[Senate Hearing 116-38]
[From the U.S. Government Publishing Office]
S. Hrg. 116-38
NOMINATIONS OF THOMAS PETER FEDDO, NAZAK NIKAKHTAR, IAN PAUL STEFF,
MICHELLE BOWMAN, PAUL SHMOTOLOKHA, AND ALLISON HERREN LEE
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
ON
NOMINATIONS OF:
THOMAS PETER FEDDO, OF VIRGINIA, TO BE ASSISTANT SECRETARY, TREASURY
FOR INVESTMENT SECURITY
__________
NAZAK NIKAKHTAR, OF MARYLAND, TO BE UNDER SECRETARY, COMMERCE FOR
INDUSTRY AND SECURITY
__________
IAN PAUL STEFF, OF INDIANA, TO BE ASSISTANT SECRETARY OF COMMERCE AND
DIRECTOR GENERAL, UNITED STATES AND FOREIGN COMMERCIAL SERVICE
__________
MICHELLE BOWMAN, OF KANSAS, TO BE A MEMBER, BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
__________
PAUL SHMOTOLOKHA, OF WASHINGTON, TO BE FIRST VICE PRESIDENT, EXPORT-
IMPORT BANK OF THE UNITED STATES
__________
ALLISON HERREN LEE, OF COLORADO, TO BE A MEMBER, SECURITIES AND
EXCHANGE COMMISSION
__________
JUNE 5, 2019
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available at: https: //www.govinfo.gov /
___________
U.S. GOVERNMENT PUBLISHING OFFICE
37-106 PDF WASHINGTON : 2019
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
PATRICK J. TOOMEY, Pennsylvania JACK REED, Rhode Island
TIM SCOTT, South Carolina ROBERT MENENDEZ, New Jersey
BEN SASSE, Nebraska JON TESTER, Montana
TOM COTTON, Arkansas MARK R. WARNER, Virginia
MIKE ROUNDS, South Dakota ELIZABETH WARREN, Massachusetts
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
MARTHA MCSALLY, Arizona DOUG JONES, Alabama
JERRY MORAN, Kansas TINA SMITH, Minnesota
KEVIN CRAMER, North Dakota KYRSTEN SINEMA, Arizona
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Joe Carapiet, Chief Counsel
Kristine Johnson, Professional Staff Member
Elisha Tuku, Democratic Chief Counsel
Laura Swanson, Democratic Deputy Staff Director
Phil Rudd, Democratic Legislative Assistant
Cameron Ricker, Chief Clerk
Shelvin Simmons, IT Director
Charles J. Moffat, Hearing Clerk
Jim Crowell, Editor
(ii)
C O N T E N T S
----------
WEDNESDAY, JUNE 5, 2019
Page
Opening statement of Chairman Crapo.............................. 1
Prepared statement........................................... 32
Opening statements, comments, or prepared statements of:
Senator Brown................................................ 2
Prepared statement....................................... 33
NOMINEES
Thomas Peter Feddo, of Virginia, to be Assistant Secretary,
Treasury for Investment Security............................... 5
Prepared statement........................................... 34
Biographical sketch of nominee............................... 36
Responses to written questions of:
Senator Brown............................................ 91
Senator Toomey........................................... 93
Senator Perdue........................................... 93
Senator Tillis........................................... 94
Senator Warner........................................... 95
Nazak Nikakhtar, of Maryland, to be Under Secretary, Commerce for
Industry and Security.......................................... 6
Prepared statement........................................... 41
Biographical sketch of nominee............................... 43
Responses to written questions of:
Senator Brown............................................ 97
Senator Perdue........................................... 99
Senator Moran............................................ 101
Senator Menendez......................................... 102
Senator Warner........................................... 104
Senator Cortez Masto..................................... 107
Ian Paul Steff, of Indiana, to be Assistant Secretary of Commerce
and Director General, United States and Foreign Commercial
Service........................................................ 8
Prepared statement........................................... 50
Biographical sketch of nominee............................... 52
Responses to written questions of:
Senator Menendez......................................... 110
Michelle Bowman, of Kansas, to be a Member, Board of Governors of
the Federal Reserve System..................................... 10
Prepared statement........................................... 60
Biographical sketch of nominee............................... 61
Responses to written questions of:
Senator Brown............................................ 111
Senator Rounds........................................... 120
Senator Tillis........................................... 121
Senator Menendez......................................... 125
Senator Warren........................................... 126
Senator Cortez Masto..................................... 127
(iii)
Paul Shmotolokha, of Washington, to be First Vice President,
Export-Import Bank of the United States........................ 11
Prepared statement........................................... 69
Biographical sketch of nominee............................... 70
Responses to written questions of:
Senator Brown............................................ 132
Senator Warner........................................... 134
Senator Cortez Masto..................................... 135
Senator Sinema........................................... 137
Allison Herren Lee, of Colorado, to be a Member, Securities and
Exchange Commission............................................ 13
Prepared statement........................................... 79
Biographical sketch of nominee............................... 80
Responses to written questions of:
Senator Rounds........................................... 138
Senator Menendez......................................... 139
Senator Warner........................................... 140
Senator Warren........................................... 143
Senator Cortez Masto..................................... 145
Additional Material Supplied for the Record
Letter submitted by Senator Bob Dole in support of Thomas Peter
Feddo.......................................................... 148
Letter submitted by the Independent Community Bankers of America
in support of Michelle Bowman.................................. 149
(iv)
NOMINATIONS OF THOMAS PETER FEDDO, NAZAK NIKAKHTAR, IAN PAUL STEFF,
MICHELLE BOWMAN, PAUL SHMOTOLOKHA, AND ALLISON HERREN LEE
----------
WEDNESDAY, JUNE 5, 2019
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:52 a.m., in room SD-538, Dirksen
Senate Office Building, Hon. Michael Crapo, Chairman of the
Committee, presiding.
