[Senate Hearing 115-118]
[From the U.S. Government Publishing Office]
S. Hrg. 115-118
NOMINATIONS OF DAVID J. RYDER, HESTER M. PEIRCE, AND ROBERT J. JACKSON,
JR.
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
David J. Ryder, of New Jersey, to be Director of the United States Mint
__________
Hester M. Peirce, of Ohio, to be a Member of the Securities and
Exchange Commission
__________
Robert J. Jackson, Jr., of New York, to be a Member of the Securities
and Exchange Commission
__________
OCTOBER 24, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Elad Roisman, Chief Counsel
Michelle Mesack, Senior Counsel
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Megan Cheney, Democratic Legislative Assistant
Dawn Ratliff, Chief Clerk
Jimmy Guiliano, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
C O N T E N T S
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TUESDAY, OCTOBER 24, 2017
Page
Opening statement of Chairman Crapo.............................. 1
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
NOMINEES
David J. Ryder, of New Jersey, to be Director of the United
States Mint.................................................... 4
Prepared statement........................................... 35
Biographical sketch of nominee............................... 36
Responses to written questions of:
Senator Brown............................................ 98
Senator Rounds........................................... 99
Hester M. Peirce, of Ohio, to be a Member of the Securities and
Exchange Commission............................................ 5
Prepared statement........................................... 43
Biographical sketch of nominee............................... 44
Responses to written questions of:
Senator Brown............................................ 99
Senator Toomey........................................... 100
Senator Tillis........................................... 101
Senator Menendez......................................... 106
Senator Warner........................................... 109
Senator Warren........................................... 111
Senator Donnelly......................................... 114
Senator Schatz........................................... 115
Senator Cortez Masto..................................... 116
Robert J. Jackson, Jr., of New York, to be a Member of the
Securities and Exchange Commission............................. 6
Prepared statement........................................... 74
Biographical sketch of nominee............................... 76
Responses to written questions of:
Senator Brown............................................ 118
Senator Toomey........................................... 119
Senator Sasse............................................ 121
Senator Tillis........................................... 129
Senator Menendez......................................... 137
Senator Warner........................................... 142
Senator Warren........................................... 147
Senator Donnelly......................................... 149
Senator Schatz........................................... 152
Senator Cortez Masto..................................... 153
Additional Material Supplied for the Record
Wall Street Journal article submitted by Senator Van Hollen...... 155
``The 8-K Trading Gap'' submitted by Senator Van Hollen.......... 159
(iii)
NOMINATIONS OF DAVID J. RYDER, OF NEW JERSEY, TO BE DIRECTOR OF THE
UNITED STATES MINT; HESTER M. PEIRCE, OF OHIO, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION; AND ROBERT J. JACKSON, JR., OF NEW
YORK, TO BE A MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION
----------
TUESDAY, OCTOBER 24, 2017
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Mike Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
This morning we will consider three nominations: Mr. David
Ryder, to be Director of the U.S. Mint; Ms. Hester Peirce, to
be a member of the Securities and Exchange Commission; and Mr.
Robert Jackson, to be a member of the Securities and Exchange
Commission.
These nominees, if confirmed, will serve important roles in
our Nation's commerce and capital markets.
Mr. Ryder is well equipped to oversee the manufacturing and
distribution of our Nation's currency, as well as collectible
coins, national medals, and precious metals, based on his
executive experience in the private sector and extensive
Government service.
Most recently, Mr. Ryder served as Global Business
Development Manager and Managing Director of Currency for
Honeywell Authentication Technologies after serving as CEO of
Secure Products Corporation. He also has firsthand experience
with the U.S. Mint, having served as its Director beginning in
1991 under President George H.W. Bush.
His time in Government service also includes serving as
Deputy Treasurer of the United States, Assistant to the Vice
President, and Deputy Chief of Staff to Vice President Dan
Quayle. Raised in Idaho, Mr. Ryder attended Boise State
University.
Following Mr. Ryder, we will receive testimony from both
Ms. Peirce and Mr. Jackson to be members of the SEC.
Earlier this year, the Senate confirmed the President's
nominee for SEC Chair, Jay Clayton, who now serves with
Commissioners Michael Piwowar and Kara Stein.
Today we have the opportunity to consider two more highly
qualified nominees who, if confirmed, would round out the SEC's
five-person Commission.
The SEC has an important three-part mission: protect
investors; maintain fair, orderly, and efficient markets; and
facilitate capital formation. Each part of the mission is
equally important and should not come at the expense of
another.
Today's nominees have demonstrated a depth of knowledge in
securities law and financial markets through their previous
experience and body of academic work.
Ms. Peirce is a senior research fellow at the Mercatus
Center at George Mason University and the director of Mercatus'
Financial Markets Working Group. Before joining Mercatus, Ms.
Peirce served on the staff of the Senate Banking Committee
under Chairman Shelby, served at the SEC as a staff attorney
and as counsel to Commissioner Paul
Atkins, and worked as an associate at a Washington, DC, law
firm.
Mr. Jackson is a professor of law and director of the
Program on Corporate Law and Policy at Columbia Law School
where he has focused on executive compensation and corporate
governance matters.
Prior to joining Columbia in 2010, Mr. Jackson served as a
senior policy adviser at the U.S. Department of Treasury in the
Office of the Special Master for TARP Executive Compensation
and practiced in the executive compensation department of a New
York law firm.
I look forward to hearing the priorities of each nominee in
their respective positions, as well as their thoughts on the
U.S. capital markets or the production of our Nation's
currency.
Congratulations on your nominations, and thank you and your
families for your willingness to serve.
Senator Brown.
STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Mr. Chairman. And welcome to all
three witnesses. Good to see you all, some of you for the
second time. So nice to see you.
David Ryder has been nominated to be Director of the U.S.
Mint. Congratulations. Ms. Hester Peirce and Mr. Robert
Jackson, Jr., have been nominated to be members of the SEC, as
the Chairman said.
Mr. Ryder previously served as Director of the Mint in the
George H.W. Bush administration. Since that time he has
continued to work in the world of currency design and security
in the private sector, most recently at Honeywell. His public
service and corporate experience have prepared him to lead the
Mint in a time of evolving currency design and technology.
If confirmed, Ms. Peirce would return to the SEC as a
Commissioner. Her time at the SEC and working on the Banking
Committee's staff provide her with a broad understanding of the
agency's regulatory and legislative issues at a time when
technology is transforming the way financial markets work.
Mr. Jackson's academic and private sector background will
help him weigh the theoretical and practical sides of SEC
policy. His scholarship on executive compensation--something
very important to this Committee--and corporate governance will
be useful as the SEC works to finish, finally, the executive
compensation rules required under the years-ago-passed Wall
Street Reform Act.
The nominees to the SEC will finally bring the Commission
to full strength. The SEC has joined corporate America as a
cyberattack victim. Not only must the SEC protect the data it
collects, it must make sure the public companies that are the
engine of our economy are up front with investors and their
customers about cyber risks and breaches.
I want to emphasize the SEC's investor protection mission
is the cornerstone of a well-functioning stock market, and that
is something that is very important to remember. The SEC must
work tirelessly to ensure integrity and fairness in the capital
markets so that investors can believe in the markets and in the
regulator.
The failure to hold any senior executives responsible for
the massive misconduct during the financial crisis stands out
as a failure in enforcement and not just at the SEC. Ms. Peirce
and Mr. Jackson, this is something that should bother you as
well, and if you are confirmed, I expect you to do everything
you can to promote a strong enforcement program.
Thank you.
Chairman Crapo. Thank you, Senator.
We will now move to the testimony, and before doing so, we
need to place each of you under oath. Would you please rise and
raise your right hand? Do you swear or affirm that the
testimony you are about to give is the truth, the whole truth,
and nothing but the truth, so help you God?
Mr. Ryder. I do.
Ms. Peirce. I do.
Mr. Jackson. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted committee of the Senate?
Mr. Ryder. I do.
Ms. Peirce. I do.
Mr. Jackson. I do.
Chairman Crapo. Thank you. That will do.
I will begin the questioning with both you, Ms. Peirce, and
Mr. Jackson. While I----
[Pause.]
Chairman Crapo. They just reminded me I need to let you
make an opening statement.
[Laughter.]
Chairman Crapo. I guess I will.
Senator Brown. This is so much on the Banking Committee's
agenda that we just want to dispense with all the formalities.
[Laughter.]
Senator Shelby. Mr. Chairman, he is from Idaho. You may
dispense with it. That is up to you.
Chairman Crapo. Actually, I really do want to hear your
opening statements.
Senator Brown. They put all that work into writing the
opening statements, and nobody wants to hear them.
Chairman Crapo. OK. My face is red, and we will now start
with you, Mr. Ryder, with your opening statement.
STATEMENT OF DAVID J. RYDER, OF NEW JERSEY, TO BE DIRECTOR OF
THE UNITED STATES MINT
Mr. Ryder. Thank you, Mr. Chairman.
First, I would like to introduce my family who came here
today: my wife of 35 years, Monie; my daughter, Caroline; and
my son, Nick Ryder. And my niece, Sarah Ryder, came up from San
Antonio, Texas, and is interested in learning more about the
Government process, so she came up from San Antonio to be with
us today.
Thank you, Mr. Chairman, Senator Brown, and distinguished
Members of the Committee for allowing me to appear here today.
Mr. Chairman, as you said, I am a fellow Idahoan, having grown
up in Boise. In fact, my siblings and I still own a small piece
of property just outside of McCall, so I do my best to get out
to Idaho at least once a year to visit family and spend a
little time in what the great State of Idaho has to offer.
Chairman Crapo. We appreciate it, and we hope you bring
some common sense back with you to your job.
Mr. Ryder. Thank you.
First, I must say that I am honored that President Trump
has nominated me to serve as the 39th Director of the United
States Mint.
As you are aware, in 1992, I was nominated by President
George Herbert Walker Bush to be the 34th Director of the Mint.
I received a recess appointment at that time and served for a
period of 14 months.
When I left the Government in 1994, I became a partner with
Secure Products, a new venture spin-off from the Sarnoff
Corporation in Princeton, New Jersey, which was formerly the
central research facility for the RCA Corporation. Our mission
was to develop advanced anti-counterfeiting technology
solutions to be primarily used in currency and branded
products. After a successful 13 years in business, the
Honeywell Corporation acquired Secure Products in 2007. The
ensuing 10 years was spent with Honeywell as their global
business development manager and managing director of currency.
In my role at Honeywell, I worked with Government agencies
and central banks around the world to address currency issues.
Interestingly, one of my last duties while at Honeywell was a
joint project with The Royal Mint of the United Kingdom where
we assisted them in the development of the new U.K. one pound
coin, which was introduced earlier this year. This new
circulating coin is considered to be the most advanced and
secure coins in the world today.
If confirmed, I would like to make education one of my
focal points at the Mint. As the 34th Mint Director, we
introduced an initiative called the ``Money Story''. The goal
of this initiative was to educate the youth of this Nation on
the history of money, both coinage and paper, via a teacher's
curriculum and a video co-developed by the U.S. Mint and the
Bureau of Engraving and Printing. This packet of information
was made available to all teachers for use in the classroom.
Teaching our youth early on how to collect coins and other
numismatic products, as well as how to start saving their hard-
earned money, helps lay the foundation of the importance of
money. Over the years, the Mint has continued this excellent
tradition via various tools which are located on their website.
Having worked in the currency industry for the past 25
years plus, I have developed a strong operational and technical
understanding of this tight-knit industry. I respect the men
and women who dedicate their lives to this industry. During my
time with Secure Products and Honeywell, I was afforded the
opportunity to visit and work with many private and Government
currency manufacturers in the United States, as well as around
the world. I will bring to the Mint Director position a strong
understanding of the industry and many of the challenges it
faces.
If confirmed, I would be honored to once again serve in our
Government and work with this Committee. The U.S. Mint has an
impressive history, and I look forward to becoming part of that
history again. As in all businesses, I am sure the Mint has
challenges to address. I look forward to facing these
challenges while at the same time fulfilling its mission.
Thank you.
Chairman Crapo. Thank you.
Ms. Peirce, welcome back to the Committee, and you may now
start your statement.
STATEMENT OF HESTER M. PEIRCE, OF OHIO, TO BE A MEMBER OF THE
SECURITIES AND EXCHANGE COMMISSION
Ms. Peirce. Thank you. Chairman Crapo, Ranking Member
Brown, and Members of the Committee, it is a privilege to be
here today with you, and it is an honor to be nominated,
alongside Professor Jackson, to be a member of the Securities
and Exchange Commission. If I am confirmed, I look forward to
working to protect investors, uphold market integrity, and
facilitate capital formation--the three interrelated parts of
the SEC's mission.
As a young girl, when I was in junior high school, I
dreamed of being a securities analyst. Now, admittedly, that
dream was probably built more on the fact that there was always
a Wall Street Journal gracing my father's reading chair, and my
mother was always listening to the market news on the radio.
And, ultimately, that dream was not to come true, but perhaps
it planted the seeds for why I am here today.
Ultimately, I went on to study economics at Case Western
Reserve University and law at Yale. And following my clerkship,
I joined a law firm where I worked in the securities practice
group. Ultimately, I found my way to the SEC where I spent 8
years. The first part of my time there was spent as a staff
attorney in the Division of Investment Management, after which
I joined Commissioner Atkins' office and worked on a broader
range of issues. Then I had the privilege of coming to this
Committee and working for Senator Shelby, and most recently, I
have been at the Mercatus Center, where I have learned much
from my colleagues' knowledge about regulation and economics.
My desire to return to the SEC is motivated by a belief in
the importance of individuals, institutions, and innovation.
Every individual has a unique set of interests, talents,
knowledge, relationships, and in order for our country to be
able to draw on those, we need to make sure that our capital
markets function properly. So, for example, an entrepreneur who
wants to start a business and has an idea, she needs the money
so she can meet investors through the capital markets. And then
when those investors invest in her company, she is able to
employ other people who can then use their skills and abilities
to further the enterprise. And then when the investors get
their returns from their investment, they are able to invest it
in their own children's education, and those children then
become the next generation of entrepreneurs and employees.
But no one is willing to trust her fortunes and future to
the capital markets unless the institutional framework
surrounding them is strong. We need to have clear rules that
are enforced carefully, and we need to foster compliance with
them. And, of course, everything needs to be done in an orderly
way, with impartiality and diligence. In the United States, the
SEC is a key part of that institutional framework. It is
important for it to set and establish clear rules and modernize
them when necessary.
And that brings me to my third point, which is innovation.
Why is innovation important in financial markets? Not only does
innovation lower prices and improve quality, but it expands
access to people who have not had access to the capital markets
in the past, and it opens up access to companies that have not
had the ability to use the capital markets in the past. But
sometimes regulation is so inflexible that innovation cannot
happen, and so we need to make sure that our rules are flexible
enough to accommodate innovation as appropriate.
If I am confirmed, I look forward to working with Chairman
Clayton and my fellow Commissioners to implement, enforce, and
modernize rules to support healthy, dynamic capital markets.
Together we can ensure that our capital markets serve
individuals and companies across this country, that we build
strong institutions, and that we support innovation.
Thank you, and I look forward to taking your questions.
Chairman Crapo. Thank you, Ms. Peirce.
Mr. Jackson.
STATEMENT OF ROBERT J. JACKSON, JR., OF NEW YORK, TO BE A
MEMBER OF THE SECURITIES AND EXCHANGE COMMISSION
Mr. Jackson. Thank you. Chairman Crapo, Ranking Member
Brown, and Members of the Committee, thank you very much for
the opportunity to join you today. It is my honor truly to be
testifying before you regarding my nomination to be a
Commissioner of the Securities and Exchange Commission.
For me, there is no greater privilege or responsibility
than upholding the SEC's mission to protect investors, maintain
fair, orderly, and efficient markets, and facilitate access to
capital. And to understand why that is so important to me, I
thought it might be helpful for me to start today by sharing a
bit about myself and my family. I was born in the Bronx, New
York, to my two wonderful parents, Maureen and Robert Jackson,
and I feel so fortunate that they could be here with me today.
My mother was one of nine children; my father was one of five.
And of all those people, no one, least of all my parents, would
have even dreamed that 1 day they would be sitting behind their
son on an occasion like this.
You see, the day I was born, my father was working as an
encyclopedia clerk--as an accounting clerk at a small
encyclopedia company called Funk and Wagnalls. Throughout my
childhood, my mother held several part-time jobs, including the
early shift at Dunkin' Donuts, just to help make ends meet.
They were young, overworked, and sometimes even
overwhelmed. But they believed that if they worked hard and
saved what they could, their son might someday go to college.
So every month my parents plowed their hard-earned
paychecks into the market, knowing that if their investments
were protected and growing they might someday be able to afford
to send me to school. And that is really the only reason that I
had the chance to go to college--and the incredible opportunity
to be here with you all today.
I believe that the SEC's purpose is to protect everyday
investors like my Mom and Dad. Because today's markets are so
complex, it can be easy to get lost in technical details and
forget why those safeguards are so important. But my story
shows why protecting America's investors is at the heart of
what the SEC does. Safe markets not only encourage investment
and entrepreneurship and growth. Safe markets make it possible
for two young middle-class parents to transform their lives so
that someday their son has the chance to sit before the U.S.
Senate as a Presidential nominee. Safe markets are at the core
of the American dream, and that is something I have learned by
living it.
That is why my work--in Government, as a teacher, and as a
researcher--has always focused on everyday investors'
confidence in our markets. At the Treasury Department during
the financial crisis, I was proud to help develop rules that
tie top managers' pay more closely to performance and give
investors a voice on executive compensation. When my research
team at Columbia Law School showed that the SEC's systems were
inadvertently giving high-speed traders market-moving
information before the public could see it on the SEC's
website, I worked with this Committee's staff to help make sure
the SEC gave investors the level playing field that they
deserve. And when our team helped convince regulators to
release additional information about stockbroker fraud, we were
proud to help others use the data to expose the brokers most
likely to defraud investors.
If I have the honor of being confirmed, I intend to bring
those tools to bear on the SEC's crucial task. I will be a
strong advocate for exploring how new technologies can help
make corporate disclosures more reliable and enforcement
efforts more effective and efficient. I will encourage the
staff and my fellow Commissioners to draw on the SEC's long
history of favoring transparency as a means of maintaining
investor confidence in our markets. And I will work to
implement the corporate governance protections that Congress
has enshrined into law so that investors, employees, and
communities can be sure that our companies are working to
produce the kind of long-term value creation that has been the
hallmark of the American economy for generations.
Whether protecting retirees from stockbroker fraud, making
sure Americans get a fair price when they purchase shares of
stock, or uniting an entrepreneur with the funding he or she
needs to spur a life-changing invention, the daily meat-and-
potatoes work of the Commission and its staff is crucial to the
functioning of our economy. It is vital to millions of American
businesses and families. That is why my parents' story is such
an important reminder to me. You see, my parents' confidence in
our markets not only changed my life; it changed their lives,
too. My father, the encyclopedia company clerk, retired as the
chief accounting officer of a public company. My mother left
Dunkin' Donuts, earned her teaching degree, and has been
teaching elementary school now for nearly 30 years. None of
that would have been possible if my parents had not felt they
could safely save for their futures--and mine--in our markets.
If I am confirmed, you should know that helping to make stories
like theirs possible is what will motivate me every day. That
is really what makes the SEC so important--and why I am so
honored to be here.
Thank you again for the opportunity to appear before you
today. I would be delighted, of course, to answer any questions
you might have.
Chairman Crapo. Thank you, Mr. Jackson.
And now we are at the question time, and I will start out.
I want to start out with you, Ms. Peirce and Mr. Jackson. And
while we all know that the Chairman of the SEC sets the agenda
for the Commission, I would like each of you to just discuss
one or two or three areas that you think the Commission should
focus on and prioritize during the next year. Ms. Peirce, why
don't you start out?
Ms. Peirce. Thank you. In addition to the rulemaking agenda
that is going to be taking up a lot of time, I think there are
some important issues to look at, for example, the supervision,
the oversight of firms through OCIE. The Office of Compliance,
Inspections, and Examinations is an important thing. I want to
see how that is working, including the oversight of SROs, such
as FINRA. And I also think it is important to take a look at
market structure again, not only equity market structure but
also fixed-income market structure. I think we need to have a
long-term view of how we can address some of the problems that
we see cropping up in those areas. And then, of course, the
recent events suggest that cybersecurity will be an important
area for us to keep an eye on.
And, finally, I know that once you get inside an agency,
you often see things that you did not see before that need
attention. So I will definitely have an open mind to consider
other issues that need to be looked at.
Chairman Crapo. Thank you.
Mr. Jackson.
Mr. Jackson. Well, thank you, Senator. I would emphasize
three areas in response to your question, and the first would
be cybersecurity. I think recent events both at the SEC and
public companies have taught us that we have got some work to
do, sir, in making sure that our securities rules and our
securities regulators have the tools and technologies in place
to keep up with the changing marketplace. So I think that is an
area we should focus.
Second, I would also want to focus on completion of the
outstanding rules that the Dodd-Frank Act requires. Sir, I am
concerned that some 7 years after the passage of that law,
several important investor protections, including protections
around executive compensation and the clawback of erroneously
awarded pay, still are not finished. I think those are things
we should be working on and finishing, and right now the
Commission has several proposals before it that I think are
worth some attention.
And then, finally, I think we should be thinking about
enforcement and, in particular, sir, the law of insider
trading. I worry that some of the recent events have caused
investors to wonder whether or not the SEC is really on top of
the job, is really the cop on the beat that we need to make
sure that investors are getting a fair deal. I think those
enforcement efforts deserve further attention and, if
confirmed, I would very much look forward to working on them.
Chairman Crapo. Well, thank you.
And, Mr. Ryder, similarly, what are some of the top two or
three priorities you would like to bring to the U.S. Mint?
Mr. Ryder. Well, having not had a Director of the Mint for
some 8 years, I think one of the things is to get in and get my
hands dirty and understand a lot of the issues that have not
been addressed by a Director in the past 8 years, to address
some of the EEO issues that may be before the Mint,
manufacturing issues with the manufacturing facilities, and
make sure they are running smoothly in order to be able to
achieve higher revenue for the Government. Last year, the Mint
returned some $550 million to the general fund in processes and
fees from special coinage programs and from of Seigniorage. I
would like to try to increase that revenue. And then, finally,
work with the Members in this Committee to ensure that some of
these commemorative programs that do earn quite a lot of money
for the Government are operated professionally, smoothly, and
return the type of value that you all expect.
Chairman Crapo. Thank you. And I only have about a minute
left, so I would like to ask you to be very brief in your
response. This question is for Ms. Peirce and Mr. Jackson. Both
of you brought up enforcement in my first question. This
question relates to it, and while the SEC does not have
criminal authority, it does have civil enforcement authority.
To each of you, and, again, briefly, could you describe
your views on the SEC's enforcement program as well as your
views on bringing actions against individuals and not just
regulated entities when appropriate?
Ms. Peirce. Enforcement is a key part of what the SEC does.
If the SEC is not enforcing rules, then no one will take them
seriously. So I think it is really important to focus resources
on the right areas. I am glad that the Chairman is focused on
retail fraud. And I think that looking at individuals is
important. If something has been done wrong, an individual has
been involved. So I would like the SEC to make an effort to
look for individuals to hold responsible.
Chairman Crapo. Mr. Jackson.
Mr. Jackson. Mr. Chairman, I think that enforcing the
securities laws is critical to maintaining investor confidence.
And in particular, what I would be interested to learn more
about at the agency would be the degree to which new technology
is being used to make those enforcement actions not just more
effective but more efficient, so we can make the best possible
use of the resources that Congress gives us.
Chairman Crapo. Thank you.
Senator Brown.
Senator Brown. Thank you, Mr. Chairman.
Mr. Jackson, senior executives at Wells Fargo and Equifax,
both who testified in our Committee recently, they oversaw
longstanding problems: fraud pushed from the top at Wells
Fargo, undoubtedly, and negligent cybersecurity practices at
Equifax. They were allowed to retire after giving up only part
of their compensation packages. Equifax CEO Richard Smith, who
retired in sort of humiliation, received salary and stock worth
$57 million in 2016, could still receive about $90 million for
retiring. I suppose that is--57 plus 90 is about a dollar for
every person whose information was stolen, if I can personalize
it a little bit. Existing clawback rules in the proposal under
the Wall Street Reform Act only apply if there is financial
fraud. We now have two examples frankly that could be just as
bad as cooking the books.
Mr. Jackson, how should corporate boards and the SEC
encourage sound executive compensation practices and improve
accountability?
Mr. Jackson. Well, thank you, Senator, and just to begin, I
could not agree with you more that corporate accountability and
making sure that investors see that when things like this
happen executives do not walk out the door with the kinds of
payments you are describing are critical. Senator, that is why
I would favor finishing the rules that the SEC is currently
working through that are mandated by the Dodd-Frank Act. And,
in particular, Section 954 of that statute authorizes and
requires the SEC to promulgate rules requiring companies to
adopt policies or develop policies on the clawback of executive
compensation in a variety of circumstances. And I think this
would be one that we should be taking a careful look at.
It is troubling to me, Senator, that 7 years after the
passage of that law, those rules still are not in effect, and I
think that is among the first questions I would ask if I were
confirmed.
Senator Brown. And I think both of you--I do not know
either of you well. I have spoken, obviously, privately and
publicly in this sense with each of you. I think you both
understand how this undermines the public's confidence in the
people you regulate and in the Government for the fact that--
you know the litany--nobody of major consequence went to
prison. We think it is a victory around here when a CEO who
resigns in disgrace gives up his bonus--always a ``his,'' it
seems--gives up his bonus, like that is a major give-back even
though they have pocketed tens of millions of dollars with no
real accountability. And I hope that both of you understand
what that does to people's faith in Government, in regulators,
and particularly in the financial sector.
I want to talk about--let me go with this next question.
This will be for Ms. Peirce and Mr. Jackson. I am concerned
that companies are failing to disclose information to investors
and to the public. Wells Fargo covered up a fake account
scandal. They were investigated. They were sued by three
regulators. They agreed to a $180 million fine. Cynics and
people not so cynical would say that is just a cost of doing
business. The company said this was not material. In the
meantime, investors and consumers who entrusted Wells Fargo
with their money were left in the dark.
Equifax waited over a month to disclose the breach that led
to the theft of over 145 million Americans' personal
information, has never said when or how it determined the
breach was material. In the meantime, investors and consumers--
even though executives knew, some of them, the investors and
consumers were left in the dark.
Ms. Peirce, how can investors be confident they are getting
the whole story from companies like Equifax and Wells Fargo
that seem--these companies seem to choose when the rules apply
to them?
Ms. Peirce. Senator, without speaking to any particular
company's disclosure, it is really important for companies to
think carefully about what material facts they need to
disclose. And the SEC staff works intensively with companies
and goes back and forth about what is happening at the company.
But, of course, ultimately the company knows better than the
staff what is material and what is not, and so the ultimate
responsibility is on the company.
Senator Brown. So you argue that we should leave the
decision to the company on what is material?
Ms. Peirce. No. My point is just that the SEC is pushing
companies on what is material and what is not, but the ultimate
responsibility--when omissions are made, the ultimate
responsibility lies with the company, not with the staff.
Senator Brown. When a company makes a decision like
Equifax, they apparently thought it was not material for a
period of time. The Equifax stock price dropped 25 percent
after it disclosed. That seems material to me. If you are
saying that it is up to the company to decide materiality,
doesn't that mean company executives should be held accountable
when it clearly--maybe they thought it was not material, but
certainly the stock market and investors and the public did.
Ms. Peirce. Again, without speaking to any particular
company's disclosure, it is important to hold companies and
individuals responsible when omissions are made.
Senator Brown. OK. Mr. Jackson, what can the SEC do to make
sure fewer companies make the wrong decisions in terms of
materiality especially? What do we do to make sure those
companies that make--that they make fewer wrong decisions, if
you will, like Equifax and Wells Fargo?
Mr. Jackson. Thank you, Senator. I think the way to think
about this and the way I think about it is from the point of
view of investor protection. The materiality standard asks us
to think through what would a reasonable investor think affects
the total mix of information about the stock that they are
choosing to buy or sell.
Now, for me, my concern is that the SEC's rules in this
area and guidance on what materiality is is not keeping pace
with the changes in our markets and our companies. I think the
recent events you talked about are some evidence of that. And
for me, this requires the SEC to think through how are the
kinds of disclosures companies are making in today's market
different from the ones they were making in the market 5, even
7 or 10 years ago? And how do we need to update the way we
guide companies about what is important to investors going
forward? That would be the way I would think about this issue.
Senator Brown. Thank you.
Chairman Crapo. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Mr. Ryder, on October 16th, the Inspector General of the
Treasury Department, Mr. Eric Thorson, provided a memorandum to
the Treasury Secretary discussing challenges that the
Department is currently facing. In this memo, the Inspector
General stated that the U.S. Mint should consider the effect of
alternative payment methods and other technological advances.
If confirmed, in what ways will you address Inspector General
Thorson's concern in the area of cryptocurrency?
Mr. Ryder. Thank you, Senator. Having spent the last 25
years primarily with technology-related companies, I certainly
appreciate the advancement in technologies. Some of the things
that we did for central banks around the world were based on
advancements in anti-counterfeiting technology. If confirmed, I
do plan on entertaining as many technology companies that want
to come to the Mint and present their technology. I think it is
important to grow the technology base. Given how old it is,
certainly change is necessary in certain cases. So I would
welcome the opportunity to do that.
Senator Shelby. Could the cryptocurrency be a challenge to
a lot of the central banks and so forth that regulate our
currency?
Mr. Ryder. Probably. Central banks are pretty old
institutions that do things one way.
Senator Shelby. I know.
