 10,
2019, https://www.warren.senate.gov/newsroom/press-releases/senator-
warren-representative-casten-lead-colleagues-introducing-a-bill-to-
require-every-public-company-to-disclose-climate-related-risks.
Q.9.a. The most recent volume of the National Climate
Assessment, a scientific report issued by 13 Federal agencies
in November 2018, stated that climate change may cause losses
of up to 10 percent of the U.S. economy by 2100.\26\
Additionally, a 2015 report from The Economist Intelligence
Unit wrote that, of the world's current stock of manageable
assets, the expected losses due to climate change are valued at
$4.2 trillion by the end of the century.\27\
---------------------------------------------------------------------------
\26\ New York Times, ``U.S. Climate Report Warns of Damaged
Environment and Shrinking Economy'', Coral Davenport and Kendra Pierre-
Louis, November, 23, 2018, https://www.nytimes.com/2018/11/23/climate/
us-climate-report.html.
\27\ The Economist Intelligence Unit, ``The Cost of Inaction'',
2015, p. 41, https://eiuperspectives.economist.com/sites/default/files/
The%20cost%20of%20inaction_0.pdf.
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During the hearing, I asked you whether the SEC has a
mandatory, uniform standard for climate risk so that investors
can compare companies head-to-head.\28\ You declined to answer
my question directly, instead broadly stating that the SEC has
a materiality standard.\29\ In an October letter, you also
stated that ``investors must have the information necessary to
understand the material risks posed to an issuer's business and
financial performance.''\30\
---------------------------------------------------------------------------
\28\ Office of Senator Warren, ``Senator Warren to SEC Chairman
Clayton: You Have Done Nothing To Protect the Economy From Climate
Change Risks'', press release, November 17, 2020, https://
www.warren.senate.gov/newsroom/press-releases/senator-warren-to-sec-
chairman-clayton-you-have-done-nothing-to-protect-the-economy-from-
climate-change-risks.
\29\ Id.
\30\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, October 13, 2020.
---------------------------------------------------------------------------
Do you believe that understanding which assets of public
companies may be materially affected by climate change may help
investors make more informed decisions about the risk of their
investments?
Q.9.b. As I mentioned during the hearing, this summer, 40 major
investors who collectively manage over a trillion dollars in
assets joined with nonprofits, businesses, and former
regulators in sending you a letter arguing that the climate
crisis is material and a systemic threat to our economy and
asking the Commission to mandate corporate climate risk
disclosure.\31\
---------------------------------------------------------------------------
\31\ New York Times, ``Climate Change Poses `Systemic Threat' to
the Economy, Big Investors Warn'', Christopher Flavelle, July 21, 2020,
https://www.nytimes.com/2020/07/21/climate/investors-climate-threat-
regulators.html.
LDo you believe it would be useful for investors to
understand public companies' contributions to
greenhouse gas emissions and their exposure in the
event of a Government--or market-mandated transition
---------------------------------------------------------------------------
toward a lower-carbon economy?
LIn an October letter, you stated that you ``will
consider [climate risk] issues . . . as [you] continue
to evaluate whether current requirements elicit
disclosures that provide insight into a company's
assessment of, and plans for addressing, material
risks--including those related to climate change--to
its business, operations and financial condition.''\32\
Please provide detailed information about the meetings,
advisory groups, processes, or decisions that the SEC
or senior SEC staff have held or made regarding climate
risk disclosure this year.
---------------------------------------------------------------------------
\32\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, October 13, 2020.
A.9.a.-b. To be clear, investors must have the information
necessary to understand the material risks posed to an issuer's
business and financial performance. Climate-related issues can,
depending on the facts and circumstances, be material to an
issuer. To the extent material, issuers are required to
disclose the current and expected future effects of climate-
related issues on their operations and performance, and our
rules are designed to elicit disclosures that are appropriately
tailored to the particular issuer. This approach is important,
particularly when the risks and uncertainty are not uniform. In
these circumstances, issuers are generally in the best position
to assess their particular facts and circumstances to determine
whether an issue such as climate change presents a material
risk, and what disclosures are required based on those facts
and circumstances.