OPENING STATEMENT OF CHAIRMAN MIKE CRAPO
Chairman Crapo. This hearing will come to order.
First of all, I want to thank our six nominees who are here
to serve in five different agencies. As you are well aware, we
have had votes scheduled today at eleven o'clock. So we are
trying to adjust how we move along, and we have changed the
instructions to you several times this morning.
Let me tell you how we will proceed. At one point, we had
asked you to just forego your opening statements to give us
more time for Senators to ask questions. The Senators have
indicated that they would like to have you make your opening
statements, if you would like to make one, and so any of you
who would like to--and I invite you to--can make your opening
statements.
We will then proceed normally from there. We are going to
ask everybody here to help us move along quickly with answers
and questions, and hopefully, we will get through this with no
difficulty.
With that, this morning, we have first Mr. Thomas Peter
Feddo. He is nominated to be the Assistant Secretary of
Treasury for Investment Security.
Next, the Honorable Nazak Nikakhtar. Did I get it right?
Where are you? There you are.
Then next, Mr. Ian Paul Steff.
By the way, Nazak is to be the Under Secretary of Commerce
for Industry and Security.
Next, Mr. Ian Paul Staff to be the Assistant Secretary of
Commerce and Director General of the United States and Foreign
Commercial Service.
Then we have the Honorable Michelle Bowman to be a member
of the Board of Governors of the Federal Reserve System.
We next have Mr. Shmotolokha--I got it pretty close--who
has been nominated to serve as the First Vice President and
Vice Chairman of the Export-Import Bank of the United States.
And, finally, we have Ms. Allison Lee, who is nominated to
serve as a Member of the Securities and Exchange Commission.
I welcome all of you to the hearing today.
I see friends and family behind you, and I welcome you to
introduce them, if you would like to do so as well, when we
turn the time over to you.
At this point, I am going to forego any further statement
of my own so that we can move on more quickly.
Senator Brown does have a statement, and let me turn to
you, Senator Brown.
OPENING STATEMENT OF SENATOR SHERROD BROWN
Senator Brown. Thank you, Chairman Crapo, and thanks to all
of you, and welcome to your families.
I know even though this hearing may be truncated, we do not
want that to happen. So I want you to do whatever you want to
say in your opening statements, and do not feel pressured in
time in terms of answering questions or anything else.
Your family is here. It is a big moment for them. It is a
big moment for you. If for reasons of votes--and the Chairman
and I have talked. He has not agreed to this, but if we do need
to bring you back for questions, if Members do not get a chance
to ask questions because of the floor votes--I would also just
mention the frustration on this side of the aisle that all this
Senate seems to be doing is the Majority Leader just wants to
jam through as many possible judges as possible as he can get
through the Senate. That is why we have many of these votes
today, especially considering the number of judges that the
Majority Leader blocked in the Obama administration and now is
trying to fill all these with very young judges.
So it is a power move from the Majority Leader. My
relationship with the Chairman has been great, and we will
continue to work together. We disagree on some of the bigger
picture issues. We want to move on all of you, if we can. Some
of you, I am happier with than others, as your public records
and all.
But I want to just speak and with my opening statement give
some thoughts, and then we will move forward. But these are all
really important jobs, all six of you, and I do not think it is
fair to you or to Members in both parties to get anything but a
chance to do full questioning. Just the fact that there are six
of you here is frankly too many--that is our decision, not
yours--to bring you all together, considering the importance of
your jobs and considering that all of us have questions,
multiple questions for many of you, far beyond our 5 minutes.
That is why it is rare to do six together and why I am not wild
about doing six together. I understand the crunch of time, but
that crunch of time is often artificially squeezed.
Let me say a few things. Mr. Feddo, thank you for joining
us, first nominee to be Assistant Secretary of the Treasury for
Investment Security, a position we created under the Foreign
Investment Risk Review Modernization Act of 2018, the
bipartisan legislation that came out of this Committee. We are
thrilled you are here.
We created this new position because of the critical role
that CFIUS plays promoting U.S. national security from
increasing threats from certain foreign investments. Yesterday
we heard about how China has adopted new tactics to acquire
American technology in sectors vital to our national security.
It is why we passed this bill. It is why your job is so, so
important.