Mr. Ryder. And they do that for a long time, and it is hard
to change. The payment systems, vending machines, all of those
apparatuses worldwide would need to be looked at, retrofitted
if necessary, but with the proper technology, I think it is
possible to certainly entertain it and see where it takes us.
Senator Shelby. If you do not, won't the market get ahead
of the regulators?
Mr. Ryder. That is quite possible. Technology is a pretty
slippery slope, and you have to be pretty darn sure of what you
are implementing in a market this size that it is going to
work, is going to work effectively, and not slow down the
payment process.
Senator Shelby. Ms. Peirce, I join Chairman Crapo in
welcoming you back to the Committee where you spent a lot of
time. If confirmed, you will be tasked, as you well know, with
protecting everyday investors--you mentioned that--while
maintaining the efficiency and integrity of U.S. capital
markets. I have long believed that the best way--one of the
best ways for the SEC to do these things is to conduct a
thorough cost-benefit analysis on all rulemaking. For the U.S.
to maintain its longstanding position as having the strongest
capital markets, I believe the regulators must ensure that they
prevent bad actors from taking advantage of individuals while
also not creating an undue regulatory burden. Do you want to
speak to that?
Ms. Peirce. Yes, I think that the----
Senator Shelby. The cost-benefit analysis.
Ms. Peirce. Economic analysis is extremely important. The
agency needs to figure out what the problem is it is trying to
solve, and then it needs to look at the different methods.
Senator Shelby. And also how you do it, right?
Ms. Peirce. Exactly. The different methods of solving it
and then the costs and benefits associated with each. And it is
very important to also build in metrics so that you can look
back and see how the rule is working.
The SEC has improved its economic analysis in recent years,
but there is more room for improvement, and if I am confirmed,
I look forward to working on that.
Senator Shelby. Mr. Jackson, you had a compelling statement
a few minutes ago, and I believe you, along with Ms. Peirce,
will be a great addition to the SEC. I have the same basic
question to you, because in a 2016 brief I have been told that
you filed in the case between MetLife v. the Financial
Stability Oversight Council, the FSOC, you stated--and, of
course, I know you are an advocate. You stated that using a
cost-benefit analysis to designate institutions as systemically
important, your words, ``reveals a lack of understanding of
basic principles of financial regulation.'' What did you mean
there? Or do you disagree with what she said?
Mr. Jackson. Thank you, Senator. In that brief, in that
particular case, the position we were taking was not that cost-
benefit analysis is not important.
Senator Shelby. OK.
Mr. Jackson. And, Senator, I agree with you that thinking
through the costs and benefits of any particular rule is
critical to----
Senator Shelby. It is important to all of us, isn't it?
Mr. Jackson. Yes, sir. I agree with you. The point we were
making in that brief was not that costs and benefits are not
important, but that we should know the limits of what we can
know about costs and benefits in any particular case, because
at the end of the day, Senator, although regulators must work
hard to know what costs and benefits are, many of us make
policy judgments, including, with all respect, the Congress,
not knowing exactly what the implication might be of any
particular choice. And that was the point we were making in
that case.
Senator Shelby. OK. Ms. Peirce, quickly, we have a lot of
layers of regulation, sometimes--well, we have laws, too, that
are overburdensome and so forth. How will you at the SEC work
to look back on some of the regulations and ascertain if they
are duplicative, do they make sense--in other words, good
oversight? Because I think the SEC should do good oversight,
just like we should.
Ms. Peirce. Yes, it is very important, and the SEC has been
around for a long time, so it does have quite a few years of
rules, and I think it makes sense to go back and see how
individual rules are working and also see how they are working
together and when we need to pare things back or when we need
to add things. But we should do it very carefully with being
mindful of the overall burden.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Crapo. Thank you.
Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
I was struck, Ms. Peirce and Professor Jackson, that you
both identified cybersecurity as one of the key challenges. In
that regard, you seem to be closely aligned with Chairman
Clayton because he said when he was here for his confirmation,
``I think cybersecurity is an area where I have said previously
I do not think there is enough disclosure. In terms of whether
there is oversight at the board level that is comprehensive for
cybersecurity issues, that is something that investors should
know, whether companies have thought about the issues, whether
it is the particular expertise of the board or not. But I agree
that it is something companies should know. It is a very
important part of operating a significant company. Any
significant company has cybersecurity risk.''
I assume you agree with the Chairman, Ms. Peirce.
Ms. Peirce. I do think that almost every company these days
has cybersecurity risk, and I think it is important for them to
think about how to disclose that to investors and for the SEC
to think about whether it needs to provide additional guidance
to help them do that in light of some of the recent changes in
recent years and the fact that the threats are greater now than
they were even 5 years ago.
Senator Reed. Professor Jackson.
Mr. Jackson. Absolutely, Senator, I think the risks that
companies face on the cybersecurity front today are different
than they were even just a few years ago. And my concern is
that we make sure that the rules they face and the disclosures
they provide to investors keep pace with those changes. I think
it is a critical area for the SEC.
Senator Reed. Would it help to have some legislative
direction so that the SEC could move more expeditiously?
Mr. Jackson. Well, Senator, I think it is always helpful to
have guidance from the Congress about exactly what the SEC's
priorities should be, and I look forward to working with you
and your staff on those questions. But I should point out that
updating these rules is critical to the SEC's mission more
generally, and they can, and I think sometimes they should, do
it without legislation.
Senator Reed. All right. Another aspect of the SEC's
responsibility for cyber is having the resources. In Dodd-
Frank, I helped legislate a $50 million per year fund for the
SEC for technology improvements and cybersecurity. And, again,
I asked Chairman Clayton in September about the fund, and he
said essentially, ``We need more money, and we will ask for
more money.'' And I would again ask, starting with Professor
Jackson, do you think we will need significant resources to get
the SEC ready?
Mr. Jackson. Yes, and the reason, sir, is that companies
are spending--the markets that the SEC hopes to regulate are
spending billions of dollars on the latest technology. And for
the SEC to keep up, they need to have the kind of resources
that you just described.
I was very glad to see that provision in Dodd-Frank that
provides the SEC the funding, and, sir, I am not sure we can
ask the SEC to keep up unless we provide them the resources
that allow them to do so.
Senator Reed. Ms. Peirce, your view?
Ms. Peirce. Funding is obviously an important component of
the SEC's ability to oversee the markets, but it is also
important that resources be used well. And it is a little bit
difficult from the outside to understand how well resources are
being used. You know, I can see Inspector General reports that
talk about problems on the inside. But it will be much easier
to assess that when I am actually there.
Senator Reed. My sense, though, is that given what we have
read in the newspapers, what we have seen on television, given
what your regulated entities spend, particularly the large
ones, on cybersecurity, the funds that the SEC is devoting are
rather meager. So my instincts would be that we need to
reinforce your efforts, in addition to providing more guidance,
and we are working on legislation to help you do that.
Professor Jackson, you pointed out in your testimony that
the purpose of the SEC really is to protect people on Main
Street, not people on Wall Street, and because of the
complexity of the markets, because of the complexity of
products, I wonder if you might expand on those points.
Mr. Jackson. Thank you, Senator. Yes, I think it is very
easy to be at an agency like this one and talk about and think
about these problems in very technical ways. What should the 8-
K rules look like? What is the right market structure for us?
And for me, the important thing, and what I hope I might be
able to do if I am confirmed as a Commissioner, is keep in mind
why you do it. And I think the reason that you do it is so that
everyday investors can have the kind of story my family had,
where they can somehow find a way by plowing away money into
safe investments in the American economy, somehow find a way to
change their lives. And that certainly would motivate me, if I
am confirmed, sir.
Senator Reed. Thank you very much.
And just for the record, Mr. Chairman, I am not trying to
imitate Senator Brown. I have a bad cold.
[Laughter.]
Chairman Crapo. Well, and you finished within your 5
minutes, also, and I appreciate that.
Senator Rounds.
Senator Rounds. Thank you, Mr. Chairman.
First, I want to thank all of you for meeting with me in my
office last week, and I just want to start with Ms. Peirce and
Mr. Jackson. We had the opportunity to talk about FINRA at our
meetings, and I believe there is room for improvement at FINRA,
especially in the area of transparency and in the way that they
work with compliance with different companies who are producing
products.
FINRA must also do, I think, a better job of giving
producers an outlet to air their concerns. Sometimes I suspect
that the actual companies or the compliance departments want to
make sure that producers are absolutely not in front of or
involved in any reporting whatsoever of anything that is
inappropriate other than directly through a compliance
department itself.
I am just curious whether or not it is time to take a
second look at FINRA and whether or not their directions with
regard to compliance is appropriate at this time and whether or
not it has to be looked at and reviewed.
Ms. Peirce. I do think that FINRA needs to be reviewed. I
am encouraged by the fact that they are now under the
leadership of Robert Cook, who has made an effort to reach out
to a whole range of constituencies to find out their concerns
about FINRA. That said, I think it is important for the SEC to
oversee that process closely. I worry about transparency, too,
and I have heard from small firms that have concerns about
their ability to be heard by FINRA. So I think that is
important.
We are seeing the number of small firms drop pretty
dramatically, and so one has to ask: Is that related to the
fact that the regulatory burden is just not properly
calibrated? But then you also raise an important issue, which
is we want to make sure that the communication between FINRA
and its regulated entities is such that when someone sees
something bad happening in the industry, they can go and tell
FINRA without being scared that that is going to train FINRA's
attention on a firm that is fully compliant and doing things
well.
Senator Rounds. Do you think that atmosphere exists today?
Ms. Peirce. I worry that the atmosphere now is one just as
you described: You keep your head low, and you do your thing,
and you are not even willing to raise issues when you see real
fraud happening.
Senator Rounds. Mr. Jackson.
Mr. Jackson. Thank you, Senator. As we discussed in your
office, I think it is important that the SEC take a prominent
oversight role with respect to FINRA, and as we discussed, I am
in particular interested in the part of your question that
talks about transparency. One thing that FINRA has been doing
is collecting important information and data on the degree to
which stockbrokers are engaged in fraud. And one thing that has
come to light very recently is that there are a number of
repeat offenders in that space, and I am not sure that FINRA
has been transparent enough in giving that information to
investors so investors can tell the difference between a
producer who can help them plan for their retirement and
somebody who is going to take their money.
So I think there is a lot of work to do in that area. But I
am also encouraged by Robert Cook's leadership. I think he
understands this, sir, and if confirmed, I very much look
forward to working with you.
Senator Rounds. Thank you.
I think that the Department of Labor's fiduciary rule is
fundamentally flawed, and I firmly believe that this should
have been done at the SEC in the first place. I think you would
have done a better job and you would have understood the need
of small investors.
In addition to the jurisdictional issues, this rule truly
does hurt that small investor by--most of them are going to get
priced out of the market based upon the DOL's current fiduciary
rule. Chairman Clayton has been active on this issue since
starting at the SEC. What are your views on the DOL's fiduciary
rule? And what role do you believe the SEC should have in this
space going forward? I will begin with you, Mr. Jackson.
Mr. Jackson. Thank you, Senator. Let me start by making
clear I agree the SEC should have an important role in the
development of these fiduciary standards. It is a natural area
for the SEC to do rulemaking. And I understand that presently
the Chairman is working with the Department of Labor and other
regulators to develop the SEC's presence.
Without commenting too much on a matter that might come
before me if I were confirmed, I want to say my own view is
that what is important in developing this standard is to make
sure that the market and investors have consistency. Senator,
my concern is that someday investors are going to think they
have one standard of protection for their retirement assets and
another standard of protection for their brokerage accounts.
And I think that kind of confusion is not only costly but does
not let investors know what they need to know about the
protections that they have.
Senator Rounds. I am going to run out of time, but Ms.
Peirce?
Ms. Peirce. I have concerns about the DOL's rule as it is
currently written. I am glad that calmer minds have prevailed
and people both at DOL and at the SEC are taking a look at it.
I think it is important to work with the States as well and try
to get everyone in a room to work together for the objective
that everyone has, which is to make sure that investors know
the type of service they are getting and that they have access
to service.
Senator Rounds. Thank you.
Mr. Ryder, I am out of time, but I will ask one question
for the record, but I will submit it to you for the record if
that is OK with the Chairman. I think you will do a fine job,
sir.
Mr. Ryder. Thank you.
Senator Rounds. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you. I am over here at the
children's table.
[Laughter.]
Senator Cortez Masto. I appreciate it. I am a new Senator
from Nevada. I appreciate the conversation we are having here
today, and, Mr. Jackson, I just wanted to follow up, and Ms.
Peirce, on some of the conversation that I have heard already
from Senator Brown and some others with respect to individual
executive accountability and what that should look like at the
end of the day.
Ms. Peirce, what specific steps would you take to bolster
executive accountability? I have heard you having this
conversation, but what would you actually do when it comes to
executive accountability and making sure that the SEC is doing
the enforcement necessary?
Ms. Peirce. I think a lot of it really does come down to
specific cases and asking questions when you get a settlement
that only involves a company pushing and saying ``why are we
settling only with the company without individuals being
involved?'' Because it really is a case-by-case issue.
Now, we have to be able to prove the case, obviously,
against the individual, but I am worried that too often we are
just seeing settlements that are using shareholder money to
take the focus off the executives.
Senator Cortez Masto. Thank you.
Mr. Jackson.
Mr. Jackson. Thank you, Senator. My own view about this is
that there are two things we should be thinking through.
First, to what degree is the SEC pursuing the enforcement
actions that it can against individuals? And I agree with what
has just been said that we could focus on not only settlements
with corporations, but also the individuals who are
responsible. And I think it is terrific to ask that question.
But I would back up, Senator, and ask a broader question,
which is: Do we have the law we need, does the SEC have the
tools it needs to bring those cases successfully? Because the
standards of proof are extremely high, the cases can be
difficult to make, and I am wondering whether the law that we
have is the law that we need to hold individuals accountable.
And that is something I would very much look forward to working
with this Committee and you and your staff on, updating that
law to make sure that individuals can be held accountable when
things go as wrong as they did in the financial crisis.
Senator Cortez Masto. I appreciate those comments, because
my next question kind of fits right into that, and you are
familiar with the Yates memo, and I specifically am concerned.
When I asked Mr. Clayton about the Department of Justice
potentially withdrawing the Yates memo from the previous
administration, he really could not comment on the potential
impact on the SEC's enforcement program. As you know, this memo
outlines six key steps prosecutors should take to strengthen
the pursuit of individual corporate wrongdoing, and news
reports indicate that the Attorney General, Attorney General
Sessions, may rescind the memo or scale it back.
So if confirmed to the SEC, will you commit to redoubling
efforts to hold individuals accountable for corporate
wrongdoing, even if the Department of Justice backs away from
the previous administration efforts? Ms. Peirce.
Ms. Peirce. Yes, the SEC is an independent agency and has
its own enforcement agenda to pursue, and an important part of
that is looking at individuals. So I will commit to looking at
individuals.
Senator Cortez Masto. Thank you.
Mr. Jackson.
Mr. Jackson. I agree with Ms. Peirce, and I share that
commitment. The SEC is an independent agency, and whatever the
Department of Justice does, I think it is important that the
SEC redouble its commitments to enforcement and, in particular,
holding individuals accountable. So, yes, Senator, I will
commit that to you today.
Senator Cortez Masto. I appreciate that.
Arbitration clauses, Ms. Peirce, you have written
critically about the CFPB's rule limiting forced arbitration
clauses. As we know, this rule will give consumers a choice as
to whether they want to resolve disputes with financial
companies through a rigged arbitration system or have their day
in court. Your claim is that the CFPB's rule should be repealed
and the market can solve this problem. If consumers do not like
the clauses, they simply can refuse to do business with
companies that use them.
But let us take the two recent examples that we have talked
about. With the Equifax data breach impacting 145 million
Americans' personal data, the company initially included a
forced arbitration clause in its identity theft protection
service, only removing it after tremendous public outcry.
Meanwhile, other credit reporting agencies still use these
clauses, and Equifax still even uses such restrictions in it
general terms of service. Wells Fargo continues to maintain in
court that forced arbitration clauses apply even to fake
accounts that consumers never even requested in the first
place.
Can consumers ask to be deleted from credit reporting
agencies' data bases if they do not like their arbitration
clauses? They simply just cannot walk away. And this is data
that they do not necessarily own, even though it is their
personal information. What rights do they have to vote with
their feet when Wells Fargo tries to enforce such a clause on a
fake account or Equifax does the same thing with data that is
really not their own?
So I am curious how you can make that statement and what
your actions would be into looking at forced arbitration
clauses as SEC Commissioner.
Ms. Peirce. So credit reporting agencies are not regulated
entities of the SEC, but in general, arbitration can work well
for people, but, obviously, the circumstances around it matter.
So if I were at the SEC, I would be happy to work with staff
and my fellow Commissioners to consider arbitration as it comes
up. But I do think that arbitration in general can be actually
more beneficial than class-action litigation. Treasury issued a
report yesterday, I think, talking about that. So I think it is
important to look at the evidence.
Senator Cortez Masto. So you would be willing to study it
as an SEC Commissioner, forced arbitration clauses and the
impact they have on individuals who are really entering into
adhesion contracts that do not really have the ability to walk
away from if they need service?
Ms. Peirce. As that issue comes up on the SEC's agenda,
but, as I said, the SEC would not be looking at something like
the credit reporting agencies, which are outside its purview.
Senator Cortez Masto. My time is running out, and I
appreciate your comments.
Mr. Jackson, is this something that you think the SEC would
be willing to study or take a look at or has a role?
Mr. Jackson. I think it should, and let me just say,
Senator, that this issue is going to come up again because,
increasingly, companies are including mandatory arbitration
provisions with respect to shareholder lawsuits against them.
And to the degree that these kinds of provisions come up and
shareholders are asked to go through arbitration instead of
litigation, I will have real questions about the degree to
which we are protecting those shareholders. To me, Senator,
what is puzzling about that development is we already have some
law, the Private Litigation Securities Reform Act, that
increases the burdens of proof and tries to deal with nuisance
litigation. And, more generally, Senator, I do not have the
sense that what we have in corporate America is too much
accountability. So for me, I would be skeptical of those
clauses, and I want to take a close look at them.
Senator Cortez Masto. Thank you. I notice my time is up.
Thank you for your indulgence.
Mr. Ryder, I have no doubt you will do an incredible job. I
appreciate all three of you, really, and your willingness to
serve in public service, so thank you. And welcome to your
families as well.
Chairman Crapo. Senator Kennedy.
Senator Kennedy. Thank you, Mr. Chairman.
Mr. Jackson, I listened to your comments about everyday
investors and transparency, and I agree with you. Have you ever
bought a stock?
Mr. Jackson. Yes, sir.
Senator Kennedy. Before you buy, did you read the
prospectus?
Mr. Jackson. Well, I reviewed all the disclosures. It was a
company that had gone public some time ago, but I read all the
relevant disclosures, yes.
Senator Kennedy. No. Did you read the prospectus?
Mr. Jackson. I do not recall in that particular case, but
generally I would want to know all the things disclosed, both
in the prospectus and the more recent disclosures.
Senator Kennedy. All right. Have you ever bought a bond?
Mr. Jackson. Yes, sir.
Senator Kennedy. Did you read the prospectus?
Mr. Jackson. No. In that case, I do not think so, sir.
Senator Kennedy. OK. Ms. Peirce, have you ever bought a
stock?
Ms. Peirce. I am a mutual fund investor because I realize
my limitations.
[Laughter.]
Senator Kennedy. Before you bought the mutual fund, did you
read the prospectus?
Ms. Peirce. I did not read the prospectus before I bought
the mutual fund, I will admit.
Senator Kennedy. I guess my question is: What is the point?
I mean, I believe in disclosure. And we all talk about everyday
people and ordinary investors. But yet we have made the
disclosure documents inaccessible.
Now, you are both well-educated, intelligent people,
presumably sophisticated investors. You are going to be on the
SEC. I mean, what is the point of a prospectus if nobody is
reading it?
Ms. Peirce. I mean, I think you make an excellent point,
which is that especially for things like mutual funds, where it
is a retail investor audience that you are going for, it is
important to have documents that are tailored for them to read.
Now----
Senator Kennedy. Well, I know I am making a good point.
What are you going to do about it on the SEC?
Ms. Peirce. Well, I think that that is an issue that--for
example, the Investor Advisory Committee is a relatively new
addition, a Dodd-Frank addition to the SEC, and I think it can
be very useful in helping the Commission figure out what kind
of disclosure is needed, and also there is more--the SEC is
making a greater effort to do investor testing and things like
that. And I think that there is real promise there.
Senator Kennedy. Well, I can save some time on the investor
testing. The lawyers have made the prospectus meaningless.
People do not read them. OK? There is your poll. I do not know
anybody who reads it. I am not saying we should not have
disclosure. We need more disclosure. But what we are doing is
not working.
Ms. Peirce. I fully agree that we need to revisit
disclosures to find out what we can do to make it work.
Senator Kennedy. I mean, it looks to me like the only
people benefiting are the lawyers. You used to be at Wachtell
Lipton. I bet you all charged--I am not saying--look, I believe
in free enterprise. But, I mean, what do you pay a law firm to
put together a prospectus?
Mr. Jackson. I am sure it is expensive, Senator.
Senator Kennedy. Yeah. That has always bothered me that the
SEC always talks about disclosure, and what I think the SEC
does in many cases is undermines it.
Let me ask you this: Can we agree, Mr. Jackson, that the
recession from 2008 was probably the worst we have had since
the Great Depression?
Mr. Jackson. Yes, sir.
Senator Kennedy. How many people went to jail--well, let me
strike that. What caused it?
Mr. Jackson. Well, Senator, it is complicated.
Senator Kennedy. How about giving me a one-sentence answer?
I do not mean to be rude, but I try to stay--how about this:
greed? Would you agree with that?
Mr. Jackson. I would agree that was an important factor,
Senator, absolutely.
Senator Kennedy. All right. How many people went to jail?
Mr. Jackson. In terms of high-profile, important
accountability convictions, I do not think there are any, sir.
Senator Kennedy. Did the SEC take a lead in trying to hold
real people with beating hearts who were greedy, did the SEC do
anything to make them accountable?
Mr. Jackson. Well, sir, they did bring some cases in this
area, but as you point out, there were no successful
convictions at the highest possible levels of corporate
management. And if you are asking, sir, did we do enough to
hold those people accountable, then, Senator, the answer is no.
Senator Kennedy. Ms. Peirce, do you think anybody broke the
law on Wall Street in 2008?
Ms. Peirce. Certainly.
Senator Kennedy. And how many went to jail, again? I
forgot.
Ms. Peirce. Yes, I mean, individual accountability is
important----
Senator Kennedy. Well, where was the SEC? You could not
have found them with a search party. Where were they?
Mr. Jackson. Well, Senator, as I say, the SEC did bring
important cases in that area, but if you are unsatisfied----
Senator Kennedy. And you can count them on this hand.
Mr. Jackson. Sir, if you are unsatisfied----
Senator Kennedy. Missing a couple of fingers.
Mr. Jackson. If you are unsatisfied, sir, with the job the
SEC did in holding those people accountable for the devastation
of that crisis, so am I.
Senator Kennedy. I mean, we all give lip service to
everyday people and transparency, but when it counted, uh-uh.
I am over my time, but only by 30 seconds. That is a
record.
Chairman Crapo. And I appreciate that.
Senator Heitkamp, see if you can beat his record.
Senator Heitkamp. You know, I am going to follow up on his
line of questioning because I think it is critical. We
certainly hope those fund managers are reading the prospectus.
And we certainly need to make sure that the information is made
more accessible in terms of summary data with background
information. And so that can be a big challenge for you guys.
But I am sure as a general matter you guys need to know if you
share my belief that the quickest way to provide a deterrent
from insider trading or all kinds of nefarious bad acts is send
someone to jail, right?
Mr. Jackson. Absolutely, Senator. Enforcement, especially
in that area, is absolutely critical.
Ms. Peirce. Yes, I mean, sending people to jail is
certainly a deterrent.
Senator Heitkamp. Yeah, I think there is this sense that
people, especially in white-collar crime, there is this sense
that if you give someone a big fine--but frequently the profits
exceed the fine and the fine is inadequate to deter behavior,
and we need to see people go to jail. And if we have got a
problem, as I think we do with the mens rea qualification or
standard for proof of intent, then we need to fix that. And we
expect advice from the SEC on how we can do that. I think I
talked about this with both of you when you were in my office.
I just wanted to get a couple things on the record. As you
know, Senator Heller and I pushed and were successful in
getting something called the ``Small Business Advocacy Act''
passed. Now that the SEC has an obligation to put a small
business advocate into policymaking at the SEC, I want to know,
if confirmed, do I have your commitment to move quickly to set
up the new office and appoint that advocate with a background
that understands the capital formation crisis that is facing
middle America? Do I have your commitment?
Ms. Peirce. Yes, I think it is extremely important to get
that voice at the SEC.
Mr. Jackson. In a word, Senator, yes.
Senator Heitkamp. OK. Thank you. And can I also get your
commitment that you will work to ensure that the Commission
appoints individuals to the Advisory Committee who understand
the specific challenges of rural startups in the United States
of America?
Ms. Peirce. Yes.
Mr. Jackson. Absolutely. I think the SEC needs to cast a
wide net and make sure that those kinds of individuals are in
those positions so we can really find out what those challenges
are and we can address them.
Senator Heitkamp. This whole bill was never about checking
a box and saying look what great thing we did for small
business. This is about changing the culture of the SEC as it
relates to small business, and so I am glad to have your
commitment that you will take that effort very seriously.
Under the Model Business Corporation Act Section 8.42(b),
there is a passage that I think is very instructive: ``for
purposes of establishing knowledge within a corporation of
material violations of law or bad behavior.'' The passage
covering fiduciary obligations reads you ``must report certain
matters to others in the company, including any business
information within your sphere of responsibility that you know
or have reason to believe to be significant, or concerns
actually or probably material violations of the law.''
To my knowledge, not one State has adopted this model
guidance into law. Would a more robust duty-to-report
requirement such as the one proposed by MBCA with associated
criminal fines and penalties help force material information up
the chain of command to the board and top executives within a
corporation?
Ms. Peirce. That does seem to be more of a State-level
issue than an SEC issue, but I think that there are some
changes that have happened. I think the whistleblower changes
in Dodd-Frank also have the effect of helping to force stuff up
the chain. So I am hopeful that we will see better compliance.
Mr. Jackson. I do think, Senator, the whistleblower part of
the Dodd-Frank law has been important in this respect. What I
would like to do, if I have the honor of being confirmed, is
learn more about how we can encourage that information to get
up the corporate chain, whether it is----
Senator Heitkamp. I do not want to just encourage it,
because everybody agrees it should go up the chain. I want to
mandate it, because I am tired of executives saying, ``I did
not know,'' ``Not my business,'' ``Did not look, not my
business.'' And we absolutely need to change the culture at the
top. And we have tried over and over and over again various
iterations of forcing this information up the chain only to be
unsuccessful. And so let us not pass the buck to State
organizations. Let us just sit down and figure out how we are
going to get this accountability at the very highest level of
corporate America moving forward.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, and almost totally on time.
Senator Scott.
Senator Scott. I will try to reverse that trend, Mr.
Chairman. Thank you very much.
[Laughter.]
Chairman Crapo. I have a gavel.
Senator Scott. Yes, sir. That is a warning.
Good morning. Thank you, folks, for being here this
morning. I will say to Ms. Peirce and Mr. Jackson your answer
to Senator Rounds' question on the fiduciary was a very
important answer, and I thank you for your answer. There is no
doubt that there is an important opportunity for the SEC to
coordinate with the DOL as well as State insurance regulators
during this 18-month window, because in South Carolina the
average person who is close to retiring only has 1 year of
income in their retirement account. So the importance of
opening the door for more financial experts to come into
households and provide expertise so that those retirees have a
chance to use their limited resources in the most effective way
cannot be overemphasized. So I appreciate both of you being
informed, educated, and, frankly, motivated about making a
difference in that space. So thank you both for your answers. I
was going to ask that question.
Ms. Peirce, I have a different question. You have written
about Government regulations that make it nearly impossible for
new credit rating agencies to enter the market. I am concerned
anytime the Government hinders competition. How can the SEC
help change this dynamic, especially with investor guidelines?
Ms. Peirce. It is a problem, I think, especially in an area
where we have seen the damage when you only have a few large
credit rating agencies. So I think that the SEC needs to be
willing to work with the credit rating agencies, the smaller
agencies, to help them to comply with the rules. And then in
terms of investor guidelines, those are private, so it is
difficult for the SEC to intervene and force that change. But I
think if the SEC allows new credit rating agencies to come up
and start, then it is more likely those investor guidelines
will change over time.
It is important that all of the NRSRO ratings be removed
from regulations and statutes. I think that is the start to
then getting the investor guidelines to change.
Senator Scott. Thank you.
Mr. Ryder, we have given you too much time off this
morning, so I want to ask you a very important question. There
are 10,629 jobs held by South Carolinians because of our $2
billion-a-year scrap recycling industry. I have got folks from
Spartanburg to Clinton to Cayce and all the way to the coast in
South Carolina sitting on millions of dollars of mutilated
coins the Mint will not accept. Is reinstating the Mint
Mutilated Coin Redemption Program something you will be working
on?
Mr. Ryder. Yes, sir. It is a program that was suspended in
2015, for good reason. They needed to review the program. It
had been in operation for quite a number of years.
Senator Scott. Yes.
Mr. Ryder. And they are currently on track to have a new
set of rules hopefully introduced by the end of this year.
Senator Scott. Thank you. On behalf of 10,629 folks in my
State, we appreciate that.
Mr. Jackson, some believe that the balance between
corporate management and shareholders is tilting too far in one
direction. Chair Clayton seems to agree. Do current shareholder
proposals' resubmission thresholds further fair and efficient
markets?