It has often been noted that this process can be more
efficient if disclosure is standardized or uniform. However,
standardization can be difficult across industries, and in
particular, forward-looking information can be difficult to
standardize in that different participants within and across
industries may reasonably have differing assumptions about
future developments. In addition, forcing metric-specific
standardization in this area, particularly across differing
sectors (e.g., insurance, biotechnology, data services and
transportation), may lead to a loss of information and the
insights that can be derived from examining a range of well-
informed, company and sector-specific disclosures. SEC staff is
diligently working through this complex issue through various
domestic and international channels to see if greater
standardization or comparability can be achieved, particularly
within specific sectors. Personally, I am of the view that
improving the decision-useful nature of disclosures in this
area, including efforts to enhance comparability, may be best
approached through broad principles, applied on a sector-by-
sector basis.
The Commission and SEC staff have been actively engaged in
climate-related disclosure issues for over a decade and remain
committed to ensuring that investors are receiving accurate and
adequate information about the companies in which they are
investing. Since the early days of my tenure, I have been
engaged with fellow regulators, investors, and other market
participants on climate-related matters and, in particular,
have sought to make the engagement between investors and
companies, as well as investors and providers of financial
products and services, substantive and further the
dissemination of material information. This engagement includes
work within IOSCO, where we have been active participants in
the Sustainable Finance Task Force, and work within the FSB,
including with its staff and current and former Chairmen (Randy
Quarles and Mark Carney) and participating in its
Sustainability Finance Network (Network). I have supported the
work of the FSB's Task Force on Climate-Related Financial
Disclosures (TCFD) and the Network, and they have issued
several recent reports.\33\ I also have engaged with the
Investor Advisory
Committee\34\ and our Asset Management Advisory Committee\35\
on these topics and have encouraged each to do their part to
improve the investor-registrant and investor-provider dialogue.
Further, I have made my view on improving disclosure in these
areas clear and welcomed input in various other fora.\36\
---------------------------------------------------------------------------
\33\ See, e.g., Financial Stability Board, Stocktake of Financial
Authorities Experience in Including Physical and Transition Climate
Risks as Part of Their Financial Stability Monitoring (July 22, 2020),
available at https://www.fsb.org/wp-content/uploads/P220720.pdf; Task
Force on Climate-related Financial Disclosures: Status Report (June
2019), available at https://www.fsb-tcfd.org/wp-content/uploads/2019/
06/2019-TCFD-Status-Report-FINAL-053119.pdf; ``Sustainable Finance and
the Role of Securities Regulators and IOSCO (Apr. 2020), available at
https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf.
\34\ See, e.g., Chairman Jay Clayton, Remarks to the SEC Investor
Advisory Committee (Nov. 7, 2019), available at https://www.sec.gov/
news/public-statement/clayton-remarks-investor-advisory-committee-
110719; Chairman Jay Clayton, Remarks to the SEC Investor Advisory
Committee (Dec. 13, 2018), available at https://www.sec.gov/news/
public-statement/clayton-remarks-investor-advisory-committee-meeting-
121318.
\35\ See Remarks at Asset Management Advisory Committee Meeting
(May 27, 2020), available at https://www.sec.gov/news/public-statement/
clayton-amac-opening-2020-05-27.
\36\ See, e.g., FCLTGlobal, ``A Conversation With SEC Chairman Jay
Clayton: Long-Term Investing, Sustainability, and the Role of
Disclosures'' (June 23, 2020), available at https://www.fcltglobal.org/
resource/jay-clayton-sec-webinar/.
Q.10. A Government Accountability Office (GAO) report from
February 2018 states, ``[Securities and Exchange Commission
(SEC)] reviewers may not have access to the detailed
information that companies use to arrive at their determination
of whether risks, including climate-related risks, must be
disclosed in their SEC filings.''\37\ While the SEC has issued
guidance for considering effects of climate change, the SEC has
not mandated disclosures for how climate risk materially
affects returns.