Mr. Feddo currently serves as Deputy Assistant Secretary
for Investment Security. He has played a key role in
formulating the reforms last year and is now working to carry
out the technical and structural changes under FIRRMA,
including finishing the rulemaking to expand CFIUS's scope.
If confirmed, Mr. Feddo, you will need to continue this
critical work. I know you have made progress. I look forward to
hearing from you about next steps.
Ms. Nikakhtar, welcome. Nice that you are here. You have
been nominated to serve as Under Secretary of Commerce for
Industry and Security, responsible for a set of key U.S.
national security, foreign policy, and economic objectives
through application of effective U.S. and multilateral export
controls and treaty compliance. Although Ms. Nikakhtar has
extensive experience in international trade, she has more
limited experience in national security and export control
matters. If confirmed, she will be responsible for
administering critical U.S. export control laws and regulations
that cover all kinds of sensitive technology.
I hope you will work with your colleagues to navigate, Ms.
Nikakhtar, the complex national security and political concerns
that surround the export of sophisticated U.S. technology.
Mr. Steff is nominated to be Assistant Secretary of
Commerce for Global markets and Director General of the U.S.
and Foreign Commercial Service. Welcome. He will be responsible
in that role for the ITA's work to advance U.S. business
overseas and promote U.S. exports and fair trade rules. His
current experience as Deputy Secretary for Manufacturing at
Commerce and his prior experience working on economic
development, providing an understanding of how to strengthen
the competitiveness of U.S. industry. We count on you for that.
Ms. Bowman, welcome. Good to see you again. She is
nominated to be a member of the Board of Governors for a full
14-year term, expiring in 2034. As a former State bank
commissioner, she serves in the role designated for a Fed
Governor with community bank experience.
At her first nomination hearing, I was concerned that Ms.
Bowman would be a rubber stamp for Wall Street. I think I was
right to be concerned about that. This Administration looks
like a retreat for Wall Street executives. Far too many people
with Wall Street connections and Wall Street bias have been
nominated by this Administration to key regulatory positions.
I know you possess a deep understanding of community banks
and are being nominated for a full 14-year term. I am concerned
that you have too often taken the side on the Fed, the side of
big banks and Wall Street, doing favors for Wall Street by
relaxing capital standards and weakening stress tests and other
postcrisis safeguards. That Federal Reserve and the Trump
nominees seem to have a collective amnesia about what happened
in this country 10 years ago and the number of people that lost
savings, lost lifetime savings, lost their jobs, lost their
home.
I hope you will do, if confirmed, all that you can to
ensure the regulatory system works for community banks, but for
our financial system and protecting all consumers. So far, you
have fallen short. I am hoping you will do better.
Mr. Shmotolokha is the nominee to be First Vice President
of the EXIM Bank.
For 4 years, I have pushed EXIM to be fully reopened. The
Vice President, apparently, and a handful of Republicans on
this Committee have blocked the Export-Import Bank, costing
thousands of manufacturing jobs in my State and tens of
thousands, maybe hundreds of thousands of jobs around the
United States because they have blocked--they have not seen fit
to do what this Congress used to do bipartisanly, almost
unanimously to support the Export-Import Bank.
We are counting on you to push back when they try to slow
it and stop it and cripple that agency. Your work is especially
important as the final nominee to the bank's board to be before
this Committee.
Ms. Lee, welcome. She has been nominated to be Commissioner
of SEC. If confirmed, she would return to the SEC at a critical
time. I expect Ms. Lee to draw on her SEC enforcement
experience while considering rules that would affect investor
rights and remedies against wrongdoers and when weighing
penalties in misconduct cases.
Your work is especially important in light of what I said
earlier that this Administration has such a strong bias toward
the most privileged in this country, whether it is Wall Street,
whether it is corporations that ship jobs overseas, whether it
is special interests that take advantage of people. We really
count on you, Ms. Lee, in that job.
Thank you, Mr. Chairman.
Chairman Crapo. Thank you, Senator Brown.
I know I said I was not going to make an opening statement,
but I do need to respond to two things that you said.
Senator Brown and I do have an excellent working
relationship. I just want to make it clear that there is plenty
of precedent, both in this Committee as well as others, to have
six nominees before us. Frankly, especially, I do not know of
any significant controversy about any of the nominees before us
today.
Second, with regard to the comments you made about us being
jammed by unreasonable pressure to push votes on the floor for
nominations of judges, I guess this is one where we are just
going to have to continue to disagree. I think that the reason
we are having these kinds of extensive votes is because we have
been stopped from having votes in what I consider to be a
reasonably and orderly process for the last 2\1/2\ years, and
we are now moving forward with more votes because we have been
in a battle, if you will, on the floor the Senate over getting
two votes.
So, anyway, we have had this debate for many months and
will continue to have it.
With that, before we proceed to the nominees, I do need to
administer the oath to you. So would each of you please rise
and raise your right hands.
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. Feddo. I do.
Ms. Nikakhtar. I do.
Mr. Staff. I do.
Ms. Bowman. I do.
Mr. Shmotolokha. I do.
Ms. Lee. I do.
Chairman Crapo. And do you agree to appear and testify
before any duly constituted committee of the Senate?