Mr. Jackson. It is a very important question, Senator, so
thank you. What we are trying to do, as you point out, is
strike a balance between making sure corporate management can
run the firm as they see fit to maximize its value, provide
jobs and growth; on the other hand, make sure that they are
held accountable, sir, for the decisions that they make by the
owners of the company. And the shareholder proposal rules are
really shareholders' best opportunity to have a dialog with the
company, to bring forth ideas and proposals to management,
almost always on a nonbinding basis, to guide the management
about what the shareholder thinks the right next step for the
company is.
My own sense is that, with respect to the resubmission
proposals, the SEC very well could and should take a look at
whether repetitive proposals are furthering that goal. So I am
someone who is very focused on dialog between shareholders and
management, and I think as long as we can advance that goal but
minimize the repetitive proposals that consume corporate
management's time and cost, I think that would be a good way
forward.
Senator Scott. Mr. Jackson, Ms. Peirce, Mr. Ryder, thank
you very much for your time.
Mr. Chairman, I yield back.
Chairman Crapo. I appreciate that 13 seconds.
Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman. I thank all of
you for your testimony today, and I have some questions to
start out with for Mr. Jackson and Ms. Peirce.
There has been a lot of talk about insider trading, and
when we had a hearing on Equifax, one of the issues that came
up is at what point in time did they have an obligation to
inform the public about the hack that had taken place which
could have an impact on shareholder value? And that is a big
issue of what triggers this obligation and materiality. But
there should be no dispute that once a company reaches that
decision, they have to inform the public; they have to file an
8-K; that after that point in time, in my view, they should not
be engaging in trading their own stock. And I know, Mr.
Jackson, you have written about this. You have written about
the 8-K gap and shown that during this window of time, the
reality is that executives and insiders have traded, so far
technically legally, and ended up getting a better deal for
themselves than would be available to a member of the public
who is informed about these developments.
Could you comment on that? Because we are working on some
legislation, bipartisan legislation, to address at least that
window.
Mr. Jackson. Thank you, Senator. Yes, you are right. This
is an area in which I have written before, and I am very
concerned, sir, that corporate management might be engaging in
trading right before the announcement of a material public
event, but after the event has occurred. And I think this is a
troubling pattern, and I was delighted to hear Chairman Clayton
at the last hearing say that it really is good corporate
hygiene for insiders not to be trading during this period.
Senator, I would very much look forward to the opportunity
to work with you and your staff on the legislation you
described. I cannot understand the case, candidly, Senator, for
why insiders should be trading right before they are about to
announce important news to the public.
Senator Van Hollen. Right. Ms. Peirce, would you agree? You
had an exchange a little while ago with the Ranking Member
about, you know, what triggers materiality and who makes that
determination. But, clearly, once a company has made the
determination that they have an obligation to file an 8-K,
doesn't it make sense to say that executives cannot engage in
trading at that point?
Ms. Peirce. Yes, I mean, I thought that Professor Jackson's
work on this point was really interesting, and I think there is
some useful work to be done in the area, and I look forward, if
I am confirmed, to working with you and the other people
working on this legislation.
Senator Van Hollen. Thank you.
Now, Mr. Jackson, you said that one of the purposes of, you
know, a company's leadership is to ``maximize value and to
promote growth and jobs.'' And, clearly, if a company is making
decisions that are in the long-term interests of its long-term
shareholders, that is something that can promote growth as they
make investments, whether in their workforce or other things,
but we also have a lot of short-termism. We have lots of
examples where CEOs and the top brass seem to make decisions
that benefited them at the expense of the long-term interests
of the corporation. And I am interested in beginning to look at
some of the incentives that are under the jurisdiction of the
SEC in that regard because we are about to embark--we are
embarked already on a big debate over tax reform, and as you
all may be aware, you know, the Department of Treasury under
Secretary Mnuchin removed from the website something that had
been there through Democratic and Republican administrations
about where the benefit of a corporate tax cut goes, whether it
is to workers or to the capital side, shareholders, plus folks
who benefit from stock buybacks. And it is going to be a really
important question.
What you have, I think, at your disposal are some tools
that can address this short-termism, and I wondered, starting
with you, Mr. Jackson, whether you can talk about issues with
respect to CEO compensation in the form of stock that might
give them an incentive to look to the long term, not simply
short-term profits for themselves.
Mr. Jackson. Thank you, Senator. Yes, I think that is an
extremely important issue, and we are all concerned, I think,
about what short-termism is doing to American companies and the
economy more generally.
With respect to executive compensation, what I would say is
I think it is time for corporate managers who are worried about
short-termism to put their money where their mouth is, sir, and
to commit to hold the company's stock over much longer periods
of time than they currently do, to show investors and
communities and employees that the decisions that they are
making are long-term decisions.
If that is their argument, Senator, if their argument is
that we really want to do the right thing for the long term,
then it is hard to understand why they do not want to hold the
company's stock over the long term.
You mentioned buybacks, and if I could just add a point on
that, Senator, I share your concern that, to the degree that
corporate money might soon find its way back in the United
States, if there is some legislation on this point, you know,
the previous research on the last time we did this makes very
clear that that money, the last time we had a tax holiday of
this kind, was spent on share buybacks. And I would be
concerned that we have the right rules in place governing stock
buybacks to make sure that if that tax change were to happen,
companies are prepared and required to explain to investors if
they are going to use that money for buybacks.
Senator Van Hollen. Thank you. I see my time is up.
Mr. Chairman, if I could, just for the record, submit a
Wall Street Journal article describing what happened back in
the earlier 2000s when we had the tax holiday and which
essentially confirms what Mr. Jackson said, that that money
essentially went to buybacks, shareholders, and they actually
cut their workforce. Thank you.
Chairman Crapo. Without objection.
Senator Cotton.
Senator Cotton. Thank you, Mr. Chairman. And
congratulations to each of you on your nomination.
Ms. Peirce, Mr. Jackson, I want to raise with you an issue
I raised with the Chairman a few weeks ago when he was here and
that we have also discussed, which is the audit treatment of
small broker-dealers. The Dodd-Frank Act requires broker-
dealers to be audited by a Public Company Accounting Oversight
Board-registered accounting firm, even when they are small,
even when they are not introducing brokers, so they do not take
custody of assets. I find that a curious policy since the PC in
PCAOB is ``public company,'' not ``small firm.'' It also, it
should be said, takes away business from small accounting firms
in communities in States, all across a State like Arkansas.
So starting with Ms. Peirce, could I get your thoughts on
this policy and what the SEC might be able to do, if anything,
to give our small broker-dealers as well as our small
accounting firms a little bit of relief?
Ms. Peirce. I think that the SEC in its oversight capacity
of the PCAOB can work with them to understand how they are
approaching their supervision of their oversight of broker-
dealer auditors and think about whether the scope of that
requirement is appropriately tailored. I think, you know, in
general, smaller entities that are overseen by the PCAOB have a
tough time, and so maybe there are ways that we can help foster
compliance to help them try to be compliant rather than coming
down on them for problems without essentially forcing them out
of the industry, because I think that is the choice that a lot
of them are making--that it is just not worth it, so they just
get out of that business altogether. Maybe there is a way that
we can work with them to foster compliance.
Senator Cotton. Mr. Jackson.
Mr. Jackson. Thank you, Senator. This broker-dealer
auditing program is relatively new, and we are learning some
things about it. And as you and I discussed, one of the things
we are learning is about the kinds of dynamics and costs when
it comes to smaller firms.
One opportunity I am wondering about, Senator, is whether
or not we can and should distinguish between custodial and
noncustodial broker-dealers for this purpose. I look forward to
looking into that. I would want to hear more about what the
facts on the ground are. But I look forward to working with you
and your staff on making sure that those firms can engage in
their business and grow.
Senator Cotton. Thank you. I appreciate both answers, and I
look forward to working together with you and the Chair and the
other Commissioners upon confirmation. I do not think there is
a question of less oversight or less disclosure. It is just a
question of smart oversight and recognizing the difference
between, you know, a small broker-dealer with a half dozen or a
dozen employees and a giant firm, likewise giant accounting
firms and small accounting firms.
I would like to now turn to the issue of the consolidated
audit trail for which the SEC has asked and just raise the
question of, you know, with the SEC's data breach, with the
data breach we saw at OPM, is it smart for the SEC to be
seeking this information? What is the problem it is trying to
solve? And is there away that we could solve that without
introducing new risks to sensitive data? Again, we will start
with Ms. Peirce and then go to Mr. Jackson.
Ms. Peirce. I do have concerns about anytime the SEC is
collecting data, I think it needs to ask: Do we need the data?
What are we going to use it for? And can we protect it? I am
not convinced that those questions have been answered to my
satisfaction, but, again, it is difficult to know that without
being at the SEC and understanding why they decided on such a
broad scope of data. But those are questions, if I were
confirmed, that I would want to ask.
Senator Cotton. Thank you.
Mr. Jackson.
Mr. Jackson. Thank you, Senator. I think it is important to
remember why we began the consolidated audit trail program in
the first place, and it was really motivated by the flash crash
and the need to understand exactly what happened in those
markets so we can make sure it never happens again.
Now, I have the same question that Ms. Peirce just
described. I am wondering what degree do we need personally
identifiable information to solve that problem, and, sir,
coming from the outside, I do not know the answer to that
question. SEC staff have been working on it for years. I would
want to get a better sense of what they are thinking on that
question and how well they feel they can protect that PII
before making any decisions. But I do think it is important,
sir, that we put the cat in place because flash crash is
something that we do not ever want to repeat, and we want to be
sure we can protect investors if something like that were ever
to happen again.
Senator Cotton. Thank you.
Mr. Ryder, this will be your second rodeo at the Mint, 25
years on. What are the biggest changes that you have seen at
the Mint from when you were the Director 25 years ago?
Mr. Ryder. Well, coinage is pretty old, and it does not
change much. But at the Mint, I think some of the advances in
manufacturing, some of the technology that is used in the
industry has been quite interesting. I hope to carry that
tradition on and see where we can take the Mint from a
technology point of view and advance it to the next century and
beyond. So I look forward to that challenge.
Senator Cotton. Well, thank you very much for being willing
to serve again in a very specialized but very critical role.
Mr. Ryder. Thank you.
Senator Cotton. Thank you all.
Chairman Crapo. Thank you.
Senator Warren.
Senator Warren. Thank you, Mr. Chairman.
The 2008 financial crash exposed serious problems in our
securities markets, and in response, as part of the Dodd-Frank
Act of 2010, Congress directed the SEC to issue new rules that
would protect investors.
It is now 7 years later, and the SEC still has not
completed more than 20 of these required rules. Think about
that. Seven years and 20 rules are still unfinished. The SEC
has the worst track record of all the financial regulators. And
when the SEC recently released its regulatory agenda for the
upcoming year, it did not even include most of these unfinished
Dodd-Frank rules.
Now, Mr. Jackson, do you think it is all right that the SEC
still has not finished so many of the Dodd-Frank rules and
apparently has no plans to finish them anytime soon?
Mr. Jackson. Absolutely not, Senator. My view is that those
protections are critical to preventing the next financial
crisis, to making sure investors are protected, and I am
especially concerned about the executive compensation
protections in Dodd-Frank that are still today not the law.
Senator Warren. Good. So we are going to come to those in
just a minute here. I just want to be clear on the record. If
you are confirmed, will you make it a top priority to get these
rules back on the agenda and get them completed as soon as
possible?
Mr. Jackson. Absolutely, yes.
Senator Warren. Thank you.
And, Ms. Peirce, same question. If you are confirmed, will
you make it a top priority to get these rules back on the
agenda and completed as soon as possible?
Ms. Peirce. I will work with the Chairman as he sets the
agenda to try to get the rules done that are not done.
Obviously, sometimes things come up that are not anticipated
that have to take precedence, but I will work with him to get
the rules completed.
Senator Warren. OK. I am a little concerned. The answer
seemed to be a little less definitive than Mr. Jackson's
because it is the Chairman right now who set the agenda for
next year, and he has not even put the rules on the agenda for
work.
Ms. Peirce. So I think it is important, if I am confirmed,
to get to the SEC and to talk with the Chairman to understand
what is motivating his decisions about what goes on the agenda.
As I mentioned, often when you get inside an agency, you
discover that there are other priorities that you did not
actually know about on the outside. So I think it is important
to remember that the agenda has to follow where the risks
really lie. And so, yes, getting rules done that Congress has
directed the agency to do is important, but you also have to
look at it in context of everything else that is happening at
the agency.
Senator Warren. Well, Ms. Peirce, I just want to be clear.
These rules are not optional. It is not a set of rules that
says Congress said write these rules if you all feel like it or
if it fits in your agenda. We passed a law requiring the SEC to
write these rules, and we did that because they matter.
For example, three of those unfinished rules relate to
executive compensation. One requires disclosures on why
executives are paid what they are paid. Another requires public
companies to adopt policies for clawing back compensation from
executives. And a third prohibits bank executives from
receiving incentive compensation that it could encourage the
wrong kind of risk taking.
Study after study has shown that the chance to receive
giant bonuses pushed executives to take enormous risks in the
run-up to the 2008 crash, risks that blew up the whole
financial system, and we know it is still happening.
In the Wells Fargo fake account scam, executives pushed
employees to open new accounts at all costs. Why? Because it
made the Wells' stock price go up, and that put millions of
dollars in the pockets of the executives.
You know, the SEC was told to write these rules 7 years
ago. They are central to the SEC's mission of investor
protection. So I want to ask the question why you think it is
OK for the SEC to continue to ignore them.
Ms. Peirce. Having been a staffer on this Committee, I do
appreciate the role that Congress plays, which is directing the
SEC what to do. And it is the responsibility of the SEC to
implement the rules that it has been directed to implement.
But, again, part of the reason that those rules are given to
the SEC to implement is that it thinks about it in terms of all
of the priorities in order to protect investors, facilitate
capital formation, and uphold the integrity of the markets. So,
yes, it is an obligation of the SEC to do that, and if I get to
the SEC, it is something that I will want to understand----
Senator Warren. My time is out here, so let me just ask
this. I just want to make sure to get it on the record. Do you
believe you have an obligation to complete these unfinished
congressional mandates from 2010 before any other discretionary
rules or projects?
Ms. Peirce. I cannot answer that question without----
Senator Warren. Well, I think that is an answer then. You
know----
Ms. Peirce. ----being at the SEC. The SEC is obligated to
implement rules that Congress tells it to implement, but I
cannot tell you in what order they are obligated to implement
them.
Senator Warren. Well, but it is supposed to implement the
rules. I do not care if you are a Democrat or a Republican. I
do not care if you love Dodd-Frank or you hate Dodd-Frank. The
SEC is required to follow the law. And if you believe in the
American constitutional system, you should demand that the SEC
stop this lawless behavior.
I am glad you are willing to do that, Mr. Jackson.
Thank you, Mr. Chairman.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman. Welcome to all of
you and congratulations on your nomination.
Mr. Ryder, I am going to ask you the first question, but
before I do, I am going to ask Ms. Peirce and Mr. Jackson to
think about their answer. One of the things I want you all to
do, if you take a look at the mission of the SEC as protecting
investors, maintaining a fair, orderly market, facilitating the
capital formation, and enforcement. So I would like for you all
to talk about your critical assessment of the SEC, whether or
not the ratios are right in terms of fulfilling that mission. I
will give you a chance to think about that.
Mr. Ryder, I have always believed that silence is consent,
so the fact that you have not gotten many questions makes me
think you are going to do just fine with your confirmation, so
you should consider that a good thing.
I just have one question for you, and it really has to do
with the future of the Mint. You are right, coinage is kind of
old or long-serving, but the world is changing. I was thinking
the other day, I was at a convenience store, and 20 years ago I
would have never pulled out a credit card to make a $2.50
purchase because at the time people would think you just did
not have $2.50, that you could not afford it. Now it is
completely inverted. I mean, people that carry crash are crazy.
I am not one of them, and let any burglars hear that.
But where do we go from here? When you start talking about
alternate payment methods, first we have got counterfeiting. I
want you to talk a little bit about that because I know you
have some expertise in that area, anti-counterfeiting, I should
say. But then where do we go, I mean, what do we do in terms of
the future of coins and dollars? And what does it look like 10,
20, 30 years from now based on the nature of the way people
settle payments today?
Mr. Ryder. Sure, Senator. Thanks for the question. First of
all, I do not think currency is going anyplace anytime soon. I
think it is going to be around for quite some time. It may be
in a different form, but I think what you see is----
Senator Tillis. And I am getting to the form part.
Mr. Ryder. And the dollar bills or the dollar coins or the
different forms of the currency, I think they are going to be
around for a while.
In the coinage industry, that may change with the use of
credit cards and so on and so forth, and the vending machines,
but the technology that is used to accept those products is
also changing because the technology is changing. It gives you
a better opportunity to do things that might be a bit more
modern, up-to-date.
Senator Tillis. And just because I want 2 minutes for 1-
minute responses from each of the other two nominees, what is
the top priority in terms of an additional role that you all
will play in anti-counterfeiting?
Mr. Ryder. I think anti-counterfeiting is something that is
becoming to be a critical issue. With coinage specifically, the
bullion side of the house, with the counterfeitings that are
coming out of China and elsewhere that are exceptionally good,
I think technology there has to be developed and implemented
within the United States Mint, and that is something I look
forward to working on.
Senator Tillis. OK. And, Ms. Peirce, I asked a question
before. I will not be able to do a lot of follow-ups, but give
me an idea of your critical assessment of the SEC today and
with respect to their mission, whether the ratios and the
actions are, in your opinion, just you get confirmed, you want
to continue the status quo or not.
Ms. Peirce. I think the three parts of the mission too
often are thought about as separate parts when they are really
interrelated and complementary. So you cannot protect investors
if you do not give them investment opportunities. You cannot
protect investors if your markets are not working the way they
should. And so, unfortunately, I think the SEC has too often
taken the view, a very paternalistic view of how to protect
investors, which is to limit their options and make sure that
nothing bad happens. Instead, I think we should think about
investors having access to a portfolio of good investments,
because it really is not--you should not think about it--a
finance professor would tell you do not think about it on a
company-by-company basis. Think about it across a portfolio of
companies and give investors access to a broader array, and
also make sure that you are allowing companies of all sizes to
take advantage of the market. So we may need to make
adjustments in order that small companies are better able to
access capital.
Senator Tillis. Mr. Jackson, do you disagree with any of
that?
Mr. Jackson. Thank you, Senator. I think Ms. Peirce has
quite aptly described a lot of the challenges the SEC faces,
but I want to be clear about something, sir. I think the
critical question for me, if I am confirmed, will not just be
about what the SEC is focused on. It will get the focus on
making sure that the SEC uses all the resources Congress has
put at its disposal. Let me give you an example of what I have
in mind.
There is a wonderful and very deep source of market data
that the Enforcement Division has at the SEC. It is a critical
resources that Congress has helped to fund, and it occurs to
me, sir, that other divisions at the SEC should be using and
have access to those data. In other words, we should try to
keep the SEC from becoming too siloed an organization and
instead work together across divisions, as Ms. Peirce
described, to achieve all the parts of its mission.
So I would look forward to working on that, sir, if I were
confirmed.
Senator Tillis. Thank you, Mr. Chair.
Chairman Crapo. Thank you.
Senator Schatz.
Senator Schatz. Thank you, Mr. Chairman.
Thank you for your willingness to serve. I have a question
for Ms. Peirce and Mr. Jackson. A few weeks ago, I asked a
question of the Chairman about the disclosures related to
severe weather, and I pointed out that there are troubling
examples of publicly traded companies that are essentially
throwing up their hands and saying because the risk of climate
change and severe weather is hard to predict or quantify, we
are going to just assume that there is no risk. And I want to
read to you an example from Valero Energy's 10-K filing from
2016, and I quote: ``Some scientists have concluded that
increasing concentrations of GHG emissions in the Earth's
atmosphere may produce climate changes that have significant
physical effects, such as increased frequency and severity of
storms, droughts, and floods and other climatic events. If any
such effects were to occur, it is uncertain if they would have
an adverse effect on our financial conditions and operations.''
And then, at the end of August in 2017, Hurricane Harvey,
one of the strongest Atlantic storms in history, shuttered 20
percent of the U.S. oil refinery industry and shut down over a
third of Valero's refining capacity over a week. These closed
Valero refineries usually produce 1.1 million barrels a day.
And so my question, and I will start with Ms. Peirce, is:
Risk is risk, whether it is cybersecurity risk, whether it is
political risk, whether it is regulatory risk, or whether it is
the risk of severe weather. Do you commit to making sure that
the Division of Corporation Finance holds companies accountable
for adequately disclosing all risk, including the risk of
severe weather?
Ms. Peirce. Yes, I mean, I think companies need to be
thinking of a broad array of risks, and that includes
cybersecurity and weather, as you described. And I think it is
helpful to have Corp. Fin. looking at disclosures across
industries so they can get an idea of a company's ability to
disclose particular types of things. You obviously do not want
to have speculation in disclosure documents, but you do want
shareholders to have a real sense of the whole array of risks
that companies face.
Senator Schatz. Thank you.
Mr. Jackson.
Mr. Jackson. Thank you, Senator. As we were discussing
earlier, materiality really is the touchstone of the securities
laws and the disclosure mandates. And one of the things that we
think about when we wonder about whether something is material
is whether shareholders are interested in it, whether that is
something that shareholders are focused on. And so more and
more, shareholders are pressing companies to better understand
these risks, and that signals to me that this might be
something increasingly important that we need to make sure
these companies come forward with disclosures on.
So I would very much hope that Corporation Finance is
thinking about those questions, and I think it is important to
point out that in that back and forth between the Division of
Corporation Finance and a company, they really should be
pressing and making sure: Have you thought through whether you
have material climate risk? And if the answer is yes, sir, that
should be disclosed.
Senator Schatz. Thank you, and I will stay with you, Mr.
Jackson. The question is on stock buybacks. Since the SEC
issued Rule 10b-18 in 1982, which effectively removed barriers
to stock buybacks, the amount of money companies have put into
stock buybacks has ballooned to over $700 billion in 2016.
Companies have choices when they decide how to spend their
extra cash, and more and more they choose not to spend it on
their workforce, on capital investments, or R&D. When they have
extra cash, they immediately pass it on to shareholders. This
is not a good thing for these companies or for the economy.
Looking at the performance of companies on the S&P 500, we
see that companies that spent the most on shareholder payouts
underperformed companies with the highest spending on capital
investments and R&D. We may wonder what has happened to
productivity in our economy, but I think the answer, at least
partly, has to do with the choices that the SEC made.
Do you think that the enormous scale of stock buybacks is a
problem for economic growth and the economy generally?
Mr. Jackson. Senator, I am worried--I think you are right
to raise the concern--that what is happening with buybacks is
companies are consistently choosing not to invest in their
employees, in their communities, in the future, and I----
Senator Schatz. Just in the interest of time, for both of
you, are you willing to reconsider that rule passed, which
obviously precipitated a golden age of buybacks? And I have 30
seconds, so I will start with you, Mr. Jackson.
Mr. Jackson. Absolutely, sir.
Senator Schatz. Ms. Peirce.
Ms. Peirce. I am willing to look at the rule, which has
been on the books for a while, and so it could be looked at
again.
Senator Schatz. Thank you very much.
Chairman Crapo. Thank you very much, Senator Schatz, and
that does conclude the questioning.
Before I conclude, although I will wrap up the hearing, I
want to again thank each one of you for agreeing to attend and
participate in today's hearing and your willingness to serve
our country. You are strong candidates, and I believe you will
all have the support of the Senate to move into your positions
and be confirmed.
For Senators, all questions for the record need to be
submitted by Thursday, close of business, and for our
witnesses, responses to those questions we ask be due by Monday
morning. So you will have a little bit of work to do, assuming
that there are questions. Usually there are some, and usually
they are not overwhelming. But we ask you to get them to us on
Monday morning if you can.
With that, this hearing is adjourned.
[Whereupon, at 11:42 a.m., the hearing was adjourned.]
[Prepared statements, biographical sketches of nominees,
responses to written questions, and additional material
supplied for the record follow:]
PREPARED STATEMENT OF DAVID J. RYDER
To Be Director of the United States Mint
October 24, 2017
I would like to first introduce my family who are joining me here
today. My wife of 35 years Monie, our son Nick, and our daughter
Caroline Ryder.
Thank you, Mr. Chairman, Senator Brown, and distinguished Members
of the Committee for allowing me to appear before you today. Mr.
Chairman, my siblings and I still own a small piece of land outside of
McCall, so I do my best to get out to Idaho at least once a year to
visit family and spend a little time enjoying all that the great State
of Idaho has to offer.
First, I must say that I am honored that President Trump has
nominated me to serve as the 39th Director of the United States Mint.
As you are aware, in 1992, I was nominated by President George H.W.
Bush to be the 34th Director of the Mint. I received a recess
appointment at that time and served for a period of 14 months.
When I left the Government in 1994, I became a partner with Secure
Products, a new venture spin-off from the Sarnoff Corporation in
Princeton, NJ, formally the central research laboratories for the RCA
Corporation. Our mission was to develop advanced anti-counterfeiting
technology solutions to be primarily used in currency and branded
products. After a successful 13 years in business, the Honeywell
Corporation acquired Secure Products in 2007. The ensuing 10 years was
spent with Honeywell as their Global Business Development Manager and
Managing Director for Currency.
In my role at Honeywell, I worked with Government agencies and
central banks around the world to address currency issues.
Interestingly, one of my last duties while at Honeywell was a joint
project with The Royal Mint of the United Kingdom where we assisted
them in the development of the new U.K. One Pound Coin, which was
introduced earlier this year. This new circulating coin is considered
to be the most advanced and secure coins in circulation today.
If confirmed, I would like to make education one of my focal points
at the Mint. As the 34th Mint Director, we introduced an initiative
called the Money Story. The goal of this initiative was to educate the
youth of this Nation on the history of money, both coinage and paper
currency, via a teacher's curriculum and video co-developed by the U.S.
Mint and the Bureau of Engraving and Printing. This packet of
information was made available to all teachers for use in the
classroom. Teaching our youth early on how to collect coins and other
numismatic products, as well as how to start saving their hard-earned
money, helps lay the foundation of the importance of money. Over the
years, the Mint has continued this excellent tradition via various
education tools which are located on their website.
Having worked in the currency industry for the past 25 plus years,
I have developed a strong operational and technical understanding of
this tight-knit industry. I respect the men and women who dedicate
their lives to this industry. During my time with Secure Products and
Honeywell, I was afforded the opportunity to visit and work with many
private and Government currency manufactures here in the United States,
as well as around the world. I will bring to the Mint Director position
a strong understanding of the industry and many of the challenges it
faces.
If confirmed, it would be an honor to once again serve in our
Government and work with this Committee. The U.S. Mint has an
impressive history and I look forward to becoming part of that history
again. As in all businesses, I am sure the Mint has challenges to
address. I look forward to facing these challenges while at the same
time fulfilling its mission.
Thank you.
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PREPARED STATEMENT OF HESTER M. PEIRCE
To Be a Member of the Securities and Exchange Commission
October 24, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you for considering my nomination. It is an honor to be nominated
by the President, alongside Professor Robert Jackson, to be a member of
the Securities and Exchange Commission (SEC). I welcome the
opportunity, if I am confirmed, to work to protect investors; maintain
fair, orderly, and efficient markets; and facilitate capital
formation--the three interrelated and complementary aspects of the
SEC's mission.
I have spent nearly two decades working on financial regulation. I
studied economics at Case Western Reserve University and law at Yale.
After a judicial clerkship, I was an associate in the securities
practice group of a large law firm. I then spent 8 years at the SEC. I
first worked as a staff attorney in the division that regulates mutual
funds and investment advisers. As a counsel for Commissioner Paul
Atkins, I was able to work on a broader array of issues. Following my
time at the SEC, I had the privilege of serving on the staff of Senator
Richard Shelby on this Committee. Now I am a Senior Research Fellow and
Director of the Financial Markets Working Group at the Mercatus Center
at George Mason University, where I have learned much from my
colleagues' economic and regulatory expertise.
I desire to return to the SEC because I believe that individuals,
institutions, and innovation are important to our capital markets and
the broader society.
Properly functioning capital markets enable our society to draw on
each individual's unique set of talents, experiences, relationships,
and knowledge. An entrepreneur's vision comes to life because we have
markets that enable her to share that vision with others who have money
to invest. Investors' funds pay the salaries that unlock the potential
of other individuals in society. The returns investors make are used to
educate the next generation of entrepreneurs and employees.
Individuals trust their fortunes and futures to the capital markets
because these markets have grown up within a robust institutional
framework. Without strong institutions, people would not use the
capital markets. An effective institutional framework establishes
reasonable rules, fosters compliance, and swiftly pursues violations
when they occur. It does all of these things with an unwavering
commitment to due process. The SEC is a key part of our institutional
framework. It is therefore incumbent on the SEC to lay out clear rules,
enforce them diligently and impartially, and modernize them when
necessary.
If regulation is appropriately flexible, innovation can bring new
investors into the financial markets, lower prices, and improve the
quality of financial products and services. Innovation forces existing
companies to stay on their toes and pushes them aside when they fail to
meet people's needs. A regulatory structure that blocks new firms or
prohibits innovation lets existing companies grow complacent to the
detriment of the rest of the economy. By contrast, a regulatory system
that invites competition ensures that the capital markets work for Main
Street.
I look forward, if I am confirmed, to working with Chairman
Clayton, my fellow commissioners, and the SEC staff to implement,
enforce, and modernize rules that support healthy, dynamic capital
markets. Together we can ensure that the U.S. capital markets work
effectively for individuals and companies across this country, are
supported by strong institutions, and accommodate innovation.
Thank you. I would be happy to answer your questions.
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PREPARED STATEMENT OF ROBERT J. JACKSON, JR.