---------------------------------------------------------------------------
\37\ Government Accountability Office, ``Climate-Related Risks'',
February 2018, pp. 17-18, https://www.gao.gov/assets/700/690197.pdf.
---------------------------------------------------------------------------
If Federal regulators do not have the information needed to
fully understand public companies' climate-related risks under
current law, do investors have the adequate information needed
to make informed decisions about companies' risks?
In an October letter, you stated ``I do not believe that
any issues raised by the GAO Report . . . are cause for changes
to our programs or approach.''\38\ Please explain why the SEC
has declined to act on the GAO's concerns.
---------------------------------------------------------------------------
\38\ Letter from Securities and Exchange Commission Chairman Jay
Clayton to Senator Warren, October 13, 2020.
A.10. I am satisfied with the Commission's approach to this
complex issue to date and believe it has been consistent with
our ongoing commitment to ensure that our disclosure regime
continues to provide investors with a mix of information that
facilitates well-informed capital allocation decisions. This
commitment has been, and in my view should remain, focused on
providing investors with information material to an investment
decision, including in areas involving future risks and
uncertainty, such as climate change. Disclosure and materiality
are at the heart of the Commission's regulatory approach. Our
principles-based disclosure requirements should elicit
disclosure that provides investors with insight regarding an
issuer's assessment of, and plans for addressing, material
risks to its business operations but also keeps pace with
emerging issues, like climate change, without the need for the
Commission to continuously add to or update the underlying
disclosure rules as new issues arise.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JAY
CLAYTON
Q.1. What discussion has the SEC staff and leadership had about
business interruption insurance? How has the expectation of
disclosure regarding the business interruption insurance
carried by publicly traded companies changed due to the
pandemic?
A.1. A fundamental principle for the SEC and our capital
markets has always been--and today is even more important than
ever--the importance of issuers providing investors with
financial and operational disclosures that are clear, high-
quality and timely. It is no surprise we have observed the
presence of uncertainty regarding the financial and operating
status of companies, as well as their future prospects, and a
resulting thirst for information from investors and the
marketplace more generally. I believe that the timely
disclosure of high-quality information--be it positive,
negative, or neutral, and be it definitive or subject to
uncertainty in light of the circumstances--increases
credibility and has a generally calming value that contributes
to market function, and in turn, reduces the potential for
systemic risk. In March 2020, along with the Director of the
Division of Corporation Finance, I issued a statement
discussing the importance of corporate disclosures and urging
issuers to provide investors with as much information as
practicable regarding their current financial and operating
status, as well as forward-looking information about their
future operational and financial planning.
Companies should consider their disclosure obligations
within the context of the Federal securities laws and our
principles-based disclosure system. The cornerstone of this
system is the timely, robust, and complete disclosure of
material information. The Commission has made clear that
disclosure requirements can apply to a broad range of business
risks even in the absence of specific line-item requirements. A
number of existing rules or regulations may require disclosure
about the known or reasonably likely risks and effects of
COVID-19 on a company's business operations and financial
condition. For example, disclosure may be necessary or
appropriate in management's discussion and analysis, the
business section, risk factors, legal proceedings, disclosure
controls and procedures, internal controls over financial
reporting and the financial statements. Disclosure about the
risks and effects of COVID-19 may need to include information
about how the company and management are responding to them,
including to the extent material, whether the company has
obtained business interruption insurance. While companies
should routinely disclose material information about how they
are addressing business risks, disclosure about whether a
company has obtained business interruption insurance may be
particularly important in helping investors make informed
investment and voting decisions in the current environment.
Q.2. Regarding the changes to the Accredited Investor rule,
does the SEC have any data or research evidence to show that a
million dollars in wealth indicates that someone is
sophisticated enough to invest in an illiquid offering that
provides limited information?