Mr. Feddo. I do.
Ms. Nikakhtar. I do.
Mr. Staff. I do.
Ms. Bowman. I do.
Mr. Shmotolokha. I do.
Ms. Lee. I do.
Chairman Crapo. All right. Thank you. You may sit down.
With that, we will proceed in the order that I introduced
you earlier, and so, Mr. Feddo, please make any remarks or
introductions you would like to make.
TESTIMONY OF THOMAS PETER FEDDO, OF VIRGINIA, TO BE ASSISTANT
SECRETARY, TREASURY FOR INVESTMENT SECURITY
Mr. Feddo. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, I am honored to appear
before you today. I am humbled to be nominated by the President
to serve as Assistant Secretary of the Treasury for Investment
Security, a new position created by the Foreign Investment Risk
Review Modernization Act of 2018.
Last August, FIRRMA was enacted with overwhelming
bipartisan support from this Committee, both houses of
Congress, and the Administration. In creating this position,
specifically through an amendment by Chairman Crapo, the
statute recognizes the need for dedicated, accountable
leadership of the critical national security function executed
by the Committee on Foreign Investment in the United States. I
am confident that my professional background affords me the
experience and knowledge to lead CFIUS and to effectively and
faithfully implement FIRRMA over the coming months.
I grew up with two younger sisters and attended public
school near Buffalo, New York. We had a full-time mom and a dad
who served in the Marine Corps and then worked for the local
electric company for nearly 25 years. My dad worked long hours
to make sure that our family had all that we needed and a
little more than he had as a child. He suddenly passed away
just months after seeing me graduate college, but I know that
he would be pleased were he here today. My mom dedicated
herself to building a warm and loving home for us, and she is
watching the hearing from Buffalo. I am deeply grateful to my
parents for laying the foundation that has brought me to this
point. By example, they instilled the virtues in my sisters and
me, and we came to know the value of hard work, loyalty, and
family.
I would not be here today without my extraordinary wife,
Muffet. She has been an unwavering source of support and
encouragement, while selflessly devoting her many talents to
raising our three wonderful children, who are dispersed through
the crowd, Emma, Kay, and Gus.
Early in high school, I decided that I would serve our
Nation in the military and sought to attend the Naval Academy,
and I am honored to have my two Academy roommates in attendance
today. Since taking the oath of office at Annapolis 33 years
ago, it has been my privilege to spend literally half of my
life in public service, including first as a lieutenant on a
nuclear submarine and then with the Naval Criminal
Investigative Service.
After law school, I served as a counsel with the House
Energy and Commerce Committee, before stints as an attorney at
the Pentagon, and a civil servant at the Treasury Department. I
have served in all three branches of the Federal Government,
with nearly 20 years in a national security-related capacity.
In the private sector, I practiced law as a patent and
trademark litigator and most recently as a partner in a large
firm's international trade group.
By virtue of these professional experiences, I understand
the importance of protecting American innovators' intellectual
property, our Nation's vital economic engine.
And as a Navy submariner, educated and trained as an
engineer, I experienced firsthand how America's superior
technology ensures our warfighting edge.
As an attorney representing global businesses, large and
small, I have gained a true appreciation for the importance of
foreign investment to our strong and vibrant economy, as well
as the benefits of regulatory certainty to business
transactions.
If I am confirmed, you have my unqualified commitment that
I will work closely with this Committee and Congress as a whole
to continue what I have been doing over the last year as Deputy
Assistant Secretary, faithfully and transparently implementing
FIRRMA, ensuring our national security is protected while
foreign investment is fostered, and serving with humility and a
deep and abiding respect for our dedicated and talented career
professionals at Treasury and across the Government who
diligently execute the CFIUS mission.
Thank you again for the privilege and opportunity to appear
before you today. I am happy to answer any questions that you
may have.
Chairman Crapo. Thank you, Mr. Feddo.
Ms. Nikakhtar.
TESTIMONY OF NAZAK NIKAKHTAR, OF MARYLAND, TO BE UNDER
SECRETARY, COMMERCE FOR INDUSTRY AND SECURITY
Ms. Nikakhtar. Mr. Chairman, Ranking Member Brown, and
Members of the Committee, thank you for the opportunity to
appear before you today.
In 2018, I was honored to be confirmed as the Assistant
Secretary for Industry and Analysis at the Department of
Commerce, and today I am extremely honored to be nominated for
the position of Under Secretary for Industry and Security.
With me today are my husband, Gene Degnan, and my mother,
Dr. Manijeh Nikakhtar. My father Bijan Nikakhtar passed away
several months ago, but he would have been beaming with pride
if he were here today, as an amateur political historian and
one of the greatest American patriots I have ever known. I am
proud to say that my parents and my husband have served our
Government as Federal employees for many years.
My husband served for over a decade at the Department of
Commerce, and my parents served for over 40 years collectively
as physicians at the VA hospital, taking care of our Nation's
veterans.
My brother, Nersi Nikakhtar, also a physician at the VA
hospital, had work obligations today.
I am proud to be part of a family that honors Government
service.