To Be a Member of the Securities and Exchange Commission
October 24, 2017
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
thank you very much for the opportunity to join you today. It is my
honor to be testifying before you regarding my nomination to be a
Commissioner of the Securities and Exchange Commission.
For me, there is no greater privilege or responsibility than
upholding the SEC's mission to protect investors, maintain fair,
orderly, and efficient markets, and facilitate access to capital. To
understand why that's so important to me, I thought it might be helpful
for me to start by sharing a bit about myself and my family. I was born
in the Bronx, New York, to my two wonderful parents, Maureen and Robert
Jackson, and I feel so fortunate that they are here with me today. My
mother was one of nine children; my father was one of five. No one,
least of all my parents, would have even dreamed that one day they
might be sitting behind their son on an occasion like this.
You see, the day I was born, my father was working as an accounting
clerk at a small encyclopedia company called Funk and Wagnalls.
Throughout my childhood, my mother held several part-time jobs,
including the early shift at Dunkin' Donuts, just to help make ends
meet.
They were young, overworked and sometimes overwhelmed. But they
believed that if they worked hard and saved what they could, their son
might someday go to college.
So every month my parents plowed their hard-earned paychecks into
the market, knowing that if their investments were protected and
growing they would one day be able to afford to send me to school.
That's really the only reason why I had the chance to go to college--
and the incredible opportunity to be here today with you.
I believe that the SEC's purpose is to protect everyday investors
like my Mom and Dad. Because today's markets are so complex, it can be
easy to get lost in technical details and forget why those safeguards
are so important. But my story shows why protecting America's investors
is at the heart of what the SEC does. Safe markets not only encourage
investment and entrepreneurship and growth. Safe markets make it
possible for two young middle-class parents to transform their lives--
so that someday their son has the chance to sit before the United
States Senate as a Presidential nominee. Safe markets are at the core
of the American dream--something I have learned by living it.
That's why my work--in Government, as a teacher, and as a
researcher--has focused on everyday investors' confidence in our
markets. At the Treasury Department during the financial crisis, I was
proud to help develop rules that tie top managers' pay more closely to
performance and give investors a voice on executive compensation. When
my research team at Columbia Law School showed that the SEC's systems
were inadvertently giving high-speed traders market-moving information
before the public could see it on the SEC's website, I worked with this
Committee's Staff to help make sure the SEC gave investors the level
playing field they deserve. And when our team helped convince
regulators to release additional information about stockbroker fraud,
we were proud to help others use the data to expose the brokers most
likely to defraud investors.
If I have the honor of being confirmed, I intend to bring those
tools to bear on the SEC's crucial task. I will be a strong advocate
for exploring how new technologies can make corporate disclosures more
reliable and enforcement efforts more effective and efficient. I will
encourage the Staff and my fellow Commissioners to draw on the SEC's
long history of favoring transparency as a means of maintaining
investor confidence in our markets. And I will work to implement the
corporate-governance protections that Congress has enshrined into law--
so that investors, employees, and communities can be sure that our
companies are working to produce the kind of long-term value creation
that has been the hallmark of the American economy for generations.
As I mentioned, the SEC's three-part statutory mandate requires the
agency to protect investors, maintain fair and efficient markets, and
facilitate capital formation. I believe in all three of these noble
goals, and in the thousands of SEC Staff across the Nation who work
every day to achieve them. Whether protecting retirees from stockbroker
fraud, making sure Americans get a fair price when they purchase shares
of stock, or uniting an entrepreneur with the funding he or she needs
to spur a life-changing invention, the daily, meat-and-potatoes work of
the Commission and its Staff is crucial to the functioning of our
economy. If confirmed, it would be my privilege to be a part of those
efforts.
But I also believe it is important to remember why that work is so
important. For me, that reason will always be my family's story. You
see, my parents' confidence in our markets not only changed my life--it
changed their lives, too. My father, the encyclopedia company clerk,
retired as the Chief Accounting Officer of a public company. My mother
left Dunkin' Donuts, earned her teaching degree, and has been teaching
elementary school for nearly 30 years. None of that would have been
possible if my parents hadn't felt they could safely save for their
futures--and mine--in our markets. If I'm confirmed, you should know
that helping to make stories like theirs possible is what will motivate
me every day. That's truly what makes the SEC so important--and it's
why I'm so honored to be here.
Thank you again for the opportunity to appear before you today. I
would be delighted to answer any questions you might have.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM DAVID J. RYDER
Q.1. Under the advice of the Office of Government Ethics, you
have agreed, if confirmed as Director of the Mint, to recuse
yourself from any decisions involving your former employer,
Honeywell.
What types of contracts and other business arrangements
does the Mint currently have with Honeywell? If you recuse
yourself from a decision involving Honeywell, who will make
those decisions in your place?
A.1. It is my understanding that the Mint's only business
arrangement with Honeywell is a purchase order (about $22K)
with Honeywell Safety Products for training at the United
States Mint in Philadelphia. If confirmed, I will adhere to all
applicable ethics laws, rules, and policies. Should I have a
question concerning my ethical obligations, I will seek the
counsel of appropriate ethics staff. Additionally, if a
situation arises in which the Director of the Mint is recused,
it is my understanding that the Deputy Director of the Mint
would handle such matters.
Q.2. As Senator Scott referenced during your nomination
hearing, the Mint suspended its Mutilated Coin Redemption
Program in November 2015 amid concerns about unlawful activity
in the program. The Mint has since issued a proposed rule that
would allow the Mint to add further precertification,
documentation, and testing requirements for individuals or
companies submitting mutilated coins for redemption.
During the 2 years that the program has been suspended,
companies have accumulated a significant backlog of mutilated
coins that cannot be circulated or disposed of without the
Mint. Do you believe the proposed rule will fully address the
concerns that the Mint has expressed about the integrity of the
program? Will the Mint work with individuals and companies that
may have large backlogs to accommodate unusually large
redemptions as the program restarts?
A.2. On November 2, 2015, the Mint suspended the exchange
program to assess the security of the program and develop
additional safeguards to ensure the integrity of the United
States coinage. A Notice of Proposed Rulemaking was published
in the Federal Register on September 19, 2017, inviting the
public to comment on proposed revised regulations for the
program. I understand an important part of the rulemaking
process that remains ongoing is reviewing public comments to
further consider the impact of the regulation's measures on
addressing security risks while maintaining access to an
effective program for participants. Although I have not been
part of the rulemaking's development or the upcoming process of
evaluating potential comments, I do believe the Mint has taken
important steps to strengthen the program.
Furthermore, I recognize the importance of resuming the
program to individuals and companies that have large backlogs.
I support the Mint's intent to expeditiously resume the
program, and I look forward to working with you and your staff
to ensure the Program remains a cost-effective way for the
public to redeem damaged coins.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM DAVID J. RYDER
Q.1. Mr. Ryder, I appreciated meeting with you recently. I
understand that you previously served as Director of the Mint
under President George H.W. Bush, and additionally as the
Deputy Treasurer.
What do you believe has changed from working as Director
under President H.W. Bush and now? Are there any new challenges
that you believe the Mint is facing today?
A.1. Circulating coin redesign has changed dramatically since
1992, which has contributed millions of dollars to the general
fund. I believe that the Mint has also been improving their
manufacturing processes which has resulted in fewer errors in
coin manufacturing. For example, the Mint has reported that its
Mint Quality Index (MQI) went from the low 70s in 2007 to a
rating of 99.3 percent in 2014 for circulating coins at the
Denver and Philadelphia facilities. Additionally, I believe the
Mint's customer service has improved dramatically in the
commemorative and bullion sales area.
One of my challenges will be the implementation of the
Mint's new 5-year strategic plan which focuses on: (1) the work
place environment; (2) improving the Mint's management and
governance; and (3) integrating technology into operations and
support lines.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM HESTER M. PEIRCE
Q.1. Although materiality has long been the foundation of the
SEC's disclosure requirements, the SEC has, over time,
supplemented this standard with specific bright-line rules. For
example, the SEC requires disclosure of specified information
related to executive compensation, corporate governance, and
internal controls. Do you agree that bright-line rules can be
useful to both companies and investors by supplementing the
traditional materiality standard?
A.1. As you note, materiality is the touchstone for companies'
disclosure under the securities laws. Bright-line rules can be
useful in guiding companies' disclosure efforts, but
materiality should be the controlling principle for the SEC in
formulating bright-line disclosure rules and disclosure
guidance.
Q.2. Speaking at NYU's School of Law earlier this year, Chair
Clayton said, ``I am not comfortable that the American
investing public understands the substantial risk that we face
systemically from cyber issues and I would like to see better
disclosure around that.'' Two days later, the Equifax breach
proved him right.
If confirmed, would you commit to working with Chair
Clayton and the other Commissioners to revise cyber risk
disclosure requirements, including considering a specific 8-K
reporting item for cybersecurity breaches that expose
personally identifiable information?
A.2. I share your and Chairman Clayton's concern that investors
need to understand the material cybersecurity risks that
companies face. If confirmed, I commit to working with Chairman
Clayton, my fellow Commissioners, and the staff of Corporation
Finance to consider whether companies need additional guidance
for cybersecurity reporting and what form such guidance should
take, including potentially a specific Form 8-K reporting
requirement.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM HESTER M. PEIRCE
Q.1. It is my understanding that Initial Coin Offerings (ICOs)
and crypto-currencies have raised billions thus far in 2017.
This represents an exponential growth in recent years.
I was glad to see the SEC begin to closely examine this
market, and I applaud the SEC for its recent issuance of the
Investigative Report regarding the DAO. The Investigative
Report was an important step in bringing some clarity to the
ICO market in explaining how securities laws apply to ICOs
depending on the ``facts and circumstances.''
Although the DAO report was helpful, I worry that a
continued lack of clarity in ICO regulation will stifle
innovation and, most importantly, leave investors at risk.
Should the SEC do more to bring clarity to the ICO market?
A.1. The SEC's 21(a) report on the DAO was a useful first step
in providing clarity in the ICO market. As the report noted,
the facts and circumstances surrounding an ICO determine
whether and how securities laws are implicated. As it gains
more experience with ICOs, the SEC should look for additional
opportunities to provide clarity--perhaps through a guidance
document--to the market about conducting ICOs in compliance
with the securities laws. To the extent the SEC brings
enforcement actions in this area, it should identify with
specificity how a particular ICO violated the securities laws
to give market participants clear examples of what they should
not do.
Q.2. Aside from enforcement actions, what can the SEC do to
provide certainty to the ICO market? Would a proposed
rulemaking make sense?
A.2. A proposed rulemaking might make sense. Alternatively, the
SEC could consider issuing a concept release, conducting public
roundtables, or otherwise soliciting input from a broad array
of market participants and other interested parties before
undertaking a rulemaking. If I am confirmed, I look forward to
working with my fellow Commissioners and the SEC staff to
assess appropriate next steps regarding ICOs. The SEC also
should work with the CFTC to help to clarify when ICOs
implicate each agency's regulatory regime.
Q.3. The SEC is about to implement the initial operating stage
of the Consolidated Audit Trail (CAT). Exchanges will soon
begin reporting to what will be a massive database, which will
include a significant amount of highly sensitive information.
In its second phase, CAT will begin receiving personally
identifiable information (PII) of brokerage customers. The
recent breach of the SEC's EDGAR database, however, calls into
question the security of the SEC's information technology.
Will you commit not to collect any PII until you are
confident that CAT is not susceptible to a breach?
A.3. If I am confirmed, I commit to working with my fellow
Commissioners, the SEC staff, and the self-regulatory
organizations participating in CAT to ensure that, to the
extent PII needs to be collected, it is not susceptible to a
breach.
Q.4. We usually think of outside hackers when we think of data
security, but in numerous cases, individuals trusted with
access to confidential data are actually the source of leaks--
Chelsea Manning and Reality Leigh Winner come to mind. How
should the SEC control access to CAT data within the agency?
Should it allow other agencies or researchers access to CAT
data?
A.4. I am concerned about both outside and inside compromises
of the CAT data. My concerns stem in part from prior incidents
at the SEC \1\ and in part from the reality that mistakes
happen even when people are well-intentioned. If I am
confirmed, I will work with my fellow Commissioners and the SEC
staff to understand the protections that are in place for
dealing with CAT data, including who is entitled to access the
data and how. Intergovernmental data sharing is important, but
should be preceded by similar questions about who the agency
will allow to access the information and how. If
nongovernmental researchers are permitted to have access to the
data, additional protections will be necessary, including
eliminating PII. Before researcher permissions are granted, the
SEC should carefully consider the purpose of allowing such
access and whether it justifies the additional risk of leakage.
---------------------------------------------------------------------------
\1\ See, e.g., Government Accountability Office, ``Information
Security: SEC Needs To Improve Controls Over Financial Systems and
Data'' (GAO Report No. 14-419 April 2014), at p.5 (``Although SEC had
issued policies and implemented controls based on those policies, it
did not consistently protect its network boundary from possible
intrusions; identify and authenticate users; authorize access to
resources; ensure that sensitive data are encrypted; audit and monitor
actions taken on the commission's systems and network; and restrict
physical access to sensitive assets.''); Office of Inspector General,
``SEC, Federal Information Security Management Act: Fiscal Year 2013
Evaluation'' (Report No. 522 Mar. 31, 2014), at p.i (describing a
number of areas in which previously identified weaknesses in security
controls had not been corrected and thus ``could adversely affect the
confidentiality, integrity, and availability of the agency's
information and information systems''); Office of Inspector General,
``SEC, Report of Investigation into Misuse of Resources and Violations
of Information Technology Securities Policies Within the Division of
Trading and Markets'' (Case No. OIG-557 Aug. 30, 2012), p.11 (in an
investigation of security breaches in the Automation Review Policy
Program (ARP), the SEC office charged with overseeing computer networks
at self-regulatory organizations, finding that ``staff spent hundreds
of thousands of dollars on computer equipment and software that had no
checks in place to ensure that the equipment and software purchased
were needed or used to further the ARP program mission'' and that ``a
significant portion of the equipment and software purchased was never
used in the ARP program'').
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM HESTER M. PEIRCE
Q.1. In brief, what is the SEC currently doing right, what
needs to change, and how do you plan on prioritizing your time,
should you be confirmed?
A.1. Chairman Clayton has set the SEC on the right course by
laying out and taking initial steps with respect to important
priorities, including facilitating capital formation, combating
retail investor fraud, and better identifying and protecting
against cybersecurity risks. To pursue these priorities, the
SEC will need to shed some bad past habits, including a
tendency to limit investor opportunities and unduly constrain
access to the capital markets in the name of investor
protection. The SEC should work to refocus disclosure
requirements so that companies are providing the material
information that investors need to make informed investment
decisions. The SEC also should work to modernize its rulebook,
which--after more than 80 years--has grown fat and unwieldy.
If I am confirmed, I will work with the Chairman to improve
capital formation, expand investor opportunities, combat retail
fraud, strengthen cybersecurity risk management, and tend to
the day-to-day business of the SEC. I expect my priorities to
include bread and butter issues like EDGAR, the efficacy of the
SEC's compliance and enforcement programs, oversight of FINRA
and the PCAOB, and consideration of potential changes to the
rules governing retail financial professionals and the rules
governing market structure. As I noted at the hearing, if I am
confirmed, my priorities may change in response to market
changes or information I learn from my fellow Commissioners or
the SEC staff.
Q.2. Do you believe that private capital being put into
underperforming companies can improve the company's
performance?
A.2. Private capital, along with the expertise that often
accompanies it, can play an important role in assisting
underperforming companies.
Q.3. Do you believe that curbing more private investment would
help underperforming companies?
A.3. Unwarranted restrictions on the ability of companies to
raise capital in the private markets diminish the likelihood
that companies will survive and thrive. An effective regulatory
framework can help to ensure that companies have access to a
healthy supply of private capital and the managerial and
operational expertise that goes along with it.
Q.4. Do you agree that private capital being put into companies
leads to more transparency and communications with existing
shareholders?
A.4. Private providers of capital can and often do condition
their provision of capital on the institution of best practices
regarding transparency and shareholder communications.
Q.5. Do you agree that corporate CEOs are more responsive to
the market today than they were in the past?
A.5. Among other things, the proliferation of real-time
information about companies, the increasing speed with which
that information is incorporated into market prices, and
compensation plans linking CEO pay to company performance
likely have increased corporate CEOs' responsiveness to the
market.
Q.6. Do you believe that restricting or making it harder for
private capital to invest in American companies is a good idea?
A.6. Placing unwarranted restrictions on the ability of
American companies to access private capital is not a good idea
from the perspective of those companies, investors, and the
general public. Along with our public markets, private markets
are an important source of capital for companies of all sizes.
If I am confirmed, I plan to work to help both private and
public markets function effectively to help support the
dynamism of American companies, the health of the American
economy, and the prosperity of American employees and
investors.
Q.7. Do you believe that private capital should be flexible and
adaptive to quickly changing circumstances?
A.7. Private capital should be flexible and adaptive to quickly
changing circumstances. One of the important features of well-
functioning capital markets is that providers of capital are
able to react rapidly to developments at particular companies
and in the broader economy. A proper regulatory framework can
facilitate such flexibility.
Q.8. Do you think that the current IPO market is at its peak?
What could we be doing to facilitate more entrants into the
public markets? What are some determinative factors that
companies evaluate when making a decision to enter into the
public markets? Do you think that some of these factors have
served as preclusive, often determinative factors for a company
deciding not to enter the public marketplace? How do public
companies affect job creation and economic growth?
A.8. Whether the IPO market is at its peak depends on a number
of factors, including general economic conditions, the
reasonableness of the existing and prospective regulatory
framework governing public companies, expectations about the
cost of shareholder litigation, and the degree to which public
capital is cheaper than private capital. In deciding whether to
go public, companies consider these factors along with their
own current need for capital, expectations about future growth,
and an assessment of the prospects for enhanced stock
liquidity. If companies determine that the cost of being
public, including anticipated costs due to future regulatory
changes, outweighs the benefits of easier access to capital and
greater liquidity for shareholders, companies will not take the
step of going public. Reluctance of companies to go public has
serious implications for our economy, investors, and workers.
Ready access to capital markets enables companies to obtain the
capital they need to innovate, hire workers, and contribute to
economic growth.
While some factors that affect the decision to go public
are beyond the control of regulators and legislators, the SEC
and Congress can take further steps to streamline the process
for going public, eliminate requirements that do not protect
investors, address concerns about market structure to ensure
that the markets work for issuers of all sizes, and commit to a
reasonable, effective regulatory regime for public companies.
Q.9. Do you think that the SEC should have a formalized
retrospective review process, much like prudential regulators
have, by which the SEC can take a holistic look at its rules
and regulations and decide which ones are outmoded,
ineffective, burdensome, etc., or similarly decide which ones
need to be changed and modernized?
A.9. Retrospective review is an important part of maintaining
an effective regulatory framework. If I am confirmed, I would
be pleased to work with Congress to develop a statutory
retrospective review process similar to that of the prudential
regulators, but the SEC already has the ability to develop an
effective process internally. The SEC has shown an increasing
commitment to economic analysis, and retrospective review
should be part of that commitment. As part of ongoing efforts
to further improve economic analysis, the SEC could make a
practice of including metrics in its rules that can serve as
the basis for future retrospective review. Moreover, the SEC's
plan to revisit Regulation NMS, among other rulemakings, will
help to set an agency precedent for retrospective review.
Q.10. How do you plan on working with the CFTC to address
harmonization issues?
A.10. Harmonization efforts by the SEC and CFTC in the
derivatives markets are important. Domestic harmonization, in
turn, will facilitate better international cooperation. SEC-
CFTC relations have not always been smooth, but Chairmen
Clayton and Giancarlo have exhibited an interest in building
interagency cooperation. If I am confirmed, I look forward to
working with the CFTC to harmonize rules governing swaps and
security-based swaps, efficiently oversee dually registered
entities, monitor the markets, and develop effective regulatory
frameworks for new technologies that potentially implicate both
regulatory regimes. I already have the pleasure of knowing
Chairman Giancarlo, Commissioner Quintenz, and CFTC nominee
Stump and look forward to getting to know Commissioner Behnam.
Q.11. With regard to cyber infrastructure and enforcement
actions, what do you think the SEC is doing right and what
would you change?
A.11. Chairman Clayton appropriately has expressed a strong
commitment to cybersecurity at the SEC and in regulated
entities and public companies. His early, public prioritization
of this issue sent an important message to regulated entities
and public companies. If confirmed, I will be better able to
assess what the SEC is doing in terms of cyber enforcement. The
SEC should create a collaborative environment to facilitate
efforts by the private sector, the SEC, and other Government
agencies to identify and address cyberthreats. If the SEC fails
to address its own problems in cybersecurity, I am concerned
that regulated entities will likewise cut corners.
Q.12. The Treasury Capital Markets report touched on potential
changes to best execution and potential changes to market
structure issues, particularly in the context of Reg. NMS. Can
you give me your thoughts on what you view as potential areas
for reform within the context of Reg. NMS?
A.12. Regulation NMS attempted to reshape the equity markets
according to a particular view of how those markets should
work. In doing so, the SEC more deeply entrenched itself in
decision making, constrained the options of issuers and
investors, and added new layers of complexity to the markets.
Potential reforms could make it easier for trading venues to
tailor themselves to meet the needs of particular issuers or
investors, rather than the current one-size-fits-all approach.
If confirmed, I look forward to working with my fellow
Commissioners, SEC staff, the Equity Market Structure Advisory
Committee, and this Committee to identify ways in which market
structure regulation is not working and consider potential
reforms to ensure that our markets serve the full range of
investors and companies.
Q.13. Some have argued that our market structure systems have
become increasingly complex and that the layered regulations
have created incentives to game the system. Can you help me
understand your views on reforming our domestic market
structure and can you commit to this body that you will work
with the Committee in tackling some of the languishing issues
that have been pervasive in market structure over the last 10+
years?
A.13. Our equity markets are the best in the world, but reforms
would help to ensure that they stay that way. Mindful of the
fact that the Chairman sets the rulemaking agenda, I look
forward to working on such reforms with my fellow Commissioners
and with this Committee. I share your concern about the
system's complexity and the gaming such complexity breeds. I
also am concerned about the role that SEC regulation plays in
determining how, where, and when orders are executed. Many
problems we see in today's markets seem to have their origin in
well-intentioned SEC attempts to structure the markets. In
contemplating reforms, the needs of investors and companies
should dictate.
Q.14. IT modernization enables financial services firms to
protect constituent financial information. In an environment of
increasing cybersecurity threats, how will you use your role at
the SEC to promote IT modernization across the financial
services sector and at the SEC?
A.14. If I am confirmed, I will work with Chairman Clayton, my
fellow Commissioners, and the SEC staff to understand and
address weaknesses in the SEC's information technology
infrastructure, policies, and practices. Getting the SEC's
house in order will send an important message to financial
firms to do the same. The SEC's compliance examiners also play
an important role in monitoring how financial firms are doing
and where weaknesses may lie. If confirmed, I look forward to
working with the SEC staff to ensure that the oversight program
fosters healthy IT modernization practices.
Q.15. How will you ensure that regulations set by the SEC do
not impede progress on IT modernization?
A.15. IT-intensive regulatory initiatives such as Regulation
NMS, the Volcker Rule, and the Department of Labor's fiduciary
rule likely divert industry resources away from IT
modernization initiatives. I plan to take such opportunity
costs into account in assessing future regulatory changes. In
addition, it is important for the SEC to write rules in a way
that ensures regulated entities have the flexibility to shift
to newer and better ways of doing things. In the past, SEC
rules have sometimes inadvertently cemented historical
information technology by being overly prescriptive.
Q.16. With regard to corporate disclosures, what standard
should be used to determine whether or not something is
disclosed?
A.16. The appropriate standard for corporate disclosure is
materiality. Corporations should disclose information ``if
there is a substantial likelihood that a reasonable shareholder
would consider it important'' in making an investment decision.
\1\ That standard avoids ``bury[ing] the shareholders in an
avalanche of trivial information.'' \2\
---------------------------------------------------------------------------
\1\ TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449
(1976).
\2\ Id. at 448.
Q.17. On February 24, 2017, President Trump signed an Executive
Order on Enforcing the Regulatory Reform Agenda, part of which
focused on identifying regulations that are ``outdated,
unnecessary, and ineffective.'' Given recent technological
advances, one area of particular focus should be regulations
requiring paper-based communications as the default delivery
method in communicating with investors and consumers. Such
regulations are prime examples of regulations that were first
adopted decades ago and have failed to evolve with the times.
If confirmed, will you work to ensure that the SEC
identifies and modifies outdated regulations regarding paper-
based communications?
A.17. If confirmed, I will work to eliminate or modernize
outdated regulations. Without prejudging the issue about paper-
based communications, the subject of an outstanding proposal, I
intend to work to ensure that technology can be used
appropriately and consistent with investor protection to meet
disclosure requirements.
Q.18 Do you believe the recent action by the SEC regarding
MiFID II was appropriate? If you do not, how would you have
addressed this issue?
A.18. While I have not had the opportunity to consult with the
staff that worked on the MiFID II resolution, I was pleased to
see that the SEC took concrete steps to provide guidance and
legal clarity on a matter of such importance. If I am
confirmed, I look forward to working with my fellow
Commissioners, the SEC staff, and international counterparts on
a longer-term resolution, should it be necessary.
Q.19. Do you think that the U.S. and the SEC should import
standards from other countries?
A.19. The SEC should draw lessons from other countries'
regulatory successes and failures, but the SEC needs to develop
regulations that work for the American markets. Moreover,
wholesale importation of foreign standards does not comport
with the Administrative Procedure Act.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM HESTER M. PEIRCE
Q.1. A preliminary report released this week found the SEC
collected $127 million in corporate civil penalties in 15 cases
from February through September 2017, in comparison to $702
million in 43 cases from February through September 2016. \1\
---------------------------------------------------------------------------
\1\ https://www.politicopro.com/financial-services/story/2017/10/
corporate-penalties-have-dropped-at-sec-since-trump-took-office-163857
---------------------------------------------------------------------------
Are you concerned that these numbers may reflect a shift in
enforcement priorities?
A.1. I am committed to a strong enforcement program--one that
sends a clear message that rules will be enforced impartially,
swiftly, objectively, and fairly. It is, however, very
difficult to assess the effectiveness and priorities of the
SEC's enforcement program by looking only at a single
statistic, such as the number of cases in which corporate
penalties were assessed or the amount of penalties. The nature
and complexity of cases are also important, and these factors
might not reflect a shift in enforcement priorities. For
example, an enforcement action that stops a retail fraudster in
her tracks before she can harm a lot of investors is an
important matter, but might yield relatively small penalties.
Q.2. If confirmed, what recommendations will you make to Chair
Clayton to strengthen the ability of the enforcement division
to hold accountable those that violate Federal securities laws?
A.2. If confirmed, I will recommend that Chairman Clayton
empower the Enforcement Division to pursue enforcement
matters--regardless of whether they generate big headlines--
that go to the core of investor protection and market
integrity. Retail and accounting fraud matters can be difficult
to investigate, but are important. I also will recommend that
the Chairman not allow routine compliance matters to take
valuable enforcement resources away from pursuing intentional
violations. I also will work with the Chairman foster a culture
within the SEC that encourages staff to raise concerns and
suggest changes. Because much of the enforcement work is
conducted outside Washington, DC, I will also recommend that
Chairman Clayton build strong relationships with the regional
offices to ensure that all of the agency's enforcement
resources are being used productively.
Q.3. In response to a question from Chairman Crapo, you
identified cybersecurity as a top priority. If confirmed, what
recommendations will you make to Chair Clayton related to
cybersecurity both at the Commission itself and in the
securities markets at large?
A.3. Cybersecurity must be an SEC priority. The recently
revealed breach at the SEC is a stark reminder that the SEC has
valuable, personally and commercially sensitive information.
Unfortunately, this last breach was not the SEC's first problem
in the cybersecurity area. As indicated by Chairman Clayton's
September 20, 2017, public statement on cybersecurity, he takes
these issues extremely seriously. I will support the Chairman's
efforts, including by recommending that the SEC act more
quickly than it has in the past to implement recommendations by
the SEC's Inspector General and the Government Accountability
Office to address cybersecurity weaknesses. To be able to do
this, the SEC will need to recruit and retain information
security experts. The establishment of a culture at the SEC
that encourages employees at all levels to be on the lookout
for problems can help to ensure that problems are identified
and elevated promptly within the SEC.
As you note, cybersecurity is an issue not just for the
SEC, but for the securities markets as a whole. By taking
aggressive action to address its own problems, the SEC can set
a powerful example for the securities markets. I also will
recommend that the Chairman work collaboratively with regulated
entities and other regulators to identify and combat
cyberthreats.
Q.4. In response to a question from Senator Reed regarding
resources and cybersecurity, you said ``it will be much easier
to assess that [resources] when I am actually there.'' I am
concerned that the SEC does not have the resources it needs to
appropriately protect itself from cybersecurity threats.
What specific steps will you take to investigate whether
the SEC has sufficient cybersecurity resources?
A.4. If I am confirmed, I will talk with the Chairman, my
fellow Commissioners, and staff in the Office of Information
Technology to understand what resources are devoted to
cybersecurity now, how cybersecurity resources have been used
in the past, and what projected needs are for the future. Past
reports suggest that some of the SEC's problems may be due to
mismanagement of resources, \2\ so I would want to understand
whether resource management has improved since the period
covered by those reports. An objective outside analysis of the
SEC's cybersecurity infrastructure could be useful in
understanding what the SEC's resource needs might be in coming
years. I also hope to get a better understanding of how other
similarly situated agencies are managing cybersecurity threats.