LDo you think people who qualify solely based on
assets are vulnerable to fraud?
LWhy did the SEC not index the monetary thresholds
to inflation?
A.2. The Commission recognized in the adopting release for the
recent amendments to the definition of ``accredited investor''
that in the case of individuals, higher income or net worth
does not necessarily correlate to a higher level of financial
sophistication. However, until these amendments were adopted,
the test for individuals to qualify as accredited investors had
relied exclusively on a person's income and net worth. This use
of income or wealth as the only proxy for a person's financial
sophistication set up a binary test, where an individual who
may not meet the wealth tests but who is clearly financially
sophisticated was denied the opportunity to participate in our
private markets. In my view, the goal of the amendments is to
more effectively include in the accredited investor definition
investors that have the knowledge and experience to invest in
private offerings. The definition now includes ways for
individual investors to qualify for accredited investor status
that are not tied to wealth but rather actual sophistication.
It is my view that, speaking generally, this measure will
improve the overall level of sophistication of our accredited
investor pool, benefiting all members of that pool.
We will continue to consider the appropriateness of the
financial thresholds in connection with the Commission's
quadrennial review of the accredited investor definition
required by the Dodd-Frank Act. Staff is also monitoring the
size of the accredited investor pool, the characteristics of
individual accredited investors who participate in the private
markets, and, to the extent data is available, performance and
incidence of fraud in exempt offerings.
Q.3. What has the SEC done to make it easier for shareholders
to vote?
A.3. The proxy system is the primary means through which most
public company shareholders cast their votes and express their
views on matters of collective importance. Modernizing and
enhancing the efficiency of the proxy process for the benefit
of all shareholders is an important priority of the Commission.
In recent years, the Commission has made a number of changes to
the rules governing proxy voting, many of which had not been
updated in decades.
In July 2020, the Commission adopted amendments to the
rules governing proxy solicitations that are designed to ensure
that clients of proxy voting advice businesses have reasonable
and timely access to transparent, accurate, and complete
information on which to make voting decisions. Facilitating
investor access to enhanced discussion of proxy voting matters,
even where proxy voting advice is not adverse to the
registrant's recommendation or where there are no errors in the
advice, contributes to more informed proxy voting decisions.
The principle that more complete and robust information and
discussion akin to what would be available at an in-person
shareholder meeting leads to more informed investor
decisionmaking, and therefore results in choices more closely
aligned with investors' interests, was a principal factor in
the Commission's adoption of these amendments. Indeed, in the
adopting release, the Commission stated its belief that it is
appropriate to adopt reasonable measures designed to promote
the reliability and completeness of information available to
investors and those acting on their behalf at the time they
make voting determinations, regardless of the incidence of
errors in proxy voting advice.
The Commission's actions are of significant importance to
long-term retail investors. The majority of our Main Street
investors participate in our public markets through
intermediaries, most commonly through ownership of mutual funds
and exchange-traded funds. Institutional investors, including
the funds that hold retail investments, own approximately 72
percent of the domestic stock market value. Proxy voting, in
the interests of those retail investors, is important to fund
performance and retail investor welfare. Many of the
institutions that manage retail investor money retain proxy
voting advice businesses for services relating to both the
substance of voting decisions and the process of voting,
including automated voting. These businesses are uniquely
situated to influence proxy voting decisions. To the extent
that investment professionals rely on the advice of these
businesses when voting the shares of Main Street investors, it
is important that (1) they do so in a manner consistent with
their fiduciary obligations, and (2) they have access to
transparent, accurate, and materially complete information on
which to make their voting decisions. I believe the
Commission's actions will help ensure that the interests of
Main Street investors and the obligations of those who vote on
their behalf will not only be better aligned, but better
decisions will be made.