I immigrated to America with my family 39 years ago. I can
remember from a very young age how proud I was to be an
American and how I marveled at American innovation and
ingenuity. I knew at an early age that I wanted to be part of
the narrative of American growth.
This is what prompted me to study law and economics after
college. I obtained my Juris Doctor and Master's in Economics
from Syracuse University, and in 2002, I began my career at the
Commerce Department, first at the Bureau of Industry and
Security and subsequently at the International Trade
Administration.
At the Department, I worked with and learned from
incredibly smart and talented civil servants. Many of those
dedicated professionals are still there today, and they are the
pillars that shape our Government from Administration to
Administration. I have great respect for them, and I am
privileged to work with them again.
I joined the private sector several years later as a trade
and export control lawyer, representing industries in aerospace
and steel sectors, in aquaculture, high-tech goods, chemicals,
and minerals.
In private practice, I worked to level the playing field
for U.S. industries, and on exports, I conducted internal
investigations to enforce clients' compliance agreements with
the U.S. Government to address U.S. national security concerns.
My training and experience, both as a lawyer and an
economist, have given me the expertise to protect U.S. national
security and simultaneously advance the economic interests of
U.S. industries.
Today national security no longer begins and ends with
military strength. It is a fact in today's world that national
security is dependent on our economic strength and our
technological leadership. Yet advancements in technology and
the interconnectedness of our economies make our national
security challenges more complex than ever before.
Economic integration has emboldened some foreign Nations to
behave in ways that undermine our national security, expecting
that the threats of economic retaliation will weaken our
resolve to act. They have increased illicit procurement of
items to build weapons of mass destruction and transshipped
those items to terrorist organizations and regimes.
We are witnessing illegal acquisitions of sensitive
technologies to weaponize dual-use items and oppress millions
of innocent citizens, and we have seen for years how rampant
intellectual property theft has displaced U.S. industries,
stifled innovation, and enabled the advancement of strategic
competitors.
The key to our success is maintaining U.S. technological
superiority and economic interests through multilateral
coordination that is more forward leaning, better use of
intelligence analytics, robust enforcement of our laws, and
tightly coordinated whole-of-Government approach that includes
more proactive engagement with Congress.
Time is of the essence, and during my 3\1/2\ months at the
Bureau, I have been leading the Department's efforts to update
our regulations to incorporate ECRA reforms and address global
threats.
We are engaging with industry to identify emerging
technologies that undermine our national security.
I have begun an initiative to work with like-minded allies
on better export control coordination and wider end-use checks.
It is imperative that we better coordinate multilateral
policies on sensitive technology so U.S. companies can compete
globally while Governments prevent technologies from being
misused by adversaries.
At the Bureau, I challenge my colleagues every day to
rethink how we can modernize policies to stay ahead of new
threats, and I have made it a priority to seek industry input,
as today's complex challenges cannot be solved without close
engagement with U.S. businesses. Our policies must advance
America's technological and economic leadership.
My parents immigrated to America knowing that this is the
greatest country in the world, and as an American, it is my
responsibility and honor to preserve this Nation's security for
future generations.
I thank you again for the opportunity to be here in front
of this Committee, and I look forward to your questions.
Chairman Crapo. Thank you, Ms. Nikakhtar.
Mr. Steff.
TESTIMONY OF IAN PAUL STEFF, OF INDIANA, TO BE ASSISTANT
SECRETARY OF COMMERCE AND DIRECTOR GENERAL, UNITED STATES AND
FOREIGN COMMERCIAL SERVICE
Mr. Steff. Chairman Crapo, Ranking Member Brown, Members of
the Committee, it is the greatest of honors to sit before you
today.
If confirmed, it would be my privilege to serve as the
Assistant Secretary of Commerce for Global Markets and Director
General of the U.S. and Foreign Commercial Service.
I thank President Trump for this nomination. So, too, I am
grateful for the continued support of Vice President Pence,
both in my former capacities in Indiana and now in Washington,
DC.
Speaking of Hoosiers, I am proud to be joined by my wife,
Brittany. I remain forever grateful for your incredible
encouragement, compassion, and flexibility as we serve the
Nation we love and raise our two little stars, Daniel and Owen.
I am also joined by my parents, Wayne and Lisa. Our
childhood home was filled with love, faith, respect, hard work,
and an enduring sense of service to one's country. Thank you,
Mom, Dad, Gram, Aunt Lori, Aaron, and to all those family
members, friends, and teachers who helped me along the way.
My story started under a few feet of snow, 30 miles south
of Buffalo, New York, on my grandparents' dairy farm. My two
younger brothers, Eric and Levi, often reflect on the comradery
we developed shoveling that never-ending lake-effect byproduct,
raising our pet ducks, and commiserating over our beloved
Buffalo Bills. Childhood summers encompassed exploring the
pastures and woods, working on our neighbor's berry and plant
farm, and waiting for the rumble of Dad's cycle as he returned
home from his job in highway maintenance. This is a glimpse of
our small slice of country and my upbringing in rural America.