---------------------------------------------------------------------------
\2\ See, e.g., Government Accountability Office, ``Information
Security: SEC Needs To Improve Controls Over Financial Systems and
Data'' (GAO Report No. 14-419 April 2014), at p.5 (``Although SEC had
issued policies and implemented controls based on those policies, it
did not consistently protect its network boundary from possible
intrusions; identify and authenticate users; authorize access to
resources; ensure that sensitive data are encrypted; audit and monitor
actions taken on the commission's systems and network; and restrict
physical access to sensitive assets.''); Office of Inspector General,
``SEC, Federal Information Security Management Act: Fiscal Year 2013
Evaluation'' (Report No. 522 Mar. 31, 2014), at p.i (describing a
number of areas in which previously identified weaknesses in security
controls had not been corrected and thus ``could adversely affect the
confidentiality, integrity, and availability of the agency's
information and information systems''); Office of Inspector General,
``SEC, Report of Investigation into Misuse of Resources and Violations
of Information Technology Securities Policies Within the Division of
Trading and Markets'' (Case No. OIG-557 Aug. 30, 2012), p.11 (in an
investigation of security breaches in the Automation Review Policy
Program (ARP), the SEC office charged with overseeing computer networks
at self-regulatory organizations, finding that ``staff spent hundreds
of thousands of dollars on computer equipment and software that had no
checks in place to ensure that the equipment and software purchased
were needed or used to further the ARP program mission'' and that ``a
significant portion of the equipment and software purchased was never
used in the ARP program'').
Q.5. If you conclude that the SEC does not have sufficient
cybersecurity resources, will you make that finding clear to
---------------------------------------------------------------------------
both Chair Clayton and Members of Congress?
A.5. Yes.
Q.6. I remain concerned that the current lack of transparency
around short selling enables manipulative trading behaviors
that harm growing companies and discourages long-term
investment. I raised this concern to former SEC Chair Mary Jo
White in a letter in January 2017. In my view, the current lack
of transparency of short positions has a trifold impact on the
securities market--it deprives investors of information
critical to making meaningful investment decisions; it denies
issuers of insights into trading activity and inhibits their
ability to interface with investors; and it withholds crucial
information from the market, ultimately impeding efficiencies
and diluting transparency. There are currently two petitions
for rulemaking pending before the SEC requesting that it
promulgate rules to require disclosure of short positions in
parity with the existing required disclosure of long positions
(File No. 4-689 and File No. 4-691). In your opinion, should
the SEC act on these pending rulemaking petitions or consider
any alternative options, in order ensure fair disclosure of
short positions?
A.6. To avoid pre-judging the issue, I cannot speak to the
particular petitions. If I am confirmed, however, I look
forward to working with my fellow Commissioners and SEC staff
to assess transparency concerns associated with short selling
and potential avenues for addressing those concerns without
unduly curtailing socially beneficial short selling.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM HESTER M. PEIRCE
Q.1. The Citizens United v. FEC ruling allowed, among other
things, corporations to contribute independent political
expenditures. Public companies are active participants in our
elections, yet their shareholders do not know the role that
they play because the SEC has been reluctant or handcuffed from
requiring firms to disclose their political contributions.
Do you believe shareholders have a right to know whether a
company they've invested in is making contributions in their
best interest?
A.1. I understand that some shareholders and other interested
persons have expressed an interest in corporate political
contributions. Under current securities law, however, companies
are not required to disclose information regarding political
contributions unless that information is material.
Q.2. What should be the threshold for determining when a
company discloses their political spending?
A.2. Materiality is the appropriate standard for all corporate
disclosures. Companies should disclose political contributions
that are important to a reasonable investor's investment
decision.
Q.3. What policy levers does the SEC have to promote long-term
value creation?
A.3. The SEC has several policy levers relevant to long-term
value creation. Adjustments to the regulatory framework
governing capital formation can ensure that innovative and
growing companies can obtain the capital they need to create
long-term value. The SEC's disclosure regime can promote long-
term value creation by providing investors the information they
need to assess companies' long-term value. Adjustments to the
regulatory regime governing market structure can ensure liquid
markets for the shares of companies of all sizes, which in turn
helps those companies to attract investors and build long-term
value.
Q.4. Do you believe companies are engaging in too many stock
buybacks and dividend payments and not spending enough on
corporate growth?
A.4. I share a desire to see corporate growth, but assessing
whether there are too many buyouts and dividends would require
a case-by-case, fact-specific assessment. Manipulative buyouts,
of course, should not occur at all. Buybacks and dividends, if
properly and legally used, can contribute to corporate growth.
For example, a company without productive uses for cash might
conclude that it should return cash to shareholders through a
stock buyback or dividend. The shareholders can then invest
that money in companies with productive uses for it. Other
companies might contribute to corporate growth by choosing to
refrain from buybacks and dividends in order to invest in new
projects.
Q.5. Is there a way to center less attention on quarterly
earnings?
A.5. Some market participants and companies cite quarterly
earnings pressure as a reason that companies cannot focus on
long-term value. I am aware of some private sector efforts to
find ways for companies to expressly embrace a long-term view.
If confirmed, I look forward to working with my fellow
Commissioners and SEC staff to consider whether regulatory or
statutory changes are necessary and appropriate to allow such
efforts to move forward.
Q.6. The disclosure of innumerable hacks over the past few
years, recently punctuated by hacks of the SEC and Equifax, has
made clear that we all need to raise our cybersecurity game.
Given the important role broker-dealers play in the formation
and distribution of capital in the United States, do you think
it's appropriate for FINRA, in its examination of broker
dealers, to perform cyber-vulnerability assessments of
registered broker dealers?
A.6. Broker-dealers' cybersecurity is an important matter given
their central role in the capital markets. FINRA looks at
registered broker-dealers' cybersecurity policies, practices,
and risk management. If confirmed, I look forward to working
with my fellow Commissioners, the SEC's FINRA inspection
office, and FINRA to understand the scope of FINRA's existing
cyber assessments and whether additional oversight of broker-
dealers' cyber vulnerabilities by FINRA or the SEC is
necessary.
Q.7. On Oct. 15, 2014, the Treasury market flash rally
occurred, where the yield on the benchmark 10-year U.S.
Treasury traded in a 37-basis-point range (0.37 percent), only
to close six basis points below its opening level. Principal
trading firms (PTFs) account for a majority of trading in
inter-dealer Treasury markets, which represent half of all
trading in Treasuries. Due to a loophole, PTFs, including many
that use algorithmic strategies, have not been required to
register as brokers. This allows them to escape oversight and
reporting requirements. Will you commit to ensuring that PTFs
are required to register as brokers?
A.7. If confirmed, I will consult with my fellow Commissioners,
SEC staff, and the Department of Treasury to consider whether,
in light of recent market developments, a rulemaking to extend
broker-dealer registration and reporting requirements to
principal trading firms in the Treasury markets is appropriate.
Q.8. Under current law, Regulation ATS's basic regulatory
standards for exchanges and other financial markets are
designed to ensure market resilience, integrity and adequate
operational risk controls. But trading venues that facilitate
the exchange of Government securities are excluded from
Regulation ATS. And by excluding them from Regulation ATS, they
are also excluded from Regulation SCI's cybersecurity
requirements. Will you commit to closing the loophole that
permits Government-securities trading venues to avoid these
basic requirements?
A.8. It is crucial that our Government securities markets
function well and are resilient. The SEC's 2015 proposal on
Regulation ATS asked for comment on whether regulatory changes
are appropriate for Government-securities trading venues If
confirmed, this issue may come before me in connection with the
adoption of changes to Regulation ATS. In considering the
appropriate regulatory framework (including cybersecurity
requirements) for Government-securities trading venues, I will
review relevant comments and consult with my fellow
Commissioners, SEC staff, the Department of Treasury, and
banking regulators.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM HESTER M. PEIRCE
Q.1. You have written extensively on the problems at the
Financial Industry Regulatory Authority (FINRA). You previously
said that you're ``not sure that FINRA serves anyone well in
its current form,'' and that ``investors feel they're not
getting the protection they need.'' \1\ And yet, despite the
SEC having the tools to oversee it, ``in practice FINRA
operates with substantial independence from the SEC.'' \2\ As
you put it, ``FINRA rules do not typically attract close
attention from the SEC's commissioners.'' \3\
---------------------------------------------------------------------------
\1\ ``FINRA Plays `Gotcha' With Brokers, Short-Changes Investors:
Hester Peirce'', Think Advisor (Mar. 17, 2017) (online at http://
www.thinkadvisor.com/2017/03/17/finra-plays-gotcha-with-brokers-short-
changes-inve?slreturn=1509052996).
\2\ Hester Peirce, ``The Financial Industry Regulatory Authority:
Not Self-Regulation After All'', Mercatus Center 19 (Jan. 2015)
(available at https://www.mercatus.org/system/files/Peirce-FINRA.pdf).
\3\ Id.
---------------------------------------------------------------------------
Given your statements on FINRA and the lack of oversight
from the SEC, can you commit to reversing that trend and
conducting formal reviews of all FINRA actions going forward?
A.1. As you note, I have concerns about FINRA's accountability.
If I am confirmed, therefore, I will actively review FINRA
actions.
Q.2. Will you commit to initiating a review of FINRA's investor
protection practices?
A.2. Investor protection is central to FINRA's role. I look
forward to working with my fellow Commissioners and SEC staff
to review FINRA's investor protection practices.
Q.3. At your hearing, you stated that you ``worry about
transparency'' at FINRA. \4\ FINRA meets behind closed doors
and is not required to release information to the public unless
it deems it necessary. FINRA is not subject to the Freedom of
Information Act, its hearings are not public, and ``there is
virtually no public information currently available about how
FINRA specifically uses [its] revenues[.]'' \5\
---------------------------------------------------------------------------
\4\ Greg Iacurci, ``SEC Nominees Jackson and Peirce Blast FINRA's
Transparency During Hearing'', Investment News (Oct. 24, 2017) (online
at http://www.investmentnews.com/article/20171024/FREE/171029976/sec-
nominees-jackson-and-peirce-blast-finras-transparency-during).
\5\ Mark Schoeff, Jr., and Bruce Kelly, ``FINRA: Who's Watching
the Watchdog?'': Investment News (Sept. 2, 2017) (online at http://
www.investmentnews.com/article/20170902/FEATURE/170909996/finra-whos-
watching-the-watchdog).
---------------------------------------------------------------------------
Do you think FINRA should be subject to the same
transparency and due process requirements that Government
agencies are subject to? If not, which requirements should and
should not apply to FINRA?
A.3. Self-regulatory organizations (SROs) have traditionally
not been subject to the same transparency and due process
requirements as Government agencies. Given FINRA's quasi-
governmental nature, I and others have asked whether FINRA's
transparency and due process requirements should look more like
those applicable to Government agencies. I have not reached a
definitive conclusion on how FINRA's transparency and due
process requirements should be reformed. As I mentioned at the
hearing, I am hopeful that some positive change may come from
within FINRA in response to the review that CEO Robert Cook
initiated. If I am confirmed, I look forward to exploring with
my fellow Commissioners, SEC staff, Members of this Committee,
investors, member firms, and other interested parties whether
the SEC or Congress also need to act to increase transparency
and procedural protections at FINRA.
Q.4. If confirmed, will you review transparency and due process
at FINRA? If necessary, will you work with both your fellow
Commissioners and the Congress to reform FINRA?
A.4. If confirmed, I intend to work with my fellow
Commissioners and the SEC staff to look at transparency and due
process at FINRA. If necessary, I will work with my fellow
Commissioners and Congress on reforming FINRA.
Q.5. Despite refusing to disclose most of their finances, FINRA
pays it several of its seven of its executives more than $1
million per year. Given its failure to protect investors, do
you think it is appropriate for FINRA to pay its executives
several times more than typical Government regulators?
A.5. I am aware of concerns about the high salaries of FINRA
executives, particularly because these salaries are paid by
broker-dealers and, ultimately, investors who have little input
in setting them. The SEC is not in a position to set salaries
at FINRA, but, should I be confirmed, I will work to hold FINRA
accountable for how well it is fulfilling its role as the
frontline regulator of broker-dealers. A piece of this
consideration is likely to be how effectively FINRA is spending
its resources.
Q.6. On June 1, 2017, the SEC solicited public comments from
retail investors and other interested parties on revising its
standards of conduct for investment advisers and broker-
dealers. In this request for comments the SEC asked ``If the
commission were to proceed with a disclosure-based approach to
potential regulator action, what should that be?'' \6\
---------------------------------------------------------------------------
\6\ Jay Clayton, ``Public Comments From Retail Investors and Other
Interested Parties on Standards of Conduct for Investment Advisers and
Broker-Dealers'', Securities and Exchange Commission (June 1, 2017)
(online at https://www.sec.gov/news/public-statement/statement-
chairman-clayton-2017-05-31).
---------------------------------------------------------------------------
Do you believe that the financial incentives that create
conflicts of interest in the retail investment market that harm
investors can be eliminated by enhanced disclosure alone?
A.6. A key part of investor protection is ensuring that
investors have access to the information they need to make
investment decisions, including decisions about working with a
financial professional. Disclosing conflicts of interest can
help investors to choose an appropriate financial professional,
even if some conflicts remain.
Q.7. If not, what steps will you take to directly tackle
problematic incentives that lead to conflicts of interest that
harm investors?
A.7. As you noted, Chairman Clayton recently sought comment
from retail investors and others about revising the standards
of conduct for financial professionals. I look forward to
reviewing these comments, working with my fellow Commissioners
and SEC staff in the Divisions of Investment Management and
Trading and Markets, and consulting with the Department of
Labor, the SEC's Investor Advocate, the Investor Advisory
Committee, and State regulators to consider whether regulatory
changes are needed and what those changes should look like.
Among other issues that I will consider are the role that
incentives play in the provision of retail financial services.
Q.8. If so, how do you design a disclosure regime that
eliminates problematic financial incentives?
A.8. If I am confirmed, until I have consulted with my fellow
Commissioners, relevant staff, the Investor Advisory Committee,
the Department of Labor, State regulators, and other interested
parties, I cannot commit to supporting a particular regulatory
approach in this area.
Q.9. If the commission proceeds with a disclosure-based
approach to potential regulator action, what user tests will
the commission conduct to prove that all investors, not just
the most sophisticated, fully understand and appreciate the
nature and extent of the conflicts of interest and make a truly
informed decision as a result?
A.9. As your question suggests, investor testing can be an
important tool for the SEC in designing disclosures so that
retail investors are able to understand them and readily find
in them the information that is critical to making good
investment decisions. If confirmed, I look forward to drawing
on the work the Office of the Investor Advocate's Policy
Oriented Stakeholder and Investor Testing for Innovative and
Effective Regulation (POSITIER) initiative. The empirical
research produced and aggregated as part of this initiative is
likely to be relevant to rulemaking efforts regarding the
provision of retail financial products and services and many
other SEC rulemaking initiatives. The research also will help
the Commission to explore how different types of investors
understand and respond to disclosures and how other types of
regulation affect investors.
Q.10. Will you consult the extensive economic analysis the
Department of Labor put together for their rulemaking on the
fiduciary standard, including analysis on the incidence and
cost of conflicts of interest in the financial services
industry and on how these financial conflicts influence adviser
recommendations?
A.10. If confirmed, as part of considering any potential
rulemaking in this area, I will consult the Department of
Labor's work in connection with its fiduciary rulemaking,
including its economic analysis.
Q.11. What will you do to ensure that broker-dealers do not
call themselves advisers? How can investors distinguish between
sellers and advisers if sellers are allowed to call and market
themselves as advisers?
A.11. I am aware of concerns that the use of the ``adviser''
title by broker-dealers is a source of investor confusion. If I
am confirmed, I look forward to working with my fellow
Commissioners and the SEC staff to consider how this source of
confusion can best be addressed.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR DONNELLY FROM HESTER M. PEIRCE
Q.1. In previous conversations with Mr. Jackson and Ms. Peirce,
we have discussed my concerns that the wave of stock buybacks
in recent years has been at the expense of the long-term health
of companies, their workers, and their communities.
Are you concerned that the increase of stock buybacks in
recent years has been at the expense of investments in American
workers?
A.1. I share your desire to see companies investing in American
workers, and the SEC should monitor stock buybacks. To the
extent that a company is repurchasing its shares to return cash
that it cannot productively use, buybacks can drive funds to
companies that are eager to hire workers. One important way the
SEC can help to protect American workers is to ensure that
companies of all sizes can raise money in our capital markets,
which they can then use to hire workers, expand production, and
invest in research and development. If capital markets are
healthy, share buybacks may occur less frequently and any
associated layoffs will take less of a human toll as new and
expanding companies will have the funds to hire laid-off
workers.
Q.2. What actions can or should the SEC take to better monitor
stock buybacks and to increase transparency? What about
requiring more immediate disclosure (as opposed to quarterly,
as currently required)?
A.2. Particularly given the large number of stock buybacks in
recent years, the SEC should monitor stock buyback activity for
compliance with the safe harbor conditions of rule 10b-18, if
relevant, and to ensure that repurchases are not fraudulent or
manipulative. If confirmed, I look forward to consulting with
my fellow Commissioners and SEC staff regarding whether the
current disclosure about stock buybacks is adequately meeting
investors' needs or whether more frequent disclosure would be
appropriate.
Q.3. Mr. Jackson, your written testimony includes this excerpt:
``I will work to implement the corporate-governance protections
that Congress has enshrined into law--so that investors,
employees, and communities can be sure that our companies are
working to produce the kind of long-term value creation that
has been the hallmark of the American economy for
generations.'' I agree that companies should produce long-term
value creation, but unfortunately ``short-termism'' has become
a disease; Wall Street pressure results in corporate management
making decisions based on the next quarter as opposed to the
next decade.
Ms. Peirce, do you share similar concerns about ``corporate
short-termism''? What actions can or should the SEC take to
combat this problem and encourage long-term value creation?
A.3. I am aware that many market observers and market
participants have expressed concern that short-termism is
driving decisions that are not value-maximizing in the long-
term. While I believe that market prices generally reflect the
long-term value of companies, it is important to ensure that
the capital markets work for investors and companies with a
long-term focus. One way the SEC can do this is by ensuring
that disclosures are focused on items material to issuers'
long-term value. I look forward to exploring--with my fellow
Commissioners, SEC staff, investors, issuers, and this
Committee--additional regulatory and statutory changes that
would make it easier for companies to explicitly and
purposefully embrace a long-term approach.
Q.4. Mr. Jackson, in our meeting, I mentioned the Carrier
layoffs and the heart-wrenching video where a corporate
executive told hundreds of workers their jobs were going to
Mexico. In response, I crafted the End Outsourcing Act to keep
jobs in America by restricting tax breaks and Federal contracts
for companies that ship jobs to foreign countries. It is
difficult, however, to track when and where outsourcing occurs.
I believe the SEC can take modest steps in this regard by
requiring public corporations to disclose country-by-country
employment. This would help investors determine which companies
employ American workers and better understand where outsourcing
has occurred.
To both witnesses, do you support requiring corporations to
disclose employment on a country-by-country basis to help
increase transparency of outsourcing and American employment?
A.4. I share your concern about the elimination of jobs in this
country. The most important step the SEC can take to help to
address this problem is to ensure that our capital markets are
functioning properly so that we have a dynamic economy in which
companies compete vigorously for workers all across this
country. My assessment of an SEC mandate to disclose workers'
locations, as with other disclosure requirements, would turn on
its materiality. In addition, the details of how such a mandate
is structured would be relevant to my decision of whether to
support such a mandate. In considering such a mandate, I would
want to consult with my fellow Commissioners and staff in the
Division of Corporation Finance and Division of Economic and
Risk Analysis.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM HESTER M. PEIRCE
Q.1. I am very concerned about legislative proposals to
dramatically increase the threshold for submitting shareholder
proposals. Shareholder proposals are an important way for
shareholders to communicate with management. They have been
instrumental in improving corporate governance, such as
requiring that independent directors make up at least a
majority of corporate boards. Shareholders submit proposals on
emerging risks, such as cybersecurity and consumer data
protection.
I also worry that the SEC may respond to pressure from
companies that do not like dealing with shareholder proposals
and raise the threshold on its own.
Do you think shareholders should have a voice in the
companies they own?
A.1. Shareholders should have a voice in the companies they
own. Although most contours of shareholders' interactions with
companies are governed by State law, the SEC's Division of
Corporation Finance is actively engaged in the shareholder
proposal process. The process can be costly to shareholders and
the SEC. If, in light of these burdens, the SEC revisits
shareholder proposal thresholds, that reconsideration must be
undertaken with the benefit of the SEC staff's expertise and
input from, interested parties, including the shareholders whom
any changes would affect.
Q.2. Do you think it would a problem if the threshold for
submitting proposals was set so high that it blocked all but
the biggest and wealthiest shareholders from submitting
proposals?
A.2. It is important that any changes in this area balance the
beneficial role that shareholder proposals can play in
informing companies of small and large shareholders' concerns
with the costs that shareholder proposals can impose on
nonproposing shareholders.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM HESTER M. PEIRCE
Q.1. If confirmed, what specific steps would you take to
bolster individual executive accountability, consistent with
what Chairman Clayton has advocated for?
A.1. Holding individuals accountable for their violations of
the securities laws is a key part of protecting investors,
maintaining fair, orderly, and efficient markets, and
facilitating capital formation. If confirmed, I plan to explore
with my fellow Commissioners and staff in the Division of
Enforcement on a case-by-case basis whether the facts and law
dictate that individuals should be charged instead of or in
addition to corporations.
Q.2. Ms. Peirce, you worked at the SEC starting in 2002, and
then for a Commissioner from June 2004 to August 2008. As you
know, during that time, tremendous risk built up in the
financial system. Large investment banks like Lehman Brothers
and Bear Stearns accumulated hugely risky positions that went
unchecked by the SEC. For example, the SEC's Inspector General
in 2008 found eleven separate failings at the Commission
related to Bear Stearns, including \1\:
---------------------------------------------------------------------------
\1\ https://www.sec.gov/files/446-a.pdf
Allowing Bear Stearns' concentration in toxic
mortgage-backed securities to surge past even the
---------------------------------------------------------------------------
firm's internal limits;
Allowing leverage to go virtually unchecked under
what was known as the Consolidated Supervised Entity
(CSE) program, a voluntary regulatory regime; and
Allowing internal audit staff, rather than external
auditors as required by SEC rules, to perform critical
oversight work.
Key regulators from that time period--from Christopher Cox
at the SEC, to Hank Paulson, the Treasury Secretary, to Alan
Greenspan, the past Fed Chair--have all acknowledged that
voluntary supervision and industry ``self-regulation'' didn't
work. Has your experience at the SEC during the build-up to the
financial crisis made you look at the world any differently? If
confirmed, how will you internalize the lessons of this time
period and apply them to your new tenure at the SEC?
A.2. My experience at the SEC has made me look at the world
differently. Being inside a regulatory agency allowed me to
understand the breadth of the challenges that regulators face
and the potential for regulatory mistakes to harm the markets,
the economy, and individual Americans. The crisis taught me the
importance of asking questions about trends in the market--why
are firms engaging in a particular type of activity and what
will happen if market conditions change? One of those important
lessons from the crisis period is that well-intended
regulations can have devastating unintended consequences. \2\ A
seemingly small change in the law can lead to dramatic changes
in asset holdings and risk taking. Regulation can homogenize
firms' risk profiles, which then causes widespread, uniform
vulnerability to shocks to the financial system. Another
important lesson that was all too evident during the financial
crisis is that when firms are able to shift the consequences of
poor risk management to taxpayers, they are less careful than
they would be if they were responsible for their own mistakes.
The crisis also taught lessons about the danger of Government-
granted monopolies, such as the credit rating agencies.
---------------------------------------------------------------------------
\2\ See, e.g., Stephen Matteo Miller, ``The Recourse Rule,
Regulatory Arbitrage, and the Financial Crisis'', (Mercatus Center at
George Mason University Working Paper, Aug. 3, 2017).
---------------------------------------------------------------------------
If I were to be confirmed, these lessons would be at the
front of my mind in crafting regulation and monitoring the
market for potentially harmful activity. I will be cognizant of
the interaction between regulation and industry decision-making
and advocate for necessary modifications to rules to ensure
that they are achieving their intended objectives without
inserting new risks into the system.
Q.3. Ms. Peirce, you have, in your previous writing, dismissed
the notion that some financial executives got off the hook for
wrongdoing that occurred in the lead-up to the financial
crisis. \3\ You wrote, ``lost in the blind bloodlust targeted
at financial institutions and their employees is an
appreciation for the complexity of many of the laws and
regulations they face.'' \4\ You also noted, ``in my
experience, Government attorneys don't need any encouragement--
beyond the prospect of resume bling--to bring big cases.'' \5\
---------------------------------------------------------------------------
\3\ https://www.usnews.com/debate-club/are-banks-becoming-too-big-
to-jail/for-real-reform-we-must-move-past-too-big-to-jail-hype
\4\ Ibid
\5\ Ibid
---------------------------------------------------------------------------
In my view, State and Federal prosecutors were often
outgunned and outspent, and many times, executives would invoke
systemic importance or ``collateral consequences'' as to why
prosecutors shouldn't bring cases. Do you still hold your view
that the notion of ``Too Big to Jail'' was mere ``hype?'' \6\
---------------------------------------------------------------------------
\6\ Ibid
A.3. No person or corporation--regardless of influence or
market power--is above the law. Strong enforcement is a key
part of ensuring the integrity of our securities markets.
Financial institutions and their employees should be held
responsible for violations of the law. Too often, however, the
discussion around enforcement issues is not focused on facts
and law, but on emotion. If I am confirmed, I will work to
ensure that the SEC takes an objective approach to enforcement
matters, fosters a culture of compliance with its rules,
diligently and consistently punishes securities law violators,
and uses its enforcement resources efficiently.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM ROBERT J. JACKSON, JR.
Q.1. Although materiality has long been the foundation of the
SEC's disclosure requirements, the SEC has, over time,
supplemented this standard with specific bright-line rules. For
example, the SEC requires disclosure of specified information
related to executive compensation, corporate governance, and
internal controls. Do you agree that bright-line rules can be
useful to both companies and investors by supplementing the
traditional materiality standard?
A.1.Yes. As I have previously written, the Commission's
disclosure rules have consistently evolved over time in
response to changing investor interests, market dynamics, and
Congressional mandates. As your question points out, the
Commission's rules regarding executive compensation, for
example, were developed in response to significant investor
interest in those matters.
It is an essential part of the SEC's task to ensure that
the Commission's disclosure rules continue to evolve
appropriately in order to make sure that investors have the
information they need in order to evaluate the companies that
they own. If confirmed, I will work with my fellow
Commissioners and the Staff to ensure that these rules keep
pace with investors' needs.
Q.2. Speaking at NYU's School of Law earlier this year, Chair
Clayton said, ``I am not comfortable that the American
investing public understands the substantial risk that we face
systemically from cyber issues and I would like to see better
disclosure around that.'' Two days later, the Equifax breach
proved him right.
If confirmed, would you commit to working with Chair
Clayton and the other Commissioners to revise cyber risk
disclosure requirements, including considering a specific 8-K
reporting item for cybersecurity breaches that expose
personally identifiable information?
A.2. Yes. Recent events have taught us that the threat that
American investors and consumers face from cybersecurity
breaches is far more serious than we might have imagined even
just a few years ago.
Like Chairman Clayton, I am concerned that our disclosure
rules, and in particular the rules governing current reports on
Form 8-K, have not kept pace with these developments--and do
not make clear to public companies the urgency of disclosures
related to cybersecurity breaches. If confirmed, I will work
with the Chair, my fellow Commissioners, and the Division of
Corporation Finance to update these rules in a fashion that
makes clear the importance of cybersecurity risk to public-
company investors.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM ROBERT J. JACKSON, JR.
Q.1. It is my understanding that Initial Coin Offerings (ICOs)
and crypto-currencies have raised billions thus far in 2017.
This represents an exponential growth in recent years.
I was glad to see the SEC begin to closely examine this
market, and I applaud the SEC for its recent issuance of the
Investigative Report regarding the DAO. The Investigative
Report was an important step in bringing some clarity to the
ICO market in explaining how securities laws apply to ICOs
depending on the ``facts and circumstances.''
Although the DAO report was helpful, I worry that a
continued lack of clarity in ICO regulation will stifle
innovation and, most importantly, leave investors at risk.
Should the SEC do more to bring clarity to the ICO market?
A.1. I share the concern that this rapidly growing market
deserves immediate and close attention so that the SEC can help
protect investors in this area. Like you, I was glad to see the
SEC carefully examining the ICO market in its Investigative
Report--and like you, I agree that the Investigative Report
should only be the beginning of the SEC's work to protect
investors in these markets.
As an outsider to the Commission, I cannot say what steps
the SEC can or should take to bring more clarity to this
market. I can say, however, that the Commission should consider
whether its existing rules provide sufficient guidance
regarding these markets and, if not, what further guidance can
be provided without impeding the innovations that are occurring
in this important area. If confirmed, I would work with the
SEC's Staff, my fellow Commissioners, and this Committee to
ensure that the SEC takes all of the steps necessary to protect
the investors participating in the ICO market--and to ensure
that the innovations that can help unite entrepreneurs with
willing capital are encouraged rather than impeded.
Q.2. Aside from enforcement actions, what can the SEC do to
provide certainty to the ICO market? Would a proposed
rulemaking make sense?
A.2. Again, as an outsider to the Commission, it is difficult
for me to say what particular steps the SEC should take to
address the issues in this important new area. The Commission
should, however, be considering whether the evidence the SEC
currently has about the use of these offerings, the likelihood
of fraud, and the potential for continued growth in this area
suggests that a rulemaking is necessary to protect investors.
If confirmed, I would look forward to working with my fellow
Commissioners and Staff on more fully understanding ICOs'
evolving place in our markets and whether and when a rulemaking
would be appropriate.