In September 2020, the Commission also adopted amendments
to modernize its shareholder proposal rule, which governs the
process for a shareholder to have its proposal included in a
company's proxy statement. These amendments are designed to
facilitate engagement among shareholder-proponents, companies,
and other shareholders, and preserve the ability of smaller
shareholders to access the proxy statements of the companies in
which they have demonstrated a continuing interest. The
amendments are intended to help ensure that a shareholder's
ability to have a proposal included alongside management's in a
company's proxy materials--and thus to draw on company
resources and to command the time and attention of the company
and other shareholders--is appropriately calibrated and takes
into consideration the interests of not only the shareholder
who submits a proposal but also the company and other
shareholders, who bear the costs associated with the inclusion
of such proposals in the company's proxy statement.
I expect the Commission's work to modernize and enhance the
proxy process to continue, including by looking at ways to
increase the voting participation rates of retail investors.
Staff is also engaging with issuers, broker-dealers, transfer
agent representatives, proxy service providers and other market
participants to explore ideas for improvements to the ``proxy
plumbing.'' In particular, the staff has regularly engaged with
major proxy service providers about their efforts to enhance
the readability of the proxy materials sent to investors and to
utilize modern communications methods in delivering these
materials to retail investors. The staff is also focused on
ways to ensure greater accuracy in the tabulation of votes.
Market participants have strong and differing views on the best
approach for addressing this concern, with, for example, some
advocating for premailing reconciliation of the eligible voting
shareholder base to minimize the likelihood of voting
tabulation errors at the meeting. Others, however, express
concerns about the costs of such an approach and prefer
alternative solutions. The staff will assess these issues as it
finalizes recommendations for the Commission.
Q.4. What has the SEC done to implement the Investor Advisory
Committee's recommendations to improve public companies'
disclosures on environmental, social, and governance (ESG)
issues?
Q.5. Do you think that asset prices fully incorporate the
relevant risks due to climate change, such as physical risk,
transition risk, and liability risk?
Q.6. Currently, investors seeking ESG information mostly rely
on third party data providers. Will the SEC provide issuers
with a reliable and consistent framework to disclose material
that is decision useful, comparable, and consistent
information?
Q.7. How will the SEC level the playing field in providing ESG
information among all U.S. issuers, regardless of market cap
size or capital resources?
Q.8. The International Accounting Standards Board recently
issued guidance addressing how existing requirements under the
International Financial Reporting Standards intersect with
climate-related risks. The guidance defined how climate-related
risks may need to be reflected within financial statements.
Should the Financial Accounting Standards Board undertake a
similar analysis of how climate risks may translate when
applying Generally Accepted Accounting Principles (GAAP)?
A.4.-A.8. As a general matter, I believe the Commission's long-
standing, principles-based approach to disclosure is consistent
with our ongoing commitment to ensure investors are provided a
mix of information that facilitates well-informed capital
allocation decisions. This commitment has been, and in my view
should remain, focused on providing investors with information
material to an investment decision, including in areas
involving future risks and uncertainty, such as climate change.
Disclosure and materiality are at the heart of the Commission's
regulatory approach. Our principles-based disclosure
requirements should elicit disclosure that provides investors
with insight regarding an issuer's assessment of, and plans for
addressing, material risks to its business operations but also
keeps pace with emerging issues, like climate change or COVID-
19, without the need for the Commission to continuously add to
or update the underlying disclosure rules as new issues arise.
I believe ``ESG'' is not monolithic and should not be
treated as such. ``E'', ``S'', and ``G'' should each be viewed
within its own context because, for one reason, the approach to
investment analysis appears to vary widely, in some cases
incorporating objectives other than investment performance over
a particular timeframe or frames. With respect to ``E'' issues
and climate change specifically, as a threshold matter, I note
that, to the extent material to an investment decision, issuers
are required to disclose the current and expected future
effects of climate-related issues on their operations and
performance. The issue of climate change and its current and
potential future impact on issues, including as a result of
regulatory and other developments is one where we are engaged
on many levels, including with our domestic and international
counterparts. I and others at the Commission, including through
the work of the Asset Management Advisory Committee, have
invested substantial time and effort, domestically and
internationally, in this area, including through our
participation in various International Organization of
Securities Commissions (IOSCO) and Financial Stability Board
(FSB) efforts. As examples, at IOSCO, we have been active
participants in the Sustainable Finance Task Force and have
supported the work of the FSB, including the industry-led Task
Force on Climate-Related Financial Disclosures (TCFD).