Rural? Yes. Encouraged to dream big? Every step of the way,
and dream we did. I devoted nearly every penny earned on the
farm to my stamp and coin collection. Years later, as I arrived
at American University to begin my academic career in
international affairs, I knew unequivocally that my future
involved fostering relations with foreign markets and the
people personified in that postage and currency I had
accumulated. That dream and future continue here today.
If confirmed, I would be incredibly honored to lead a
world-class team of professionals providing export counseling
to small- and medium-sized businesses, while identifying new
foreign markets for their products and services; advocate on
behalf of U.S. companies competing for foreign Government
procurements; attract foreign direct investment, while working
to grow the U.S. manufacturing base; and reduce, remove, and
prevent foreign trade barriers that impede market access for
U.S. goods in a free, fair, and reciprocal fashion.
As the Deputy Assistant Secretary of Commerce for
Manufacturing since June of 2017, I have seen the impact the
Global Markets team has on U.S. manufacturers and service
providers. This vast network of more than 1,300 trade and
investment specialists in headquarters and the U.S. field,
combined with the presence of the Foreign Commercial Service in
over 70 markets deliver daily. Simply put, I have come to know
the Global Markets team as a team that works, a team that
chooses to compete, and a team that delivers. These
professionals deliver one deal at a time and have a tremendous
impact measured at over $120 billion in fiscal year 2018 in the
areas I outlined.
In my former professional capacities, I accrued experience
in economic development, executive leadership, and trade
policy. In my past economic development roles, I worked
successfully to attract foreign direct investment.
SelectUSA, which would be under my purview, if confirmed,
is a valued economic development partner to many States.
Likewise, during my time in the semiconductor industry, I
witnessed the contributions of the Commerce Department to
ensure foreign market access. I regularly engaged with the
Commerce team while managing the leading chip industry
association's international engagements and technology programs
for a decade. I have seen the challenges posed by unfair
foreign trade measures and massive market-distorting practices
that have crippled companies looking to compete
internationally.
Earlier in my professional career, I worked on the Trade
Subcommittee of the House Ways and Means Committee. I have a
profound appreciation for the vital role of Congress when it
comes to ensuring the global competitiveness of U.S. industry.
While my stamp and coin collection are now the
responsibility of my two young Hoosiers, I have no doubt that
they and our country have a limitless and prosperous future
based on the unparalleled accomplishments of the Global Markets
team at Commerce. I aspire to help this team continue to
achieve its mission. If confirmed, I will devote every working
moment to its success on behalf of our Nation's exporters.
Distinguished Members of the Committee, thank you for your
consideration.
Chairman Crapo. Thank you, Mr. Steff.
Ms. Bowman.
TESTIMONY OF MICHELLE BOWMAN, OF KANSAS, TO BE A MEMBER, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Ms. Bowman. Chairman Crapo, Ranking Member Brown, and
Members of the Committee, it has been just over a year since
this Committee first recommended my nomination as a Federal
Reserve Board Governor.
While I am not the first community banker to serve on the
Board, I am humbled by the opportunity you gave me to serve as
the first Governor to fill the role Congress designated for
someone with community banking experience on the Federal
Reserve Board.
I am deeply honored the President has renominated me to
serve in that capacity. Thank you for the honor of this hearing
today.
I am also grateful to my family for their continued
support. My husband, Wes, and our children, Jack and Audrey,
are here with me today. The rest of my family are watching from
home in Kansas.
Since my confirmation last year, I have worked to fulfill
my unique role on the Board by traveling widely and listening
closely to community bankers, to consumers, small business
owners, and community leaders. I have visited with farmers,
workers, and business leaders from across the country to
discuss the economy. I am making sure these unique perspectives
are represented in the Federal Reserve's deliberations and
decision making on both monetary policy and regulatory matters.
During my time at the Board, I have also drawn on my
experience as a community banker and regulator to ensure that
our work is guided by a deep understanding of the practical
realities confronting bankers and the communities they serve
across the country. The work done after the crisis to address
the weaknesses of the U.S. financial system and ensure its
future resilience was essential.
However, during my time in my family's community bank, I
saw firsthand how the regulatory changes created in the
aftermath of the crisis impacted community financial
institutions. Small, solid institutions like this one are
essential to so many of our citizens and communities. As
regulators, we need to ensure that we are not imposing
unnecessary burdens on community banks. That is why one of my
priorities as a Governor has been to appropriately tailor our
supervision and regulation to the size, complexity, capacity,
and risks posed by an institution.
To further this effort, I recently formed a working group
of experts from across the Federal Reserve System to launch a
comprehensive review of our supervisory work with smaller
regional and community banks. While serving as the Kansas State
Bank Commissioner, I was committed to treating every consumer
and institution fairly and respectfully and fostering open
communication. This working group will follow those same
principles. We are looking for ways to optimize our supervision
and regulation to ensure it adapts to the on-the-ground
realities of an evolving industry and changing consumer
expectations while maintaining the safety and soundness of our
banking system.