Q.3. The SEC is about to implement the initial operating stage
of the Consolidated Audit Trail (CAT). Exchanges will soon
begin reporting to what will be a massive database, which will
include a significant amount of highly sensitive information.
In its second phase, CAT will begin receiving personally
identifiable information (PII) of brokerage customers. The
recent breach of the SEC's EDGAR database, however, calls into
question the security of the SEC's information technology.
Will you commit not to collect any PII until you are
confident that CAT is not susceptible to a breach?
A.3. The Consolidated Audit Trail was developed in order to
make sure that the flash crash of 2010--a period of trading in
which prices and volume swung uncontrollably, introducing
volatility into markets around the world--never happens again.
To do that, the SEC must have a detailed understanding of
trading activity. That's why the CAT project is so important to
the SEC's mission. To ensure fair and orderly markets, the
Commission needs to know much more about trading patterns and
the risks they might pose for our markets.
I absolutely share your concern that any breach of any SEC
system, and in particular the CAT, would have significant
consequences for the safety and stability of our capital
markets. That's particularly true if such a breach were to
occur after the CAT began to store PII of American investors.
And that's why, during my hearing, I indicated that the SEC's
own cybersecurity would be among my top priorities as a
Commissioner.
Before coming to any conclusions regarding the CAT and its
storage of PII, however, I would need more information
regarding the years-long development of the CAT inside the SEC.
In particular, I would need to better understand why the SEC's
Staff concluded that having PII would be helpful in
understanding the risks that gave rise to the flash crash--and
what evidence and research might support that conclusion.
However, as we discussed during the hearing, I do wonder to
what degree PII is necessary to fulfill the objectives of the
CAT. I understand that the Staff has been working on this
technology for a number of years, and if confirmed, I would
seek to understand the rationale for the design decisions of
the CAT--and how that design can both protect investors and any
PII that the system collects.
Q.4. We usually think of outside hackers when we think of data
security, but in numerous cases, individuals trusted with
access to confidential data are actually the source of leaks--
Chelsea Manning and Reality Leigh Winner come to mind. How
should the SEC control access to CAT data within the agency?
Should it allow other agencies or researchers access to CAT
data?
A.4. I share your concern that losing control of CAT data--
whether through an outside hacker or a Government leaker--is
unacceptable. As I mentioned at my hearing, the security of the
SEC's own data would be among my highest priorities as a
Commissioner--for just that reason.
While I am familiar with the general specifications of the
CAT, as an outsider I do not have sufficient information
regarding the operational details of the system, including the
internal controls and information-sharing policies that the
Staff have already developed. If confirmed, I will work with
the SEC's Staff and this Committee to gain deeper knowledge of
what data will be gathered, analyzed, and stored as part of the
CAT process--and make sure that any protocols governing sharing
such information with outsiders serve the paramount goal of
protecting information entrusted to the SEC.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE
FROM ROBERT J. JACKSON, JR.
Q.1. How can the SEC better define the scope of lawful trading-
related activity defined in its rulemakings? Where is clarity
most necessary?
A.1. As I mentioned during the hearing, Congress and the SEC
should be working to be sure the law of insider trading is
keeping pace with our markets. For two generations, American
insider trading law has been developed by judges on a case-by-
case basis. While there are benefits to this approach, there
are downsides, too. One is that the law develops slowly--too
slowly, some have argued, to keep pace with insider trading in
today's markets.
With respect to an area in which clarity would be most
helpful, recently courts have questioned the type of proof the
Government must have with respect to the benefits an insider
must receive in connection with leaks of material nonpublic
information to traders. \1\ Uncertainty with respect to such a
fundamental question is, in my view, a serious problem. The SEC
can and should frequently clarify its view of the meaning of
the insider trading laws. The Commission has not updated those
rules for nearly 20 years, and in my view it is time for the
Commission to look at these matters again. \2\
---------------------------------------------------------------------------
\1\ Salman v. United States, No. 15-628, 137 S. Ct. 420 (2016);
see also United States v. Martoma, 869 F.3d 58 (2d Cir. 2017).
\2\ See Securities and Exchange Commission, supra note 6.
Q.2. How can the SEC increase its use of informal guidance to
provide better clarity about the scope of unlawful trading-
---------------------------------------------------------------------------
related activities? Where is clarity most necessary?
A.2. There are a wide range of tools available to the SEC for
making its view of insider-trading law clear to the markets.
One, of course, is working with Congress to develop legislation
that more clearly establishes the rules of trading in your own
company's stock. Another--and one the SEC has used
historically, but not recently--is to engage in formal
rulemaking that clarifies the SEC's view of insider-trading law
in light of recent developments in the courts. \3\ Another, as
your question notes, is by providing guidance to companies and
others regarding the SEC's expectations with respect to
insider-trading activity.
---------------------------------------------------------------------------
\3\ See Securities and Exchange Commission, ``Proposed Rules:
Selective Disclosure and Insider Trading'', Release Nos. 33-7787, 34-
42259, IC-24209, 17 CFR 230 (January 10, 2000).
---------------------------------------------------------------------------
My research has previously pointed to time periods, and
especially the periods before major corporate announcements,
where companies and insiders should consider prohibiting
trading activity. \4\ In this and other areas, companies could
benefit from guidance from SEC Staff regarding the questions
raised by insider-trading activity. This kind of clarity would
help investors, companies, and insiders understand what the SEC
expects of them when executives trade in their company's stock.
If confirmed, I would look forward to working with the Staff
and your office to ensure that market participants know what
the law of insider trading requires--and can expect that law to
be vigorously enforced.
---------------------------------------------------------------------------
\4\ Alma Cohen, Robert J. Jackson, Jr., and Joshua Mitts, ``The 8-
K Trading Gap'' (Columbia Law and Economics Working Paper) (2015).
Q.3. I'd like to learn more about your approach to securities
regulations. Is there a risk that regulations can give large
incumbent firms a competitive advantage over smaller farms? If
---------------------------------------------------------------------------
so, what can be done to mitigate this risk?
A.3. Yes: there is always some risk that regulatory
intervention can give large, incumbent firms an advantage over
smaller firms, just as there is always risk that a failure by
regulators to intervene might leave investors unprotected from
fraud. Indeed, as an empirical scholar of law and economics, I
have a deep appreciation for the fact that the laws and
regulations we promulgate often have both intended and
unintended effects--and that regulators must pay attention to
both.
The best way to address this problem is for regulators
developing new rules to pay careful attention to the needs of
smaller businesses in developing those rules. That's why, if I
am confirmed, I so look forward to helping to stand up the
SEC's new Office of the Advocate for Small Business Capital
Formation, which will better help Commissioners understand the
perspective of smaller firms when developing new rules.
Q.4. Is it appropriate--in the words of former Chair Mary Jo
White--to ``effectuate social policy or political change
through the SEC's powers of mandatory disclosure''?
A.4. Disclosure is at the heart of the SEC's mission to protect
investors, and the Commission's disclosure rules have
consistently evolved over time in response to changing investor
interests, market dynamics, and Congressional mandates. In the
remarks you refer to in your question, Chair White questioned
whether certain mandates in the Dodd-Frank Act reflected an
undesirable incorporation of ``social policy'' or ``political
change'' into the securities laws. \5\
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\5\ Mary Jo White, Chairman, Securities and Exchange Commission,
``The Importance of Independence'' (Sommer Lecture at Fordham Law
School) (Oct. 3, 2013).
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The SEC is an administrative agency, charged with enforcing
and implementing the law that Congress and the President see
fit to enact. It is not for particular Commissioners, even a
Chair, to speculate about the motivations behind the statutory
mandates that Congress has chosen. Regardless of a
Commissioner's view of the wisdom of Dodd-Frank--or any law,
for that matter--the SEC's obligation is to implement the will
of the Congress. If confirmed, I intend to urge the Chairman
and my fellow Commissioners to follow the law.
Q.5. Is there a danger that disclosure requirements become so
voluminous that they become unhelpful to investors? If so, what
can be done to avoid this problem?
A.5. Making information easier for investors to digest is an
important part of the SEC's mission. But it's important to
distinguish those efforts from simply reducing the amount of
information available to investors. For generations, the
Commission has followed Justice Brandeis's famous maxim that
``sunlight is said to be the best disinfectant.'' \6\ In my
view, that rule has served investors well.
---------------------------------------------------------------------------
\6\ Louis D. Brandeis, ``Other People's Money--And How Bankers Use
It'', 22 (1914).
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Nevertheless, a great deal can and should be done to make
sure investors have the tools necessary to find the information
they need to evaluate the companies they own. In particular,
technology may allow us to rethink how we structure our
disclosure regime in a way that ensures investors have better
access to high-quality information without letting firms avoid
disclosing inconvenient material facts.
In addition, in order to better structure disclosures in a
way that serves investors, we need to learn more about how
different types of investors--from smaller retail investors to
large mutual funds and pension funds--consume the information
that companies give them. A series of recent initiatives,
including some led by the Office of the Investor Advocate, have
begun to shed important light on those questions. \7\ If
confirmed, I would look forward to working with the Staff and
my fellow Commissioners to better understand how investors
consume the information companies give them. And I would look
forward to working with your office to ensure that disclosures
are as helpful to investors as possible.
---------------------------------------------------------------------------
\7\ See Securities and Exchange Commission Office of The Investor
Advocate, ``Core Functions'' (2017) (describing the Office's efforts to
assist retail investors and study investor behavior).
Q.6. What role, if any, does the SEC have as a prudential
---------------------------------------------------------------------------
regulator?
A.6. The SEC's primary regulatory priorities are set forth in
the agency's principal enabling statutes. Those priorities
include the protection of investors, the maintenance of fair
and orderly markets, and to facilitate capital formation.
However, as we learned from the financial crisis--an event
that devastated millions of American families and even today
undermines investor confidence in our markets--modern financial
institutions often cut across regulatory boundaries. When they
do, gaps in regulatory oversight can have devastating
consequences for our markets. For that reason, it's important
for the SEC to engage, where appropriate, with prudential
regulators such as the Federal Reserve Board of Governors,
Federal Deposit Insurance Company, and Office of the
Comptroller of the Currency. If confirmed, I would work with
Chairman Clayton and those regulators to make sure that the
kind of devastation American families suffered during the last
financial crisis never happens again.
Q.7. Is it ever appropriate for the SEC to engage in the
``merit review'' of investment choices, where the SEC would
elevate its evaluation of a particular investment over the
evaluation of a private investor?
A.7. In general, the SEC has long eschewed reviewing the merits
of any particular investment choice. For example, in 1979, the
Commission famously declined to engage in reviewing the
fairness of any particular going-private transaction. \8\
Instead, in that case and many others, the Commission has
relied on a disclosure-based regulatory framework that depends
on investors and issuers to evaluate the merits of investment
decisions. That approach has generally served the Commission,
and our Nation, well.
---------------------------------------------------------------------------
\8\ See, e.g., Randal J. Brotherhood, Note, Rule 13e-3 and the
``Going Private Dilemma: The SEC's Quest for a Substantive Fairness
Doctrine'', 58 Wash. U.L.Q. 883 (1980) (describing the SEC's initial
proposal to have the Commission itself evaluate the substantive
fairness of a going-private transaction, and the Commission's eventual
decision to require only disclosure of the issuer's views regarding the
fairness of such transactions).
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But it's essential to that approach that the SEC's
disclosure rules evolve in light of changing investor
interests, market dynamics, and external events in order to
make sure that these rules give investors the information they
need to make their own judgments about the substantive merits
of any particular investment choice. If confirmed, I intend to
work with my fellow Commissioners and the Staff to ensure that
our disclosure rules keep pace with investors' needs in order
to best support the SEC's disclosure-based approach to
securities regulation.
Q.8. In 2014, former SEC Commissioner Dan Gallagher said that
``issues specific to small business capital formation too often
remain on the proverbial back burner. This lack of attention
doesn't just harm small business; it also harms investors and
the public at large.'' Do you agree?
A.8. Yes. Congress and the SEC should always be thinking about
how best to unite small businesses with the investors they need
to grow their enterprises and our economy. Facilitating capital
formation and the ability to access that capital has been one
of the great catalysts of American entrepreneurship. Making
sure that small businesses have a voice at the SEC is critical
to the Commission's mission.
Q.9. How will you work to improve small business capital
formation and respond to our economy's near-historic low levels
of firm creation?
A.9. There are many explanations for recent changes in the
number of public companies, and I think all of them are
especially relevant to small businesses. For example, the
capital-markets fees that a company must pay to go public are
far higher in the United States than in other markets, giving
entrepreneurs--and especially the kinds of small companies that
lack market power over investment bankers--pause before listing
their shares. And extensive acquisition activity over the past
two decades has worked to combine thousands of public
companies, reducing the number of listings on American
exchanges, and putting smaller companies who choose to stay
independent at a disadvantage. The SEC should consider all of
these developments when examining how to make sure small
business owners get the capital they need--and have incentives
to create the companies that will power our economy for
generations to come.
In addition, recent legislation, and especially the JOBS
Act, has been directed toward ensuring that entrepreneurs have
access to the capital they need. The SEC's rules related to
JOBS Act mandates are still relatively new, however, and it is
too soon to tell whether they are working--and how they might
be improved to help small businesses grow and better protect
investors.
The SEC will need to understand how markets and investors
have responded to the JOBS Act before taking those steps. If
confirmed, I would look forward to working with my fellow
Commissioners and the Staff to make sure that the JOBS Act and
related SEC rules do everything possible to unite entrepreneurs
with the capital they need to grow our economy--while making
sure investors are protected.
Q.10. The SEC Small Business Advocate Act of 2016 created the
Office of the Advocate for Small Business Capital Formation. If
confirmed, will you work closely with this advocate and
seriously consider the Office's recommendations?
A.10. Yes. As I mentioned during the hearing, I think this
Office will give small businesses a critical voice at the SEC,
and if confirmed I will carefully consider its recommendations.
Q.11. The SEC Small Business Advocate Act of 2016 also created
the Small Business Capital Formation Advisory Committee, which
will issue recommendations on improving small business capital
formation. Unfortunately, the SEC has traditionally largely
ignored these sort of recommendations, such as those of the
annual Government-Business Forum on Small Business Capital
Formation. While the SEC is required to respond to the
recommendations of the Advisory Committee, it is not required
to follow them. If confirmed, will you strongly consider
supporting the recommendations of the Advisory Committee?
A.11. Yes. The Commission's Advisory Committees should always
play a critical role in Commissioners' deliberations. The
reason is that those Committees often bring perspectives--
whether experience as a shareholder, on the board of a public
company, or running a broker-dealer entrusted with Americans'
retirement savings--that Commissioners should consider before
making any decisions.
Because my research and work has always emphasized the
facts on the ground--the real effects that law has on investors
and companies--I expect to give great weight to the
recommendations of these Committees if I am confirmed. In
particular, the Small Business Capital Formation Advisory
Committee and its recommendations will provide invaluable
insight into the needs and concerns of small and emerging
companies seeking capital. If confirmed, I look forward to
working with my fellow Commissioners and the Staff to make sure
that these voices are heard.
Q.12. Does anything need to be done to improve the use of cost-
benefit analysis at the SEC? If so, will you commit to
advocating for these steps?
A.12. Yes. I believe that understanding the costs and benefits
of any particular regulatory or deregulatory choice is critical
to the SEC's mission. Common sense demands that policymakers do
whatever they can to understand the implications of their
policy choices before they make their decisions. And so does
the law: the courts have made clear that the SEC has an
obligation to analyze costs and benefits to the degree possible
in connection with rulemakings. \9\
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\9\ See, e.g., Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir.
2011).
---------------------------------------------------------------------------
As I noted at the hearing, however, I believe it is equally
important for policymakers to be candid and clear about the
limits of cost-benefit analysis. All of the potential costs and
consequences of a decision--in law and in life--simply cannot
be known in advance, and that fact should not be used as a
basis for the SEC to fail to fulfill its mission. As an
empirical scholar of law and economics, I am very familiar with
the benefits--and limits--of cost-benefit analysis. If
confirmed, I look forward to working with the Division of
Economic and Risk Analysis to better understand its approach to
cost-benefit analysis and to ensure that such analysis
continues to play an important role in the SEC's work.
Q.13. I'd like to discuss more about cybersecurity at the SEC.
What--if anything--does the SEC need to do to improve its
operational cybersecurity in light of recent events at the SEC?
A.13. I share the concern that recent news of a breach of the
SEC's EDGAR system could reflect significant issues with the
SEC's operational cybersecurity. Without understanding the
facts behind that and other recent developments, I am not in a
position to assess the current State of the SEC's
cybersecurity.
However, as I mentioned at the hearing, if confirmed the
SEC's cybersecurity would be among my highest priorities as a
Commissioner. The Commission cannot fulfill its mission--nor
can it expect public companies to take cybersecurity
seriously--unless its operational cybersecurity is beyond
reproach. If confirmed, I would look forward to working with my
fellow Commissioners, the Staff, and Congress to make sure the
SEC has the resources and subject-matter experts it needs to
get this right.
Q.14. The Consolidated Audit Trail (CAT) has been called the
``Fort Knox of Wall Street.'' \10\ What value do you see in
fully implementing the CAT?
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\10\ Bob Pisani, ``Here's What Really Terrifies Wall Street About
the SEC Hack'', CNBC.COM (Sep. 21, 2017).
A.14. The Consolidated Audit Trail was developed in order to
make sure that the flash crash of 2010--a period of trading in
which prices and volume swung uncontrollably, introducing
volatility into markets around the world--never happens again.
To do that, the SEC must have a detailed understanding of
trading activity. That's why the CAT project is so important to
the SEC's mission. To ensure stable and fair markets, the
Commission needs to know much more about trading patterns and
the risks they might pose for our markets.
The data that the CAT will make available to the SEC would
help the Commission keep pace with the rapid changes in our
markets. It will help us understand what caused the flash
crash--and how to prevent one in the future. In addition,
combining these data with recent advances in data science will
help both policymakers and private companies craft measures
that will improve the functioning of markets. I look forward to
working with my fellow Commissioners and the Staff on this
important initiative.
Q.15. Are you worried that a breach of the CAT could compromise
the confidential investment strategies of trading firms,
particularly if the trade information could be reverse
engineered or pose a broader systemic risk?
A.15. Yes. I am concerned that any breach of any SEC system,
and in particular the CAT, would have significant consequences
for the safety and stability of our capital markets.
As your question points out, one of those consequences
might be the revelation of trading strategies with systemic
consequences for our markets. Another unacceptable consequence
could be that personally identifiable information (PII) might
be compromised. That's why, during the hearing, I indicated
that the SEC's own cybersecurity would be among my top
priorities as a Commissioner. And that's why these questions
will be among the first I will ask Chairman Clayton if I am
confirmed.
Q.16. Should the SEC explore alternatives to maintaining PII in
the CAT? For example, would the SEC be able to fulfill its
policy aims by requesting PII from individuals only when it is
necessary for the SEC to fulfill its oversight duties?
A.16. As an outsider it is difficult for me to know whether and
why SEC Staff concluded that it was necessary for the CAT to
collect PII. In particular, I cannot say why the Staff
concluded that having PII would be helpful in understanding the
risks that gave rise to the flash crash of 2010--and what
evidence and research might support that conclusion.
However, as we discussed during the hearing, I do wonder to
what degree PII is necessary to fulfill the objectives of the
CAT. I understand that the Staff has been working on this
technology for a number of years, and if confirmed, I would
seek to understand the rationale for the design decisions of
the CAT--and how that design can both protect investors and any
PII that the system collects.
Q.17. In response to questions for the record from Senator
Tillis during his confirmation process Chairman Clayton stated
that `` . . . we should be mindful that cybersecurity risks are
continuously evolving, and regulation in this area should take
into account its dynamic nature, including that, in such
circumstances, specific requirements may be appropriate but
also have the risk of becoming outdated . . . .'' Do you agree?
Is there a risk that Regulation SCI could create some
cybersecurity risk by introducing an incentive for companies to
focus more on complying with the regulation, instead of
leveraging private sector resources to implement innovative
cybersecurity techniques? If so, what steps should the SEC take
to mitigate this risk?
A.17. Cybersecurity risks are a constantly evolving threat and
pose a fundamental risk to our markets. That's why, at the
hearing, I described addressing those risks as among my top few
priorities if I am confirmed as a Commissioner. And that's why
I believe that the SEC should consider augmenting Regulation
SCI in light of recent developments like Equifax. In
particular, those changes should encourage exchanges to make
the investments necessary to protect themselves and investors
from the risk of a cybersecurity breach.
I am aware of the concern that certain parts of Regulation
SCI might hinder exchanges from making use of the latest
technologies to protect themselves from cyberthreats. As an
outsider to the Commission and its work, I am not yet able to
assess the evidence underlying that concern--and what the SEC
might do about it. If confirmed, I look forward to learning
more about the Staff's experience in administering Regulation
SCI. And I would be delighted to work with you and your office
to ensure that Regulation SCI gives exchanges the incentives
they need to protect investors from cyberthreats.
Q.18. Some have proposed expanding the number of entities that
should comply with Regulation SCI while others have proposed
increasing transparency over which market centers are complying
with Regulation SCI. What considerations would you take into
account when evaluating this question?
A.18. Without commenting on any particular question that might
come before me as a Commissioner if I am confirmed, I want to
be clear about what will motivate me when addressing issues
like these. When it comes to cybersecurity, my priority will be
the protection of our investors and our markets from
cyberthreats that undermine the stability and growth of our
economy.
As an outsider to the Commission and its work, I cannot say
whether expanding the reach of Regulation SCI or permitting
widely-disclosed departures from those standards will achieve
that goal in any particular case. To know the answer to that
question, the SEC will need to study the risk to the broader
economy of exchanges having inadequate cybersecurity defenses,
the costs associated with exchanges adapting to new
cybersecurity regulations, and especially the risks that
consumers will face if firms handling sensitive personal data
have lax cybersecurity protections. If confirmed, would I look
forward to learning more about the Staff's experience on these
questions. And I would look forward to working with you and
your office to make sure investors and markets are protected
from cybersecurity threats.
Q.19. Should the SEC update its cybersecurity disclosure
guidelines for public companies?
A.19. Yes. I agree with Chairman Clayton that cybersecurity is
an area where there is not enough disclosure. I'm particularly
concerned that the rules governing current reports on Form 8-K
have not kept pace with these developments--and do not make
clear to public companies the urgency of disclosures related to
cybersecurity breaches.
Our markets, and the American public, need swift and clear
disclosure when their personal information is compromised in
cybersecurity breaches. If confirmed, I will work with the
Chairman, my fellow Commissioners, and the Division of
Corporation Finance to update these rules in a fashion that
makes clear the importance of cybersecurity risk to public-
company investors.
Q.20. How should the SEC ensure that any cybersecurity
disclosure guidelines for public companies require only timely
and material disclosure instead of that which is extraneous and
untimely?
A.20. The best way to make sure our disclosure rules serve
investors is to make sure they are updated to reflect the
reality investors face in modern markets. Cybersecurity issues
are a dynamic and evolving threat, and require dynamic rules to
make sure investors get the information they need about those
threats--which is why I favor reassessing whether these rules
adequately address cybersecurity.
The materiality standard, which governs disclosures of this
type, requires us to ask whether a reasonable investor would
think the information relevant to the total mix of information
they consider when making investment decisions. Use of this
standard has, for decades, helped ensure that corporate
disclosures are relevant and timely. If confirmed, I look
forward to working with my fellow Commissioners to ensure that
critical cybersecurity risks are promptly disclosed to
investors and the American public.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM ROBERT J. JACKSON, JR.
Q.1. In brief, what is the SEC currently doing right, what
needs to change, and how do you plan on prioritizing your time,
should you be confirmed?
A.1. The breadth and depth of the SEC's mission--protecting
investors in the largest, deepest capital markets in the
world--reflects an enormous privilege and responsibility. As an
outsider to the agency, it is clear that the SEC has taken
important steps to improve its effectiveness in the years since
the financial crisis. But, as we discussed during the hearing,
there is still a great deal of work to do. If I am confirmed, I
would focus my time on the following three priorities.
The first is cybersecurity. As I mentioned during the
hearing, I think recent events both at the SEC and public
companies have taught us that we have a long way to go in
making sure that our securities regulators have the tools and
technologies they need to keep up with the changing
marketplace. The SEC cannot fulfill its mission if it cannot
assure investors that both its own systems, and the systems of
the public companies it regulates, are protected from
cybersecurity breaches. I hope to work closely with Chairman
Clayton, my fellow Commissioners, and the Staff to make sure
that the information that Americans entrust to the SEC and to
public companies is better protected.
Second, I would focus on finishing the rules required by
Dodd-Frank. The SEC's failure to do so in the 7 years since the
passage of that law has harmed investors, companies, and the
morale of the SEC Staff itself. It has also exposed investors
to risks that Congress has ordered be addressed, for example by
failing to make sure that public companies have clawback
policies in place that require executives to give back pay they
were awarded by mistake. If confirmed, I would urge the
Chairman and my fellow Commissioners to follow the law and
finish these rules.
Finally, I would focus on holding individuals accountable
for financial fraud. In particular, the SEC should be thinking
about how to modernize the law of insider-trading to deal with
the changes that have occurred in securities markets over the
last two decades. The SEC should also work with FINRA to ensure
that investors have better information on the stockbrokers most
likely to commit fraud. Making sure that individuals who engage
in insider trading or investor fraud pay the price is critical
to the SEC's mission, and more can and should be done on that
front.
Q.2. Do you believe that private capital being put into
underperforming companies can improve the company's
performance?
A.2. As I have previously written, there is significant
evidence that investors like these can help hold corporate
management's feet to the fire, especially at underperforming
companies--and that this work can be good for all investors and
the economy more generally. \1\ There is also evidence,
however, that these investors can engage in counterproductive
tactics that undermine long-term value creation. \2\
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\1\ See, e.g., Lucian Bebchuk and Robert J. Jackson, Jr., ``The
Law and Economics of Blockholder Disclosure'', 2 Harv. Bus. L. Rev. 39
(2012).
\2\ See, e.g., Leo E. Strine, Jr., ``Who Bleeds When the Wolves
Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our
Strange Corporate Governance System'', 126 Yale L.J. 1870 (2017).
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Capturing the benefits of private capital--the corporate
accountability and growth that have so often been associated
with such investments--while minimizing the costs of those
tactics is critical to ensuring the growth of the American
economy. If confirmed, I would very much look forward to
working with my fellow Commissioners, and your office, to
ensure that our securities laws are up to that task.
Q.3. Do you believe that curbing more private investment would
help underperforming companies?
A.3. No. Private investment in underperforming companies is an
important source of accountability. Corporate management knows
that, if the firm performs poorly, a private investor may well
intervene and demand better performance on behalf of all
shareholders. This knowledge--even, and perhaps especially, for
managers who are never the target of such an investment--
encourages executives to do everything they can to ensure that
the company performs well.
Q.4. Do you agree that private capital being put into companies
leads to more transparency and communications with existing
shareholders?
A.4. Private investors often encourage other investors to pay
attention to particular issues that are undermining the
company's performance. \3\ Because private investors usually
cannot force change at public companies by themselves, they
must persuade other shareholders that their ideas are best for
the company. That process can often improve transparency and
communication among all of the company's shareholders--as well
as the company's management, who also has an opportunity to
persuade investors that their strategy is right for the company
over the long term.
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\3\ See, e.g., Ronald J. Gilson and Jeffrey N. Gordon, ``The
Agency Costs of Agency Capitalism: Activist Investors and the
Revaluation of Governance Rights'', 113 Colum. L. Rev. 863 (2013).
Q.5. Do you agree that corporate CEOs are more responsive to
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the market today than they were in the past?
A.5. Yes: recent corporate governance reforms, including those
regarding director independence, executive pay, and shareholder
proposals have encouraged CEOs to be increasingly responsive to
shareholders. But let's be clear: there is still a great deal
of work left to do. As I indicated during the hearing, it is
not my sense that what corporate America is suffering from is
too much accountability.
Q.6. Do you believe that restricting or making it harder for
private capital to invest in American companies is a good idea?
A.6. No: in general, the benefits that private investors
offer--by holding corporate managers' feet to the fire and
making sure they are working hard for all investors--are
critically important to the health of American companies and
the broader economy. Making it harder for private investors to
do that work is unlikely to be beneficial for the investors who
depend on the growth of the economy to fund their child's
education and their retirements.
However, it is also important to acknowledge that these
investors can engage in counterproductive tactics--like using
undisclosed derivative positions to attack unsuspecting
companies and their constituents--that deserve immediate
attention from the SEC. If confirmed, I look forward to working
with the Chairman, my fellow Commissioners, and the SEC's Staff
to ensure that American investors continue to receive the
benefits of private investment in their companies--while
reducing the costs of some investors' counterproductive
behavior.
Q.7. Do you believe that private capital should be flexible and
adaptive to quickly changing circumstances?
A.7. Yes. One of the many benefits of private investments in
public companies is that private capital can often respond
quickly to the changing needs of the company and the economy.
As I have previously noted in my research, these benefits are
especially valuable when private capital is invested in
companies over the longer term. \4\ In those cases, the
presence of private capital can help make sure that corporate
management is working toward the kind of long-term value
creation upon which investors, employees, and our economy rely.
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\4\ Robert J. Jackson, Jr., ``Private Equity and Executive
Compensation'', 60 UCLA L. Rev. 638, 658 (2013) (documenting the
relationship between CEO incentives to maximize firm value and long-
term private-equity investments in companies that the investor has
taken public).
Q.8. Do you think that the current IPO market is at its peak?
What could we be doing to facilitate more entrants into the
public markets? What are some determinative factors that
companies evaluate when making a decision to enter into the
public markets? Do you think that some of these factors have
served as preclusive, often determinative factors for a company
deciding not to enter the public marketplace? How do public
---------------------------------------------------------------------------
companies affect job creation and economic growth?