While I believe that in many cases one or more ``E''
issues, ``S'' issues, or ``G'' issues are material to an
investment decision, I have not seen circumstances where
combining an analysis of ``E'', ``S'', and ``G'' together,
across a broad range of companies, for example with a
``rating'' or ``score,'' particularly a single ``ESG'' rating
or score, would facilitate meaningful investment analysis that
was not significantly over-inclusive and imprecise. It has
often been noted that this process can be more efficient if
disclosure is standardized or uniform. However, depending on
the issue, standardization can be difficult, ineffective and
inappropriate across industries. In particular, forward-looking
information can be difficult to standardize in that different
participants within and across industries may reasonably have
differing assumptions about future developments. I have
discussed these considerations in some detail previously. In
particular, efforts to ``score'' a particular investment (e.g.,
a mutual fund or ETF) from an overall environmental or ``ESG''
perspective appear particularly problematic, including that
they may be designed more for marketing reasons than to further
an investment thesis. In addition, forcing metric-specific
standardization in this area, particularly across differing
sectors (e.g., insurance, biotechnology, data services and
transportation), may lead to a loss of information and the
insights that can be derived from examining a range of well-
informed, company and sector-specific disclosures.
That said, as noted above, we are diligently working
through this complex issue through various domestic and
international channels to see if greater standardization or
comparability can be achieved, particularly within specific
sectors. Personally, I am of the view that improving the
decision useful nature of disclosures in this area, including
efforts to enhance comparability, may be best approached
through broad principles, applied on a sector-by-sector basis.
From my perspective, I believe the work of international
bodies, for example TCFD as discussed in its recent 2020 Status
Report, is trending in this direction.
Q.9. Please explain how the SEC calculated a $2.5 million fine
for former Wells Fargo Chief Executive Officer John Stumpf. Why
did the settlement not requiring him to admit wrongdoing?
A.9. Section 8A(g)(1) of the Securities Act authorizes the
Commission to impose a civil money penalty when it is in the
public interest. In making the public interest determination,
the Commission considers: (1) whether the act or omission
involved fraud; (2) whether the act or omission resulted in
harm to others; (3) the extent to which any person was unjustly
enriched; (4) whether the individual has committed previous
violations; (5) the need to deter that person and others from
committing violations; and (6) such other matters as justice
may require. Section 8A(g)(2) of the Securities Act establishes
a three-tier system for setting the maximum penalty the
Commission may impose on an individual: (1) a first-tier
penalty for each act or omission; (2) a second-tier penalty for
each act or omission involving fraud, deceit, manipulation, or
deliberate or reckless disregard of a regulatory requirement;
and (3) a third-tier penalty for each act or omission involving
fraud, deceit, manipulation, or deliberate or reckless
disregard of a regulatory requirement that, directly or
indirectly, resulted in (or created a significant risk of)
substantial losses to other persons or resulted in substantial
pecuniary gain to the wrongdoer.
With respect to admissions, the Commission employs a case-
by-case assessment based on the particular facts and
circumstances of the matter and considers the relative benefits
of added accountability and deterrence from admissions and the
value in avoiding, where appropriate, drawn-out proceedings
that strain resources and lengthen the time to resolution,
including for injured investors to receive compensation.
Q.10. The SEC has encouraged public companies to provide
details on how they consider diversity when making decisions
regarding the makeup of boards. Firms were asked to voluntarily
report diversity metrics. Last year, you reported that only
about 5 percent of firms chose to report diversity metrics. How
has that changed since last year?