Let me close by saying a few words about monetary policy
and the Federal Reserve's dual mandate. As a community banker,
it was my job to support local businesses and consumers. I draw
upon this experience often when thinking about monetary policy
because it has given me a personal and practical understanding
of how the Federal Reserve's goals of fostering maximum
employment and stable prices directly affects individuals as
well as the broader financial system and economy.
The Congress has given the Federal Reserve independence to
pursue these goals because our work is critical to our economy,
to businesses, to families, and to communities, and I am deeply
committed to fulfilling this mandate.
If confirmed by the Senate, I will continue the important
work I have begun and be committed to accountability,
transparency, and clear communication in all of my
responsibilities at the Federal Reserve.
Thank you for the honor of this hearing, and I look forward
to answering the Committee's questions
Chairman Crapo. Thank you, Ms. Bowman.
Mr. Shmotolokha.
TESTIMONY OF PAUL SHMOTOLOKHA, OF WASHINGTON, TO BE FIRST VICE
PRESIDENT, EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Shmotolokha. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, thank you for
considering my nomination to serve as First Vice President of
the Export-Import Bank of the United States.
I am deeply thankful to President Trump for selecting me
and humbled by the obligations that this role brings to
American workers and taxpayers.
I would like to introduce some family members who are with
me today; first, my parents, Stephen and Christine, who made
the trip from California. They came to America as child
refugees of World War II, and I am always inspired by their
contributions to our country.
My father worked as an engineer in the defense industry for
more than 40 years, and my mother served tirelessly as a nurse.
I am also joined by my wife and best friend, Dania, who
guided the family through multiple international moves and
extensive overseas travels, and Max, my son, who is entering
his senior year in college.
My brother Adrian and many of my friends, family, and
coworkers from around the world are also watching online.
I sit before you as somebody who has spent the past 16
years in the front lines of global trade, with a strong record
in growing American exports. I also bear the battle scars of
leadership in a time of unparalleled competition in global
markets.
I am here out of a sense of duty, honor, and the wish to
use my experience to serve a wider grouping of American
businesses to grow their exports, and I am also paying back a
debt for all this country has given to my family.
It is not simple for any manufacturer to export. They must
overcome political risks, economic hazards, and many nontariff
barriers. Sometimes they also need extra financial support,
especially when there are over 100 export credit agencies that
are upping the ante and creating new incentives for the end
customer.
I have experienced firsthand the circumstances requiring an
ECA like EXIM to finance deals in a timely and relevant fashion
when the private sector cannot.
My deep commitment and my international experience on both
the buying and the selling side of international trade over the
last 30 years will allow me to contribute strongly to the team
at EXIM.
EXIM's mission is to help support and create jobs. I have
experienced firsthand the thrill of walking assembly lines in
Georgia and in Washington State and meeting the newest workers
putting together products for export, thanks to deals that my
team closed. These are some of my best experiences. My legacy
and value as a business person comes from the people that I
mentor and the jobs that I help create.
By working with the president of the Bank, my fellow board
members, and the talented staff at EXIM, I believe I can best
serve America to multiply the job creation effects of EXIM.
Having served on numerous private-sector boards in various
capacities, I understand board responsibilities of proper
corporate governance, the need for transparency, and how good
strategic guidance and a positive leadership attitude can
enable organizations to realize their full productive
potential.
The EXIM board needs to make sure it does not lose sight of
its role as an important source for small businesses. Many of
its financial products in this area resonate with those who are
looking to expand to new markets.
As an entrepreneur, I have worked in small companies and
faced the pressure of making payroll. Speed to market and
effective financing can make or break these companies. I built
a significant export business in a medium-sized U.S.
manufacturer that, while a very successful domestic business,
had yet to find its legs overseas.
All companies--small, medium, and large--need help at times
in leveling the playing field in today's global economy.
If confirmed, I will bring a fresh perspective and a
fiercely competitive mindset to the Bank. My experience as an
officer in the United States Army taught me to lead from the
front, and I will work tirelessly to support the Made in
America brand that we all share and support. I will ensure that
American companies have full access to and understanding of the
programs authorized by Congress to maximize their global reach
and competitiveness.
To this end, I would paraphrase Vince Lombardi. Winning is
not everything; it is the only thing for American business and
American workers. And I pledge to bring a can-do winning
attitude and to win responsibly for the American taxpayer.
Thank you for your consideration. I would be pleased to
answer any questions.
Chairman Crapo. Thank you, Mr. Shmotolokha.
Ms. Lee.
TESTIMONY OF ALLISON HERREN LEE, OF COLORADO, TO BE A MEMBER,
SECURITIES AND EXCHANGE COMMISSION
Ms. Lee. Chairman Crapo, Ranking Member Brown, and
distinguished Members of the Committee, it is a tremendous
privilege to appear before you today and to be considered for
the position of Commissioner at the Securities and Exchange
Commission, an agency in whose mission and dedicated staff I
believe deeply.
I am very fortunate today to be supported by a large
contingent of family. I would like to introduce them: my
husband, Jay Brown; four of the five children in our blended
family, Tess, Beth, Josh, and Zoey. Also our granddaughter,
Emerson, is here, and our son-in-law Colin, my sister Laurie,
my brother Wil, my niece Emily, and my brothers-in-law, Jeff
and Chris. Unfortunately, my mother could not be here today,
but I know she will be watching.