A.8. There are a wide range of reasons why many companies today
are choosing not to go public, and all of them deserve the
SEC's attention. For example, we now have deeper and more
robust private capital markets than ever before, which allows
companies to stay private for far longer than they once could.
For another, the capital-markets fees that a company must pay
to go public are far higher in the United States than in other
markets, giving entrepreneurs pause before listing their
shares. And the pressure public companies face to meet
quarterly earnings estimates, rather than to grow the company
over the long term, no doubt can encourage some companies to
stay private rather than go public.
Public companies are critical to job creation and the long-
term economic growth of our Nation, and I am committed to
ensuring that we are doing all we can to encourage companies to
go public in American markets. Chairman Clayton has made clear
that this issue is a priority for him, and I look forward to
working with the Chairman and my fellow Commissioners to help
encourage companies to raise capital in our public markets--and
make sure that investors are protected in the process.
Q.9. Do you think that the SEC should have a formalized
retrospective review process, much like prudential regulators
have, by which the SEC can take a holistic look at its rules
and regulations and decide which ones are outmoded,
ineffective, burdensome, etc., or similarly decide which ones
need to be changed and modernized?
A.9. I believe that the Commission should consistently review
its rules to make sure that those rules give investors the
information they need about the companies they own. To the
degree that SEC rules are outmoded, ineffective, or burdensome,
modernizing those rules is a critical task, and several rules
have gone far too long without needed updates. \5\
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\5\ For example, as I have noted in my research, the rules
governing current disclosure on Form 8-K--that is, the rules that
govern the rapid updates that investors depend upon to learn about new
corporate developments--have not been carefully examined for more than
a decade. See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua
Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working
Paper) (2015); see also Securities and Exchange Commission, Additional
Form 8-K Disclosure Requirements and Acceleration of Filing Date,
Release Nos. 33-8400, 34-49424, 17 CFR 228 (Aug. 23, 2004).
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As an outsider to the Commission and its work, it is
difficult for me to say whether formalizing the retrospective
review process would be beneficial. To know the answer to that
question, the SEC should investigate, among other things, why
so many key rules have gone so long without modernization or
revision and what Staff resources are available for that work.
If confirmed, I would look forward to working with the Staff
and my fellow Commissioners to answer those questions--and to
make sure our rules are keeping up with the demands of modern
markets and investors.
Q.10. How do you plan on working with the CFTC to address
harmonization issues?
A.10. Because the SEC's and CFTC's work has so often
overlapped--especially in light of the activities in today's
markets that cut across traditional regulatory boundaries--
coordination and harmonization among the agencies' rules is
critical to maintaining fair and orderly markets. I am aware
that the Staff of both agencies have worked extensively to take
steps toward better harmonization in the past, including with
respect to the regulation of investment advisers, \6\ and have
also reviewed the joint report on harmonization that both
agencies prepared in the wake of the financial crisis. \7\
---------------------------------------------------------------------------
\6\ See, e.g., Commodity Futures Trading Commission,
``Harmonization of Compliance Obligations for Registered Investment
Companies Required To Register as Commodity Pool Operators'', RIN 3038-
AD75, 17 CFR Part 4 (Aug. 12, 2013).
\7\ Commodity Futures Trading Commission and Securities and
Exchange Commission, ``A Joint Report of the SEC and the CFTC on
Harmonization of Regulation'' (Oct. 16, 2009).
---------------------------------------------------------------------------
Although this work has been important, I understand that
there is more to be done to address the sometimes-overlapping
regulations governing the work of the SEC and CFTC. If
confirmed, I would look forward to working with my fellow
Commissioners, the Staff, your office, and Commissioners at the
CFTC to ensure that the agencies provide consistent and clear
guidance to market participants.
Q.11. With regard to cyber infrastructure and enforcement
actions, what do you think the SEC is doing right and what
would you change?
A.11. As an outsider to the agency and its work, I am not in a
position to assess the SEC's cybersecurity infrastructure. As
we discussed during the hearing, however, I am deeply concerned
by the recent revelations regarding the cybersecurity breach of
the SEC's EDGAR system--so much so that I have placed securing
the SEC's systems among my top few priorities. If I am
confirmed, the first question I will ask Chairman Clayton is
exactly what happened that made the SEC's systems vulnerable to
such a breach--and what we need to do to make sure it never
happens again.
With respect to enforcement, while taking care not to
speculate regarding particular enforcement actions that may
come before me if I am confirmed as a Commissioner, I want to
be clear: the SEC can and should make far better use of data
science to make its enforcement efforts more efficient and
effective. My previous research has used those technologies to
show how the SEC could more easily identify potential cases.
\8\ I believe that these techniques could help us to better
understand the circumstances and larger trends behind where
we'll find bad actors--and make it easier for us to hold them
accountable.
---------------------------------------------------------------------------
\8\ See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua
Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working
Paper) (2015).
Q.12. The Treasury Capital Markets report touched on potential
changes to best execution and potential changes to market
structure issues, particularly in the context of Reg. NMS. Can
you give me your thoughts on what you view as potential areas
---------------------------------------------------------------------------
for reform within the context of Reg. NMS?
A.12. Fundamentally, the SEC's role in the regulation of
capital markets more generally--and trading venues in
particular--is to make sure that American investors get the
level playing field they deserve, and pay a fair price when
they buy shares of public companies. Regulation NMS was an
important step toward reducing trading costs and increasing
liquidity in our equity markets, both important goals.
But Regulation NMS is now over a decade old, and I am aware
of the concerns that the rule has added complexity to our
capital markets--and that these markets are now characterized
by fragmentation that harms investors. In light of the rapid
changes in these markets, it may well be time for the SEC to
reassess the degree to which these rules continue to be
sufficient to protect investors. The Equity Market Structure
Advisory Committee has provided important guidance to the
Commission in this respect. \9\ If confirmed, I would look
forward to working with my fellow Commissioners, the Staff, and
your office to explore the degree to which Regulation NMS needs
to be modernized.
---------------------------------------------------------------------------
\9\ See, e.g., SEC Equity Market Structure Advisory Committee,
``Recommendations Regarding Modifying Rule 605 and Rule 606'' (Nov. 29,
2016).
Q.13. Some have argued that our market structure systems have
become increasingly complex and that the layered regulations
have created incentives to game the system. Can you help me
understand your views on reforming our domestic market
structure and can you commit to this body that you will work
with the Committee in tackling some of the languishing issues
that have been pervasive in market structure over the last 10+
---------------------------------------------------------------------------
years?
A.13. Yes: If confirmed, I will work with the Committee to
tackle any market-structure issues that are keeping our market
venues from offering American investors a fair price. As your
question points out, our markets are rapidly evolving, and that
is especially true in the area of market structure, where
frequent updates to SEC rules may be needed to ensure our law
keeps pace with the markets. In particular, I am aware of the
concern that legal changes and other factors have led to
fragmentation that harms investors. In light of the rapid
changes in these markets, it may well be time for the SEC to
reassess whether these rules continue to be sufficient to
protect investors.
Separately, although a great deal of time and regulatory
attention has been given to the structure of our equity
markets, millions of Americans--especially those at or near
retirement--also rely on the structure of our debt markets to
give them the best possible price for their investments.
Although these debt markets are crucial to American families,
they have received relatively scant attention. That is why I
was delighted to see Chairman Clayton announce his interest in
forming a Fixed Income Market Structure Advisory Committee.
\10\ If confirmed, I would work with the Chairman and my fellow
Commissioners to make sure that American investors can rely on
the structure of our debt markets to help them prepare for and
fund their retirement plans.
---------------------------------------------------------------------------
\10\ See Jay Clayton, Chairman, Securities and Exchange
Commission, Remarks at the Economic Club of New York (July 12, 2017).
Q.14. IT modernization enables financial services firms to
protect constituent financial information. In an environment of
increasing cybersecurity threats, how will you use your role at
the SEC to promote IT modernization across the financial
---------------------------------------------------------------------------
services sector and at the SEC?
A.14. I share your concern that, in a world with increasing
cybersecurity threats, SEC rules must evolve in a way that
promotes information-technology modernization. That's why I
agree with Chairman Clayton that cybersecurity is an area where
there is not enough disclosure--and, as your question suggests,
that is especially true at financial-services firms entrusted
with millions of Americans' financial information.
In particular, I'm concerned that our disclosure rules, and
especially the rules governing Form 8-K, have not kept pace
with these developments--and do not make clear to public
companies the urgency of disclosures related to cybersecurity
breaches. If confirmed, I will work with the Chair, my fellow
Commissioners, and the Division of Corporation Finance to
update these rules in a fashion that makes clear the importance
of cybersecurity risk to public-company investors.
Regarding IT modernization at the SEC itself, I share the
concern that recent news of a breach of SEC systems reflects
significant issues with the SEC's operational cybersecurity.
Without understanding the facts behind that and other recent
developments, I am not in a position to assess the current
State of the SEC's information-technology resources. However,
as I mentioned at the hearing, if confirmed the SEC's
cybersecurity would be among my highest priorities as a
Commissioner. The Commission cannot fulfill its mission--nor
can it expect public companies to take cybersecurity
seriously--unless its own house is in order.
Q.15. How will you ensure that regulations set by the SEC do
not impede progress on IT modernization?
A.15. I share your concern that SEC rules in this area must
encourage, rather than impede, corporate investments in the
kind of information-technology infrastructure that can protect
Americans' data from cybersecurity threats. That includes not
only the disclosure rules you referred to in your previous
question, but also Regulation SCI--which, some have argued, may
inadvertently discourage exchanges from adopting the latest
technology to defend against cyberthreats.
As an outsider to the Commission and its work, I am not yet
able to assess the evidence underlying that and other concerns
in this area--and what the SEC might do about it. Factors the
SEC should be focused on, however, include the risk to the
broader economy of cybersecurity breaches, the costs associated
with adapting to new cybersecurity regulations, and the risks
consumers face if those handling sensitive personal data have
lax cybersecurity protections. If confirmed, I look forward to
learning more about the Staff's experience in administering
these rules. And I would be delighted to work with you and your
office to ensure that all of the SEC's rules--including those
governing Form 8-K and Regulation SCI--give American companies
the incentives they need to protect investors from
cyberthreats.
Q.16. With regard to corporate disclosures, what standard
should be used to determine whether or not something is
disclosed?
A.16. As I mentioned during the hearing, the concept of
materiality is the touchstone of our Federal disclosure rules.
This standard--which asks whether particular information would
be relevant to the total mix of information a reasonable
investor would use when making an investment decision--has
served American investors and public companies well for
generations.
As I have written before, the best way to know whether
something is material--that is, whether it's important to
investors--is to ask investors. That's certainly what the
Commission has done in the past. For example, the SEC's rules
regarding executive compensation were developed in response to
significant investor interest in those matters. \11\ Our
markets have evolved rapidly over the past 10 years, and I'm
concerned that the Commission's disclosure rules haven't kept
pace with investors' needs.
---------------------------------------------------------------------------
\11\ See Securities and Exchange Commission, Executive
Compensation Disclosure, Release No. 33-6940, 57 FR 29,582 (1992)
(listing the shareholder-proposal activity related to executive pay at
several large, public companies as a basis for promulgating disclosure
rules on executive compensation).
---------------------------------------------------------------------------
It is an essential part of the SEC's task to ensure that
the Commission's disclosure rules continue to evolve in order
to make sure that investors have the information they need to
evaluate the companies that they own. If confirmed, I will urge
Chairman Clayton, my fellow Commissioners, and the Staff to
update our disclosure rules to give investors that information.
Q.17. On February 24, 2017, President Trump signed an Executive
Order on Enforcing the Regulatory Reform Agenda, part of which
focused on identifying regulations that are ``outdated,
unnecessary, and ineffective.'' Given recent technological
advances, one area of particular focus should be regulations
requiring paper-based communications as the default delivery
method in communicating with investors and consumers. Such
regulations are prime examples of regulations that were first
adopted decades ago and have failed to evolve with the times.
If confirmed, will you work to ensure that the SEC
identifies and modifies outdated regulations regarding paper-
based communications?
A.17. I believe that the Commission should consistently review
its rules to make sure that those rules give investors the
information they need about the companies they own. To the
degree that SEC rules are outmoded--as many rules requiring
paper-based communications may be today--modernizing those
rules is a critical task.
While I would not want to comment on any specific proposal
that may come before me as a Commissioner if I am confirmed, I
would look forward to working with SEC Staff, fellow
Commissioners, and this Committee to identify any outdated
regulations--including regulations mandating paper-based
communications--that may no longer serve investors.
Q.18 Do you believe the recent action by the SEC regarding
MiFID II was appropriate? If you do not, how would you have
addressed this issue?
A.18. I understand that the Division of Investment Management
and the Division of Trading and Markets recently issued time-
limited no-action letters in this area. Because these matters
may well be raised before the full Commission in the future, I
hesitate to comment specifically on questions that may come
before me as a Commissioner.
Nevertheless, I want to be clear: it is crucial that
American investors know who pays for research on public company
stocks and what those researchers' financial incentives are.
The European approach to this problem--that is, MiFID II--
reflects one way to give investors that information. But it is
not the only way to make sure that investors know who is
producing equity research and who is paying for it. If
confirmed, I look forward to working with the Staff in both the
Division of Investment Management and the Division of Trading
and Markets to understand the reasoning behind their recent
letters--and their thinking about longer-term solutions in this
area.
Q.19. Do you think that the U.S. and the SEC should import
standards from other countries?
A.19. When considering how best to develop new legal standards,
my approach is often to draw on as much data and experience as
possible. While the experience of other countries can be
helpful in this respect, it is always important to keep in mind
that one size does not fit all--and that American markets are
truly unique. We are fortunate to have the largest, deepest and
most diverse capital markets in the world. Lessons from other
jurisdictions may be useful in informing the way we think about
our own law, but at bottom American securities law must be the
right fit for American investors and companies.
Nevertheless, it is essential that U.S. regulators engage
with international counterparts and make sure our positions are
made clear on a wide range of regulatory questions that apply
across national boundaries. The SEC, through its Office of
International Affairs, has an important voice in international
standard-setting bodies, and if confirmed I look forward to
working with Staff, my fellow Commissioners, and our
international counterparts to help make sure that American
investors' interests are protected in capital markets around
the world.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM ROBERT J. JACKSON, JR.
Q.1. In your testimony, you highlighted enforcement and
prosecution of insider trading as top priorities. If confirmed,
what recommendations will you make to Chairman Clayton to
strengthen the ability of the enforcement division to hold
accountable those that violate Federal securities laws?
A.1. I believe that holding corporate executives accountable
when they violate the law is critical to maintaining trust in
our financial system. There are two specific enforcement-
related areas that deserve attention at the SEC.
First, if confirmed I will work with Chairman Clayton and
the Division of Enforcement on using data science to make the
process of identifying and litigating securities-fraud cases
more efficient. My previous research has used those
technologies to show how the SEC could more easily identify
potential cases. I believe that these techniques could help us
to better understand the circumstances and larger trends behind
where we'll find bad actors--and make it easier for us to hold
them accountable. \1\
---------------------------------------------------------------------------
\1\ See, e.g., Alma Cohen, Robert J. Jackson, Jr., and Joshua
Mitts, ``The 8-K Trading Gap'' (Columbia Law and Economics Working
Paper) (2015).
---------------------------------------------------------------------------
Second, as I noted during the hearing, I think it is time
for the Commission and the Congress to consider whether the law
of insider trading in particular is keeping pace with our
markets. One reason that so few corporate insiders are held
accountable is that the burdens of proof the Government faces
in these cases were designed by common-law judges decades ago.
The last time the SEC proposed updates to its rules in this
area--updates that were designed to address uncertainty created
by the courts--was nearly 20 years ago. \2\ The scope and
nature of corporate fraud has changed a great deal since then,
and it may well be time for the SEC and Congress to clarify and
strengthen our insider trading laws.
---------------------------------------------------------------------------
\2\ See Securities and Exchange Commission, Proposed Rules:
Selective Disclosure and Insider Trading, Release Nos. 33-7787, 34-
42259, IC-24209, 17 CFR 230 (January 10, 2000) (noting that those rule
proposals, like those that could be advanced by the SEC today,
``clarif[ied] two unsettled issues under current insider trading
law.'').
Q.2. In response to Chairman Crapo's questions, you raised the
law of insider trading and you highlighted a concern that
recent events may have caused investors to wonder whether the
SEC is ``really the cop on the beat we need to make sure that
investors are getting a fair deal.'' Can you expound on this?
In your opinion, does Congress need to codify insider trading
law or make other changes to our Federal securities laws to
ensure the SEC has the necessary authority to hold wrongdoers
---------------------------------------------------------------------------
accountable?
A.2. Yes: Congress and the SEC should be thinking about
updating the law of insider trading. For two generations,
American insider trading law has been developed by judges on a
case-by-case basis. There are many well-documented benefits to
this approach, including drawing on the extraordinary wisdom of
the judges who sit on our Nation's Federal bench. One downside
of this regime, however, is that the law develops slowly--too
slowly, some have argued, to keep pace with modern markets.
In particular, a recent series of cases have raised
questions regarding the Government's burden of proof with
respect to the benefits an insider must receive in connection
with leaks of material nonpublic information to traders. \3\
Uncertainty with respect to such a fundamental question of an
insider's obligations to investors is, in my view, a serious
problem. The SEC can and should frequently clarify its view of
the meaning of the insider trading laws. As noted above, the
Commission has not done so for nearly 20 years, and in my view
it is time for the Commission to look at these matters again.
\4\
---------------------------------------------------------------------------
\3\ Salman v. United States, No. 15-628, 137 S. Ct. 420 (2016);
see also United States v. Martoma, 869 F.3d 58 (2d Cir. 2017).
\4\ See Securities and Exchange Commission, supra note 6.
Q.3. The concept of ``materiality'' is defined by the SEC as
information that a reasonable investor could find important in
determining whether to buy or sell securities. Can you explain
how you think about the definition of materiality and whether
you see emerging ``material'' areas--namely environmental,
social, and governance topics--where the SEC should be
---------------------------------------------------------------------------
increasing disclosure?
A.3. My view is that one way to know whether something is
material--that is, whether it's important to investors--is to
ask investors. That's certainly what the Commission has done in
the past. For example, the SEC's rules regarding executive
compensation were developed in response to significant investor
interest in those matters. \5\ Our markets have evolved rapidly
over the past 10 years, and I'm worried that the Commission's
disclosure rules haven't kept pace with investors' needs.
---------------------------------------------------------------------------
\5\ See Securities and Exchange Commission, ``Executive
Compensation Disclosure'', Release No. 33-6940, 57 FR 29,582 (1992)
(listing the shareholder-proposal activity related to executive pay at
several large, public companies as a basis for promulgating disclosure
rules on executive compensation).
---------------------------------------------------------------------------
In particular, as your question suggests, investors have
recently expressed extensive interest in matters that companies
are often not disclosing. For example, information regarding a
company's spending on politics has been the most common subject
of shareholder proposals over the last decade. \6\ As recent
events have made clear, companies have not consistently taken
the view that cybersecurity breaches demand prompt disclosure.
And shareholder proposals asking companies to disclose the
risks related to climate change are receiving ``historically
high levels of support.'' \7\
---------------------------------------------------------------------------
\6\ ``Sharkrepellent Dataset of Factset Research Systems, Inc.'',
Proxy Proposals, available at https://www.Sharkrepellent.net.
\7\ Thomas Singer, ``Environmental and Social Proposals in the
2017 Proxy Season'', Harv. F. on Corp. Gov. and Fin. Reg. (Oct. 26,
2017).
---------------------------------------------------------------------------
It is an essential part of the SEC's task to ensure that
the Commission's disclosure rules continue to evolve in order
to make sure that investors have the information they need to
evaluate the companies that they own. If confirmed, I will urge
Chairman Clayton, my fellow Commissioners, and the Staff to
update our disclosure rules to give investors that information.
Q.4. I worked to include a provision in the Dodd-Frank Wall
Street Reform and Consumer Protection Act to require publicly
listed companies to disclose in their annual filing the ratio
of their CEO's total compensation to their median worker's
compensation. In August 2015, after 5 years of delays, I was
pleased to see the SEC finally adopted a rule implementing
953(b) of Dodd-Frank.
If confirmed, will you commit to ensure that this rule is
properly implemented? Will you work to ensure that provisions
included by the Commission to facilitate compliance do not
inadvertently open loopholes for companies looking to evade
this requirement?
A.4. Yes. I have long shared your concern that the Commission
took far too long to implement the rules required by Dodd-
Frank, including the provision requiring disclosure of the
ratio between the CEO's compensation and that of the median
employee. As I noted at the hearing, Dodd-Frank is the law of
the land--and has been for 7 years. It is time that the SEC and
public companies comply with the law, and I'm delighted that
this Spring American companies will finally disclose these
ratios to the public.
As companies prepare to file those disclosures this
Spring--and every year going forward--it will be critical to
ensure that the Division of Corporation Finance carefully
monitors compliance with the rule, and directs companies to
give clear, concise and candid information. If confirmed, I
will absolutely work to make sure investors get that kind of
information.
Q.5. In light of the sweeping good faith efforts flexibility
provided to companies by the Commission's September 2017
interpretive guidance, will you commit to supporting
enforcement actions against companies that fail to provide
disclosures in compliance with the requirements of the rule?
A.5. Yes. Without commenting on any particular matter that may
come before me as a Commissioner if I am confirmed, I can say
without reservation that I would support enforcement actions
against companies that fail to comply with the law--including
the requirement that firms disclose the ratio between the CEO's
and their median worker's pay.
Disclosure rules like these, and the transparency they give
investors, have been at the heart of the SEC's mission for
generations. We have to take these rules seriously, and that
means aggressively enforcing the securities laws when companies
or individuals fail to comply with SEC rules.
Q.6. As you know, the SEC adopted a rule in 2009 requiring
publicly traded companies to disclose more information on
director selection and diversity. Many, including former SEC
Chair White, have expressed concerns that the current rule may
be inadequate and that shareholders need more comprehensive
information to make informed investment and voting decisions.
How does the disclosure of specific details about the
diversity of corporate boards assist shareholders in making
informed investment and voting decisions?
A.6. As your question points out, disclosure regarding the
diversity of corporate boards is not only the right thing to
do, but it's the law: the SEC has required such disclosure for
years. The reason is that investors have long argued that
understanding a company's approach to boardroom diversity--and
the benefits it can bring--helps make sure the board has the
expertise and perspectives it needs to run the firm well. \8\
---------------------------------------------------------------------------
\8\ See, e.g., Ryan Vlastelica, ``Vanguard Calls for More Diverse
Corporate Boards, Better Climate-Change Disclosures'', Marketwatch
(Sept, 1, 2017).
---------------------------------------------------------------------------
I share former Chair White's concern that existing SEC
rules on this issue have proved inadequate. Women and
minorities are astonishingly underrepresented on the boards of
U.S. public companies, to the dismay of investors and employees
alike. At a minimum, the SEC should make sure that companies
are giving investors basic information about how the companies
they own have considered diversity when assembling their
directors. If confirmed, I will absolutely work with the
Division of Corporation Finance to make certain that our rules
give investors that information.
Q.7. One of the problems identified with the 2009 rule is the
Commission's decision not to define diversity. Do you think the
failure to define diversity in the rule undermines the value of
the information provided in the current disclosure regime?
A.7. While I understand that the Staff declined to define
diversity in order to allow issuers to use the definition most
suited to its business model, time and experience have shown
that the lack of guidance in this area has left both companies
and investors without the information they need regarding
boardroom diversity. In fact, the SEC Advisory Committee on
Small and Emerging Companies recommended nearly a year ago that
the SEC provide guidance on this issue, and the SEC's failure
to do so has made it unnecessarily costly for investors and
companies to comply with the law. \9\
---------------------------------------------------------------------------
\9\ Securities and Exchange Commission Advisory Committee on Small
and Emerging Companies, Recommendation Regarding Corporate Board
Diversity (February 16, 2017).
---------------------------------------------------------------------------
More importantly, the Commission's failure to enforce its
own rule in this area has raised real questions among issuers
and investors about the SEC's commitment to board diversity.
Nearly 5 years, ago an empirical study of these disclosures
revealed that more than half of them failed to comply with the
most basic aspects of the SEC's rule on disclosure related to
boardroom diversity. \10\ If the Commission wants its
commitment to boardroom diversity--and the rule of law--to be
taken seriously, it must do a better job of consistently
enforcing its disclosure rules in this area. If confirmed, I
will work with my fellow Commissioners and the Staff of the
Division of Corporation Finance to ensure that companies and
boards can expect diversity-disclosure rules to be enforced to
the letter of the law.
---------------------------------------------------------------------------
\10\ Note, ``The Glass Boardroom: The SEC's Role in Cracking the
Door Open so That Women May Enter'', 2013 Colum. Bus. L. Rev. 801
(2013).
Q.8. In January 2016, former Chair White instructed staff to
review existing company disclosures to determine whether the
SEC should require companies to provide more specific details
about their diversity practices. In June 2016, former Chair
White announced that staff was preparing a recommendation to
the Commission to propose amending the rule to require
companies to include in their proxy statements more meaningful
disclosures on their board members and nominees. \11\ The
current status of that project is unclear.
---------------------------------------------------------------------------
\11\ Mary Jo White, Chairman, Securities and Exchange Commission,
``Focusing the Lens of Disclosure To Set the Path Forward on Board
Diversity'', Non-GAAP, and Sustainability (Jun. 27, 2016).
---------------------------------------------------------------------------
In December, the SEC's Advisory Committee on Small and
Emerging Companies recommended the SEC amend the disclosure to
require issuers to describe, in addition to any policy they may
have with respect to diversity, the extent to which their
boards are diverse. \12\ If confirmed, will you commit to
investigating this issue and taking steps to determine whether
the SEC should revise its rule on director selection and
diversity?
---------------------------------------------------------------------------
\12\ Securities and Exchange Commission Advisory Committee on
Small and Emerging Companies, supra note 13.
A.8. Yes. Given the consistent complaints from investors that
the rule is not working, the statements from former Chair White
to that effect, and, as your question notes, the recommendation
from the Advisory Committee on Small and Emerging Companies, I
am puzzled that this project has not moved forward, and
concerned that it was not featured on the SEC's most recently
announced regulatory agenda.
If confirmed, among my first questions for Chairman Clayton
would be to ask why the Commission has not yet moved forward on
this long-awaited project. I hope very much to work with the
Chairman and my fellow Commissioners to ensure that investors
receive the information they need to understand boardroom
diversity in the companies they own.
Q.9. In your testimony, you highlighted the importance of
completing outstanding Dodd-Frank rulemakings, and particularly
those that relate to executive compensation and clawback
policies. I agree that this should be a top priority for every
single member of the Commission.
Can you explain how failure to complete these rulemakings
harms the market, disadvantages investors, and may encourage
senior executives to make excessively risky decisions?
A.9. The Commission's failure to complete Dodd-Frank's mandated
rules 7 years after its passage has been harmful to investors
and companies. It reflects a troubling failure to follow the
law at the Commission that I hope will be quickly rectified by
Chairman Clayton and, if I am confirmed, my fellow
Commissioners.
For 7 years, neither investors nor public companies has had
any ability to know whether and when these rulemakings will
actually become law. The result is that both parties spend
enormous amounts of shareholder money to predict whether and
when they will have to comply with these rules. That's good for
lobbyists and lawyers, but hardly anyone else, and especially
not the investors. As I mentioned at my hearing, ordinary,
everyday investors are still waiting for basic, common-sense
protections like rules requiring clawback of erroneously
awarded executive pay to take effect. Without such rules,
executives continue to have the incentives they had before the
financial crisis to take excessive risk. I cannot see why those
rules have not been implemented 7 years after Dodd-Frank's
passage.
If confirmed, I will urge Chairman Clayton and my fellow
Commissioners to finish the rules mandated by the Dodd-Frank
Act. If the Commission wants public companies to take its
commitment to the rule of law seriously, the SEC must be
prepared to follow the law itself. Dodd-Frank is, I know, a
controversial law. But it is the law, and the SEC is required
to follow it.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM ROBERT J. JACKSON, JR.
Q.1. The Citizens United v. FEC ruling allowed, among other
things, corporations to contribute independent political
expenditures. Public companies are active participants in our
elections, yet their shareholders do not know the role that
they play because the SEC has been reluctant or handcuffed from
requiring firms to disclose their political contributions.
Do you believe shareholders have a right to know whether a
company they've invested in is making contributions in their
best interest?
A.1. The bedrock principle of securities-disclosure rules is
the materiality standard. That standard asks us to consider
what a reasonable investor would think affects the total mix of
information about the stock that they are choosing to buy and
sell. One way to evaluate that standard is to see whether
investors express interest in particular kinds of information
through the shareholder-proposal process. For decades, that is
how the SEC has helped ensure that disclosure rules are
evolving to keep pace with changes in market conditions and
investor interests. \1\
---------------------------------------------------------------------------
\1\ See, e.g., Securities and Exchange Commission, Executive
Compensation Disclosure, Release No. 33-6940, 57 FR 29,582 (1992)
(developing executive-compensation disclosure rules, in part, in
response to shareholder proposals on that subject at large public
companies).
---------------------------------------------------------------------------
As I have written previously, the case for rules requiring
public companies to disclose their spending on politics is
strong. \2\ Over the past decade, requests for information
about political spending have been the most common subject of
shareholder proposals at large public companies, so it is clear
that investors have a great deal of interest in these matters.
Moreover, under current law, public companies are not required
to give shareholders detailed information on political
spending. Thus, to the degree that public companies are
spending shareholder money on politics in a way that diverges
from investors' interests, standard mechanisms for corporate
accountability and oversight can work only if investors have
the information they need to evaluate political spending at the
companies they own.