A.10. In addition to promoting a culture of diversity,
inclusion, and opportunity at the agency, we are also looking
to the industry we regulate to be leaders in promoting
opportunities for historically underrepresented populations
within their workforces. To that end, the SEC, led by the
Office of Minority and Women Inclusion (OMWI), has increased
its focus on diversity in the financial services industry and
the related value-enhancing proposition in a number of ways,
including through outreach and advisory committee
participation, including several diversity-specific panel
discussions through the Asset Management Advisory Committee.
In 2018, the SEC launched its first-ever Diversity
Assessment Report and communicated directly with approximately
1,300 of the largest SEC-registered firms to encourage
responses. Thirty-eight regulated entities responded, and while
this response was representative of almost half of the
employees in the securities and investment industry, the
results in terms of total firm participation were
disappointing.
The 2020 collection of the Diversity Assessment Reports is
now underway, and the SEC has taken steps a number of steps to
encourage more firms to share information. For example, in
March 2020, OMWI hosted a webinar for regulated entities to
discuss the Diversity Assessment Report and to promote
collaboration and best practices, and over 50 regulated
entities joined via WebEx. In April and August 2020, OMWI had
virtual meetings with the Securities Industry and Financial
Markets Association (SIFMA) Diversity Committee and discussed,
among other topics, how SIFMA could assist the SEC efforts to
improve the number for self-assessment reporting by member
firms.
The responses for the 2020 Diversity Assessment Report
exercise are encouraging. In several instances, multiple
entities of the same parent company received a request, and a
single response covers all the parent company's regulated
entities on our list of companies. We have received 41
responses from this group, which represents an 86 percent
increase in the number of responses received from this group of
regulated entities in 2018 (22). The 41 responses received from
this group cover 105 entities (8.4 percent) on the entire list
of potential respondents. By comparison, the 38 responses
during the entire 2018 collection covered about 5 percent of
the list of potential respondents that year.
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RESPONSE TO WRITTEN QUESTION OF SENATOR SINEMA FROM JAY CLAYTON
Q.1. During this pandemic, the SEC has cautioned investors
against fraudulent schemes perpetrated by actors that claim to
prevent or cure the coronavirus.
LWhat measures has the SEC taken to protect
investors from COVID-related scams?
LWhen it comes to COVID-related scams, have
fraudsters been targeting any particular demographics,
such as seniors?
A.1. During the pandemic, the SEC's Office of Compliance
Inspections and Examinations (OCIE) and Division of Enforcement
(Enforcement) expanded their continuous investor protection
work to incorporate the unique compliance challenges and the
unfortunately inevitable frauds and illicit schemes generated
by COVID-19. Starting in February 2020, the Commission began
suspending trading where immediate action was necessary in
light of questions regarding the accuracy and adequacy of
information in the marketplace. The Commission suspended
trading in 36 issuers, with 24 of those in March and April
alone. The Commission also brought seven COVID-related
enforcement actions within the first year of the pandemic, six
of which alleged fraud against issuers and individuals based on
COVID-19-related claims. Enforcement has also opened over 150
COVID-related investigations and inquiries.
Led by the Office of Investor Education and Advocacy
(OIEA), the SEC has also continued its important education and
outreach to investors and market participants about COVID-19-
related scams. OIEA, along with Enforcement's Retail Strategy
Task Force, has issued investor alerts to inform and educate
investors about concerns related to recent market volatility
and COVID-19-related schemes, as well as an alert warning
investors of bad actors using CARES Act benefits to promote
high-risk, high fee investments and other inappropriate
products and strategies. OIEA and the SEC's 11 regional offices
have also continued targeted outreach events to retail
investors, including to seniors, servicemembers, and other
potentially vulnerable populations. In addition, two of the
Commission's advisory committees--the Investor Advisory
Committee and the Small Business Capital Formation Advisory
Committee--convened special meetings that were held virtually
and broadcast live to the public to provide insight into the
operational, health, safety, and other challenges faced by
public companies and small businesses, as well as individual
and institutional investors, during this time.