---------------------------------------------------------------------------
\2\ See, e.g., Lucian A. Bebchuk and Robert J. Jackson, Jr.,
``Shining Light on Corporate Political Spending'', 101 Geo. L.J. 923
(2013).
Q.2. What should be the threshold for determining when a
---------------------------------------------------------------------------
company discloses their political spending?
A.2. As I have previously written, the development of any rules
in this area would raise a series of regulatory questions that
would require close consultation with the SEC's Staff. As an
outsider to the Commission and its work, it is difficult for me
to say whether and how the evidence currently available to the
Staff suggests that there should be a particular threshold for
determining when a company must disclose their spending on
politics.
Nevertheless, as I have indicated in previous research on
this subject, a de minimis exception to rules in this area
might appropriately balance the benefits of disclosing
corporate spending on politics with the costs of disclosing
small amounts of spending that are unlikely to be important to
investors. As I have said before, the SEC's existing regulatory
framework for such exceptions, such as SEC rules on disclosure
of related-party transactions, may serve as a sound starting
point for such an exception. \3\
---------------------------------------------------------------------------
\3\ See id. (citing 17 CFR 229.404(a) (2012) (exempting from the
SEC's disclosure rules for related-party dealings transactions with a
value of $120,000 or less)).
Q.3. What policy levers does the SEC have to promote long-term
---------------------------------------------------------------------------
value creation?
A.3. There are at least three tools at the SEC's disposal to
encourage companies to focus on long-term value creation. The
first is an area I have written about a great deal: executive
pay.
Current practice requires most public-company executives to
hold their stock-based pay for only 3 years, so it is
unsurprising that those executives often pursue short-term
stock-price increases rather than long-term value creation. As
I mentioned during the hearing, it is time for corporate
executives complaining about short-termism to put their money
where their mouths are. SEC rules should encourage executives
to hold their stock for far longer periods than they currently
do. This would give executives powerful incentives to invest
for the long term.
Second, the SEC should consider taking steps that would
allow companies and investors to choose voting structures that
favor shareholders who commit to hold shares for the long term.
\4\ The SEC should consider how to encourage and enable public
companies and their investors to choose these voting
arrangements if they see fit. Those arrangements, if
appropriate for the particular company and investor base, could
help ensure companies favor the interests of long-term
investors over short-term speculators.
---------------------------------------------------------------------------
\4\ See, e.g., Patrick Bolton and Frederic Samama, ``L-Shares:
Rewarding Long-Term Investors'' (ECGI Finance Working Paper) (2012).
---------------------------------------------------------------------------
Finally, SEC rules governing stock buybacks--which allow
corporations to return cash to investors today rather than
invest for the long term--have not been updated since 2003.
That was a very different time for our markets, our economy,
and our country. \5\ Given the importance of this issue to
making sure that public companies invest for the long term, I
believe these rules now deserve another look. Better disclosure
of stock buybacks would require managers to explain the basis
for their decision to investors and to the public, and allow
markets to price the buyback properly. That kind of disclosure
is absolutely worth considering, and if confirmed I would look
forward to working with your office on this issue.
---------------------------------------------------------------------------
\5\ See Securities and Exchange Commission, ``Purchases of Certain
Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34-
48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from
certain securities-law liability for stock buybacks affected in a
particular manner).
Q.4. Do you believe companies are engaging in too many stock
buybacks and dividend payments and not spending enough on
---------------------------------------------------------------------------
corporate growth?
A.4. On several occasions in recent years, companies have
foregone long-term R&D investments, operational expansion, and
strategic opportunities in order to return money to
shareholders. Shareholders and stakeholders alike are right to
question if authorizing buybacks or dividends payments help or
harm the long-term health of the company and the economy.
As noted above, one way for the SEC to address this issue
is to modernize its disclosure rules governing stock buybacks.
I believe that doing so is especially important in light of the
possibility that new legislation may soon encourage public
companies to return cash now held overseas to the United
States. The last time Congress enacted a corporate tax holiday,
in 2004, American companies used a significant amount of that
money for a wave of stock buybacks. \6\ If tax law changes
again to permit corporate cash to come home, I want to be sure
that companies are prepared and required to explain to
investors what they plan to do with that money--especially if
they are going to use it for buybacks.
---------------------------------------------------------------------------
\6\ See Dhammika Dharmapala, C. Fritz Foley, and Kristin J.
Forbes, ``Watch What I Do, Not What I Say: The Unintended Consequences
of the Homeland Investment Act'' (NBER Working Paper No. 15023) (2009);
see also Thomas J. Brennan, ``Where the Money Really Went: A New
Understanding of the AJCA Tax Holiday'' (Northwestern Law and Economics
Working Paper) (2014).
Q.5. Is there a way to center less attention on quarterly
---------------------------------------------------------------------------
earnings?
A.5. Yes: the SEC has several tools at its disposal to help
companies focus on long-term value creation rather than
quarterly earnings. For one thing, SEC rules should encourage
corporate executives to put their money where their mouth is
and hold their stock-based pay for lengthier periods of time.
Managers who cannot sell their stock holdings in the next
quarter--but instead have to wait for years to cash in on their
holdings--have far fewer incentives to manage to quarterly
earnings.
Second, the SEC should consider allowing companies and
investors to choose voting structures that favor shareholders
who commit to hold shares for the long term. Those
arrangements, if appropriate for the particular company and
investor base, could help ensure that companies favor the
interests of long-term investors over short-term speculators.
I share your broader concern about short-term pressures
that compel companies to focus on meeting quarterly earnings
targets. I'm concerned when companies are distributing earnings
as dividends or driving up stock prices through buybacks while
cutting back on R&D, capital expenditures, and other
investments. If confirmed I would look forward to working with
the Staff, my fellow Commissioners, and your office to
encourage corporate management to focus on the long term.
Q.6. The disclosure of innumerable hacks over the past few
years, recently punctuated by hacks of the SEC and Equifax, has
made clear that we all need to raise our cybersecurity game.
Given the important role broker-dealers play in the formation
and distribution of capital in the United States, do you think
it's appropriate for FINRA, in its examination of broker
dealers, to perform cyber-vulnerability assessments of
registered broker dealers?
A.6. I absolutely share your concern that broker-dealers--who
are entrusted with the personal financial information of
millions of American families and play critical roles in our
securities and derivatives markets--must take every possible
step to protect themselves against cybersecurity threats. And I
agree that all regulators--including the SEC and FINRA--must
prioritize responding to a rapidly evolving cyberthreat.
As an outsider to the SEC, FINRA, and their work, I am not
in a position to know whether FINRA should initiate an
examination program of the kind described in your question. The
SEC should, however, be asking whether FINRA's current
examination programs encompass this type of review, what
existing data FINRA and the SEC has about brokers'
vulnerability to cyber-related threats, and what steps the SEC
or FINRA can take to make sure that investors have as much
information as possible about the broker's cybersecurity
preparedness. If confirmed, I would look forward to working
with SEC and FINRA Staff, my fellow Commissioners, and your
Office to make sure FINRA takes whatever steps are necessary to
protect broker-dealer customers from cybersecurity threats.
Q.7. On Oct. 15, 2014, the Treasury market flash rally
occurred, where the yield on the benchmark 10-year U.S.
Treasury traded in a 37-basis-point range (0.37 percent), only
to close six basis points below its opening level. Principal
trading firms (PTFs) account for a majority of trading in
inter-dealer Treasury markets, which represent half of all
trading in Treasuries. Due to a loophole, PTFs, including many
that use algorithmic strategies, have not been required to
register as brokers. This allows them to escape oversight and
reporting requirements. Will you commit to ensuring that PTFs
are required to register as brokers?
A.7. The Treasury market plays a vital role in our financial
markets and economy, providing a risk-free benchmark to
investors around the world and financing the critical work of
our Government. Like so many modern markets, the Treasury
market has seen a number of significant technological changes
over recent years, including the increased prominence of PTFs.
I am familiar with the Joint Staff Report on the events of
October 15, 2014, produced by the staff of the Treasury,
Federal Reserve Board of Governors, Federal Reserve Bank of New
York, SEC, and CFTC, and I share your concerns regarding data
and oversight gaps of PTFs. \7\ If confirmed, I look forward to
working with the Staff, fellow regulators, and Congress to
ensure there is appropriate oversight and transparency in the
Treasury market and, more broadly, that the financial
regulatory community prioritizes preserving confidence in the
world's deepest and most liquid market.
---------------------------------------------------------------------------
\7\ See U.S. Department of the Treasury, Board of Governors of the
Federal Reserve System, Federal Reserve Bank of New York, Securities
and Exchange Commission, and Commodity Futures Trading Commission, The
U.S. Treasury Market on October 15, 2014 (July 13, 2015).
Q.8. Under current law, Regulation ATS's basic regulatory
standards for exchanges and other financial markets are
designed to ensure market resilience, integrity and adequate
operational risk controls. But trading venues that facilitate
the exchange of Government securities are excluded from
Regulation ATS. And by excluding them from Regulation ATS, they
are also excluded from Regulation SCI's cybersecurity
requirements. Will you commit to closing the loophole that
permits Government-securities trading venues to avoid these
---------------------------------------------------------------------------
basic requirements?
A.8. Because of the importance of the Treasury market to the
functioning of the financial markets that millions of Americans
depend upon each day, I share your concerns about trading
venues that focus on Government securities. Participants in
these venues must have advanced cybersecurity protections to
ensure that these crucial markets are not susceptible to
cyberthreats.
As an outsider to the Commission and its work, I am not
familiar with the Staff's full basis for concluding that
exchanges of this type may be excluded from Regulation SCI's
cybersecurity requirements. When determining whether that
exclusion is appropriate, however, the Commission should focus
on other cybersecurity requirements that may apply to these
trading venues, the degree to which the exclusion exposes these
markets and investors to unacceptable risks of data breaches,
and existing cybersecurity protections in place at these
venues.
If confirmed, I will work with my fellow Commissioners and
the Staff to understand why these venues have been excluded
from the reach of Regulation SCI. And I would look forward to
learning more about the Staff's experience in administering
Regulation SCI in evaluating whether further efforts are needed
to promote the resilience and integrity of trading venues.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM ROBERT J. JACKSON, JR.
Q.1. On June 1, 2017, the SEC solicited public comments from
retail investors and other interested parties on revising its
standards of conduct for investment advisers and broker-
dealers. In this request for comments the SEC asked ``If the
commission were to proceed with a disclosure-based approach to
potential regulatory action, what should that be?'' \1\ Do you
believe that the financial incentives that create conflicts of
interest in the retail investment market that harm investors
can be eliminated by enhanced disclosure alone?
---------------------------------------------------------------------------
\1\ Jay Clayton, Chairman, Securities and Exchange Commission,
``Public Comments From Retail Investors and Other Interested Parties on
Standards of Conduct for Investment Advisers and Broker-Dealers'' (June
1, 2017).
A.1. I share the concern that retail investors must be
protected from money managers who act contrary to their
fundamental duties to their customers. When American investors
entrust their savings to one of these institutions--whether an
investment adviser or broker-dealer--they need to know that
those who manage their money have clear obligations to their
customers.
Disclosure lies at the heart of our securities laws, and
has often served as an effective first line of defense when
protecting American investors from those who would defraud
them. But it is not the only tool in the SEC's toolkit, and I
am deeply skeptical that disclosure alone can eliminate
conflicts of interest in the retail investment market.
My general approach to questions of this type is to let the
facts--evidence from the behavior of retail investors and their
advisors--tell us what kinds of regulatory approaches are most
likely to succeed. In this case, a considerable body of
research--some commissioned by the SEC--makes clear that
disclosure is often necessary but not sufficient to address
conflicts of interest in the retail investment market. \2\ The
evidence tells us that the complexity of financial products and
compensation structures often makes disclosure ineffective for
many retail investors. And the data also suggest that
disclosures may be least effective for the investors who need
protection the most.
---------------------------------------------------------------------------
\2\ See Securities and Exchange Commission, Comments on Duties of
Brokers, Dealers, and Investment Advisers, Release Nos. 34-69013, IA-
3558, File No. 4-606.
---------------------------------------------------------------------------
As I noted at the hearing, I believe that the SEC has an
important role to play in this area. But it is critical that,
whatever steps the Commission takes, American families who
entrust their savings to others can rest easy in the knowledge
that those who manage their money have an obligation to protect
their clients from conflicts.
Q.2. If not, what steps will you take to directly tackle
problematic incentives that lead to conflicts of interest that
harm investors? If so, how do you design a disclosure regime
that eliminates problematic financial incentives?
A.2. It is important to me that I be careful to avoid comment
on a matter that may come before me if I am confirmed as a
Commissioner. Moreover, as an outsider, I have not been privy
to the ongoing work at the SEC on matters related to financial
advisers' duties to their clients--and, thus, am not in a
position to comment on what particular regulatory approaches
the SEC might be considering.
However, it is critical to create a regulatory structure
that ensures that firms do not reward advisers for working
against their clients' best interests. If confirmed, I would
look forward to working with my fellow Commissioners and this
Committee to create those kinds of protections.
Q.3. If the commission proceeds with a disclosure-based
approach to potential regulator action, what user tests will
the Commission conduct to prove that all investors, not just
the most sophisticated, fully understand and appreciate the
nature and extent of the conflicts of interest and make a truly
informed decision as a result?
A.3. As an outsider, I have not been privy to the ongoing work
at the SEC on matters related to financial advisers' duties to
their clients--and, thus, am not in a position to comment on
what particular regulatory approaches the SEC might be
considering. I have also not had the benefit of consultation
with the Staff now working on this issue--or the opportunity to
ask them about the user tests they might be considering to
ensure that disclosures are designed to protect investors.
But let me be clear: any disclosure-based approach in this
area should be grounded in evidence that proves it will be
effective in arming investors with the information they need to
make a truly informed decision. That evidence should carefully
consider the different effects that disclosures might have on
investors with different backgrounds, expertise, and financial
objectives. And disclosure-based policy prescriptions should
take those differences into account when designing the rules
governing adviser disclosures. Poorly designed disclosures are
unlikely to mitigate conflicts of interest--and may risk
further confusing investors already overwhelmed by the
complexity of financial advice.
Moreover, as noted above some conflicts are so complex that
I believe they are unlikely to be mitigated through disclosure
alone. If confirmed, I would work with the SEC's Staff and my
fellow Commissioners to ensure that the SEC's work in this area
is effective at ensuring that retail investors are made aware
of any conflicts of interest their broker-dealer faces.
Q.4. Will you consult the extensive economic analysis the
Department of Labor put together for their rulemaking on the
fiduciary standard, including analysis on the incidence and
cost of conflicts of interest in the financial services
industry and on how these financial conflicts influence adviser
recommendations?
A.4. Yes. As noted above, my approach to these questions will
be evidence-based, and I will absolutely consider the
substantive economic analysis produced by both Government
agencies and outside entities on the incidence and impact of
conflicts of interest, including the Department of Labor's
economic analysis of the fiduciary rule. I would also be
delighted to consult with current Department of Labor personnel
who have worked on that Department's rulemaking in this area.
Q.5. How will you ensure that broker-dealers do not call
themselves advisers? How can investors distinguish between
sellers and advisers if sellers are allowed to market
themselves as advisers?
A.5. I share your concern that investors need to have absolute
clarity about what types of financial professionals they are
working with and what services they are providing. Anyone who
represents himself or herself as providing financial advice
should be subject to duties appropriate to that role.
As the SEC Staff noted in a 2011 report, ``[d]espite the
extensive regulation of both investment advisers and broker-
dealers, retail customers do not understand and are confused by
the . . . standards of care applicable to investment advisers
and broker-dealers when providing personalized investment
advice and recommendations about securities.'' \3\ If
confirmed, I would be delighted to engage with firms, consumer
and investor advocates, and other stakeholders to determine
whether any additional steps should be taken to ensure that
investors understand the difference between broker-dealers and
advisers.
---------------------------------------------------------------------------
\3\ Securities and Exchange Commission, ``Study on Investment
Advisers and Broker-Dealers'' (January 2011).
---------------------------------------------------------------------------
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR DONNELLY FROM ROBERT J. JACKSON, JR.
Q.1. In previous conversations with Mr. Jackson and Ms. Peirce,
we have discussed my concerns that the wave of stock buybacks
in recent years has been at the expense of the long-term health
of companies, their workers, and their communities.
Are you concerned that the increase of stock buybacks in
recent years has been at the expense of investments in American
workers?
A.1. Yes. To the degree that stock buybacks are occurring
because corporate executives are failing to make important and
productive investments in their employees and their
communities, this is an issue that concerns me--and should
concern all Commissioners. Shareholders and stakeholders alike
are right to question whether buybacks help or harm the long-
term health of the company, the long-term performance of its
stock, and the long-term well-being of its employees.
As we discussed, the SEC's rules governing stock buybacks
were last substantially updated in 2003--a very different time
for our markets, our economy, and our country. \1\ Given the
importance of this issue to investors and employees, I believe
these rules now deserve another look--and should be updated in
a way that gives the stakeholders in these companies full
transparency as to the reasons why the company has chosen to
buy back shares.
---------------------------------------------------------------------------
\1\ See Securities and Exchange Commission, ``Purchases of Certain
Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34-
48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from
certain securities-law liability for stock buybacks affected in a
particular manner).
Q.2. What actions can or should the SEC take to better monitor
stock buybacks and to increase transparency? What about
requiring more immediate disclosure (as opposed to quarterly,
---------------------------------------------------------------------------
as currently required)?
A.2. These proposals, and several others that would improve
transparency around repurchases, deserve close consideration as
the SEC works to modernize its rules governing stock buybacks.
When the SEC last considered these rules in 2003, the scale and
scope of stock buybacks--and their importance to the economy as
a whole--were far smaller than they are today. Better
disclosure of stock buybacks would require managers to explain
the basis for their decision to investors and to the public,
and allow markets to price the buyback properly. That kind of
disclosure is absolutely worth considering, and if confirmed I
would look forward to working with your office on this issue.
Moreover, as we discussed during the hearing, I'm
especially concerned that current rules are not sufficient if
new legislation encourages repatriation of corporate profits
from overseas. We know that the last time Congress enacted a
corporate tax holiday, in 2004, American companies used a
significant amount of that money for a wave of stock buybacks.
\2\ If tax law changes again to permit corporate cash to come
home, I want to be sure that companies are prepared and
required to explain to investors what they plan to do with that
money--especially if they are going to use it for buybacks. If
I'm confirmed, I would look forward to working with my fellow
Commissioners and the Staff to make sure our securities laws
give investors the information they need if Congress enacts
another tax holiday.
---------------------------------------------------------------------------
\2\ See Dhammika Dharmapala, C. Fritz Foley, and Kristin J.
Forbes, ``Watch What I Do, Not What I Say: The Unintended Consequences
of the Homeland Investment Act'' (NBER Working Paper No. 15023) (2009);
see also Thomas J. Brennan, ``Where the Money Really Went: A New
Understanding of the AJCA Tax Holiday'' (Northwestern Law and Economics
Working Paper) (2014).
Q.3. Mr. Jackson, your written testimony includes this excerpt:
``I will work to implement the corporate-governance protections
that Congress has enshrined into law--so that investors,
employees, and communities can be sure that our companies are
working to produce the kind of long-term value creation that
has been the hallmark of the American economy for
generations.'' I agree that companies should produce long-term
value creation, but unfortunately ``short-termism'' has become
a disease; Wall Street pressure results in corporate management
making decisions based on the next quarter as opposed to the
next decade.
Ms. Peirce, do you share similar concerns about ``corporate
short-termism''? What actions can or should the SEC take to
combat this problem and encourage long-term value creation?
A.3. There are at least three areas in which the SEC should
consider action to encourage companies to focus on the long
term. The first is an area I have written about a great deal:
executive pay.
Current corporate practice requires most public-company
executives to hold their stock-based pay for only 3 years, so
it is unsurprising that those executives often pursue short-
term stock-price increases rather than long-term value
creation. As I mentioned during the hearing, it is time for
corporate executives complaining about short-termism to put
their money where their mouths are. SEC rules should encourage
executives to hold their stock for far longer periods than they
currently do. This would give executives powerful incentives to
invest for the long-term rather than manage to quarterly
earnings targets.
Second, the SEC should consider taking steps that would
allow companies and investors to choose voting structures that
favor shareholders who commit to hold shares for the long term.
Academics have argued that permitting these structures can be
beneficial, and other jurisdictions have long permitted their
use. \3\ The SEC should consider how to encourage and enable
public companies and their investors to choose these voting
arrangements. Those arrangements, if appropriate for the
particular company and investor base, could help ensure
companies favor the interests of long-term investors over
short-term speculators.
---------------------------------------------------------------------------
\3\ See, e.g., Patrick Bolton and Frederic Samama, ``L-Shares:
Rewarding Long-Term Investors'' (ECGI Finance Working Paper) (2012).
---------------------------------------------------------------------------
Finally, SEC rules governing stock buybacks--which allow
corporations to return cash to investors today rather than
invest for the long term--have not been updated since 2003.
That was a very different time for our markets, our economy,
and our country. \4\ Given the importance of this issue to
making sure that public companies invest for the long term, I
believe these rules now deserve another look. Better disclosure
of stock buybacks would require managers to explain the basis
for their decision to investors and to the public, and allow
markets to price the buyback properly. That kind of disclosure
is absolutely worth considering, and if confirmed I would look
forward to working with your office on this issue.
---------------------------------------------------------------------------
\4\ See Securities and Exchange Commission, ``Purchases of Certain
Equity Securities by the Issuer and Others'', Release Nos. 33-8335; 34-
48766; IC-26252, 17 CFR 228 (2003) (providing a safe harbor from
certain securities-law liability for stock buybacks affected in a
particular manner).
Q.4. Mr. Jackson, in our meeting, I mentioned the Carrier
layoffs and the heart-wrenching video where a corporate
executive told hundreds of workers their jobs were going to
Mexico. In response, I crafted the End Outsourcing Act to keep
jobs in America by restricting tax breaks and Federal contracts
for companies that ship jobs to foreign countries.
It is difficult, however, to track when and where
outsourcing occurs. I believe the SEC can take modest steps in
this regard by requiring public corporations to disclose
country-by-country employment. This would help investors
determine which companies employ American workers and better
understand where outsourcing has occurred. Do you support
requiring corporations to disclose employment on a country-by-
country basis to help increase transparency of outsourcing and
American employment?
A.4. Thank you for the opportunity to discuss this issue in our
meeting--and for urging me to view the video mentioned in your
question, which I watched the next day. \5\ Witnessing the
devastating impact of Carrier's decision firsthand helped me
understand the importance of this issue--and, if confirmed, I
will keep those pictures and those people closely in mind each
day I work at the SEC.
---------------------------------------------------------------------------
\5\ See YouTube, ``Carrier Air Conditioner Moving 1,400 Jobs to
Mexico'' (Feb. 11, 2016), available at https://www.youtube.com/
watch?v=Y3ttxGMQOrY.
---------------------------------------------------------------------------
Whether the kind of disclosure rule described in your
question would be appropriate depends upon whether the
information in question would be material to investors--that
is, whether it would alter the total mix of information that
shareholders would consider when investing in the company. As I
have written before, one way to know whether certain
information is material is to ask whether shareholders have
expressed interest in that information.
Many significant investors--including large pension funds
and mutual funds--have recently expressed interest in the
information described in your question, both in their public
statements regarding these matters and through shareholder
proposals. For this reason--and because this issue is so
critical to the future of millions of Americans--I would
welcome the opportunity to work with the Commission and your
office to investigate whether SEC rules should be updated to
require disclosure of these matters.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ
FROM ROBERT J. JACKSON, JR.
Q.1. I am very concerned about legislative proposals to
dramatically increase the threshold for submitting shareholder
proposals. Shareholder proposals are an important way for
shareholders to communicate with management. They have been
instrumental in improving corporate governance, such as
requiring that independent directors make up at least a
majority of corporate boards. Shareholders submit proposals on
emerging risks, such as cybersecurity and consumer data
protection.
I also worry that the SEC may respond to pressure from
companies that do not like dealing with shareholder proposals
and raise the threshold on its own.
Do you think shareholders should have a voice in the
companies they own?
A.1. Yes. My research, teaching, and previous Government
service have long focused on making sure that investors have
the tools they need to express their views to corporate
management. As I noted in my testimony, for example, I am
especially proud to have worked on the Treasury Department's
proposals to give shareholders a voice on executive pay. Giving
investors the ability to express their views help hold
management's feet to the fire, demanding accountability on
issues that shareholders believe are important to the success
of the company.
The SEC's shareholder-proposal process has, for decades,
encouraged helpful dialogue between managers and investors in
just this way. That process allows shareholders to guide
management on what they believe the right direction is for the
company--almost always on a nonbinding basis. While I am open
to the possibility that those rules, which have not been
revisited for some time, might be modernized, my focus during
any such process will be to ensure that the rules encourage
investors to express their views to corporate management.
Corporate accountability is critical to the future of our
companies and the economy, and I am deeply skeptical of making
changes to these rules that would make it harder for
shareholders' voices to be heard.
Q.2. Do you think it would a problem if the threshold for
submitting proposals was set so high that it blocked all but
the biggest and wealthiest shareholders from submitting
proposals?
A.2. Yes. I would have serious concerns regarding any proposal
to limit shareholder proposals only to the largest or
wealthiest investors. The shareholder proposal rules are
shareholders' best opportunity to have a dialogue with the
company and to bring forth ideas and proposals to management.
Limiting that process to the largest or wealthiest shareholders
would deprive American companies of the views of their owners
and reduce management's accountability to shareholders--steps
that make little sense for an agency charged with protecting
investors.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM ROBERT J. JACKSON, JR.
Q.1. If confirmed, what specific steps would you take to
bolster individual executive accountability, consistent with
what Chairman Clayton has advocated for?
A.1. I believe that holding executives accountable when they
violate the law is critical to maintaining trust in our
financial system. Specifically, there are at least two areas
that deserve greater time and attention.
First, I will make certain that in any particular case the
Division of Enforcement has explored every alternative related
to bringing proceedings against responsible individuals--not
just companies. Although I cannot at this time comment on any
particular enforcement matter that may come before me as a
Commissioner, I assure you that, where the Division of
Enforcement recommends action against a company but not
responsible individuals, if confirmed my first question will be
to ask what can be done to ensure that corporate insiders are
held accountable for their actions.
Second, I will urge Chairman Clayton and my fellow
Commissioners to adopt the rules mandated by Section 954 of the
Dodd-Frank Act, which require public companies to develop
policies regarding the clawback of executive compensation.
Those rules would help ensure that executives do not reap
financial rewards while making decisions that harm American
investors. As I mentioned during the hearing, 7 years after the
passage of Dodd-Frank, it is time for the Commission to
finalize the rules that Congress mandated in that law. That's
especially true for Dodd-Frank's clawback rules--which would
help hold corporate executives personally accountable for
causing harm to American investors.
Q.2. Some observers like to point to the Sarbanes-Oxley Act of
2002 or the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 as to why there's been a drop in public
companies since the mid-1990s. But a flood of private capital
since that time has caused merger and acquisitions (M&A)
activity to surge. Bankers enjoy the fees that industry
consolidation brings in, and with an average CEO tenure of 3
years, executives benefit from a short-term boost in stock
prices. On top of that, Congress has passed legislation such as
the JOBS Act, which makes it easier for companies to stay
private for longer.
What do you make of this argument that regulations are to
blame for a drop in public company formation? Or is it more
likely that a whole set of public policy choices make it easier
for incumbent firms to buy-up innovative start-ups, and make it
easier for private companies to stay that way for longer?
A.2. There are many explanations for recent changes in the
number of public companies, and all of them deserve the SEC's
attention. For one thing, the emergence of deeper and more
robust private capital markets than we have ever had before
allows large companies to stay private for far longer than they
once could. For another, the capital-markets fees that a
company must pay to go public are far higher in the United
States than in other markets, giving entrepreneurs pause before
listing their shares. And extensive acquisition activity over
the past two decades has worked to combine thousands of public
companies, reducing the number of listings on American
exchanges.
American capital markets can and should remain the envy of
the world. Chairman Clayton has made clear that this area is a
priority for him, and if confirmed, I would work closely with
the Chairman, my fellow Commissioners, and the Staff to ensure
that the Commission takes the steps necessary to keep our
capital markets competitive.
Q.3. What about the fact that investment banks' fees to
underwrite initial public offerings has consistently clustered
at seven percent over many decades? Why hasn't competition
driven down the price to take young companies public, and if
confirmed, will you seek to study this issue?
A.3. The fees bankers earn for taking companies public are
higher in the United States than in most other jurisdictions,
and these fees are often the most important factor in the
decision to go public. Scholars have long noted that investment
banker fees have clustered around seven percent for a wide
range of companies over a period of decades. \1\ The fact that
American entrepreneurs are required to give up some seven
percent of their creation in order to take their companies
public seems to me to be an important factor in any assessment
of the changing rates of IPOs in our markets.
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\1\ See, e.g., Hsuan-Chi Chen and Jay R. Ritter, ``The Seven
Percent Solution'', 55 J. Fin. 1105 (2000) (``Investment bankers
readily admit that the IPO business is very profitable, and that they
avoid competing on fees because they don't want to turn it into a
commodity business.'').
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To be sure, there are many reasons why companies choose not
to go public today, and they all deserve attention--including
the factors described in your question. If confirmed, I would
look forward to working with your office to study this issue
further--and take whatever actions are necessary to ensure that
America's capital markets remain competitive.
Additional Material Supplied for the Record
WALL STREET JOURNAL ARTICLE SUBMITTED BY SENATOR VAN HOLLEN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
``THE 8-K TRADING GAP'' SUBMITTED BY SENATOR VAN HOLLEN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]