I have spent the bulk of my legal career at the SEC for a
very simple reason. The SEC has a mission that is vital to the
economic well-being of Americans and American businesses. It
navigates the critical intersection between these two--between
everyday Americans striving to build savings to buy a home, to
send children to college, and eventually retire, and American
businesses that need capital to grow and prosper. This
reciprocal relationship must be nourished from both sides.
We are a Nation of investors, both retail and
institutional, and it is the SEC's job to protect them. This is
especially important as we continue the shift away from
employer pensions toward individual plans in which people must
fund and select their own retirement assets and, importantly,
manage their own risk.
The SEC works to ensure that investors are taking the kinds
of risk they sign up for, business and economic risk, not the
risk of fraud and not the risk of poorly structured or opaque
markets that may disadvantage investors. This instills
confidence which in turn promotes capital formation.
Beyond instilling investor confidence, the SEC works to
ensure that American businesses of all sizes can access the
capital they need to grow their businesses and thus create the
kinds of opportunities that investors want and need. These
businesses deserve thoroughly researched, well-tailored, and
clear rules.
I have seen, experienced, and understood this
interdependence between investors and business from nearly
every angle. I have worked in the oil business at both private
and public companies. I have owned and run my own small
business. Since law school, I have worked for over two decades
as a securities lawyer, first in private practice as a
litigator and partner, and then I was privileged to work on the
staff of the SEC.
Like many Americans, I have worn a lot of hats and juggled
a lot of priorities, working my way through college and
eventually through law school, raising children, paying the
bills, and investing my savings for retirement. If I have the
honor of being confirmed, I will bring all of these
perspectives to bear in my role as commissioner, and I will
reach out and listen to all constituencies served by the SEC to
further its critical mission.
Thank you for the opportunity to appear before you today,
and I am happy to answer questions.
Chairman Crapo. Thank you, Ms. Lee.
And in the interest of time, I am going to forego my
questions. We will go immediately to Senator Brown.
Senator Brown. Thanks, Mr. Chairman.
Mr. Shmotolokha, thank you. Thanks for sharing your story
and your experience with us.
Explain why U.S. companies in the technology and
telecommunications sector look to EXIM to expand their sales
abroad, and as you answer that, if you would also answer if
EXIM is unavailable, assistance is unavailable, are companies
able to complete foreign sales.
Mr. Shmotolokha. If I could touch on the second one first?
Senator Brown. Sure.
Mr. Shmotolokha. In my own experiences, self-financing is
the first thing any company looks for. It is the easiest, the
quickest, and when you are doing a deal with somebody, you are
looking to see if you can consummate it in the speediest of
fashions and receive your payables.
But next, I turn to private sector, and when you look to
EXIM, that is largely when you start really expanding your
business. You are looking at countries that have a higher
degree of political risk or economic risk or legal systems in
which you cannot recuperate your receivables.
Probably the biggest challenge, though, that we face today
is the fact that other ECAs or ECA-like institutions in several
countries, specifically in the BRICS that are non-OECD
countries, are using additional finance vehicles, especially
long-term ones. So where we came up against this was in the
telecommunications industry. Certain global vendors today
create extremely attractive medium- to long-term financing
situations for the same clients for which we are competing.
Sometimes those clients do not have to even make a payment the
first 2 years. They get extremely low interest rates, and it
makes it very attractive for them just simply from a capital
perspective where quality, trust, and good customer service
sometimes are overcome.
So, at that point, being able to seek institutions that can
help bring about medium- to longer-term financing when
sometimes private-sector institutions are not comfortable in
many of those locations. I would add that today a lot of the
game or a lot of the opportunities are actually in emerging
markets. There are tremendous infrastructure builds going on in
those markets. So to compete in the first-world markets, it can
be relatively level, but today the opportunities are in Latin
America, Africa, and parts of Asia. So that makes it a real
challenge.
And then having sort of the sense of approval of EXIM
behind you makes many in those countries extra comfortable with
a vendor.
Senator Brown. Right.
Mr. Shmotolokha. So that combination of public and private
with those loan guarantees that EXIM does is sometimes very
useful.
Senator Brown. Thank you very much.
Ms. Bowman, thank you for your service in Kansas and at the
Federal Reserve.
You have said that community banks, quote, ``were
significantly affected by the global financial crisis, a crisis
they did not cause.'' I think every member of this Committee on
both sides would agree with that.
Recently, though, the Fed has issues many rules that would
weaken requirements for the largest U.S. and foreign banks, the
same Wall Street banks that made risky bets and crushed the
economy.
I have a couple of yes or no questions. Have you voted
against any of the Fed's proposals that weaken the rules for
the largest Wall Street banks?
Ms. Bowman. I would not characterize them as necessarily
weakening the rules. I voted in favor of those proposals, but I
would disagree with your characterization that they have
weakened the requirements for banks.
Senator Brown. They have scaled back the requirements. You
would not disagree with that?
Ms. Bowman. I would say that we have targeted the
requirements more to the risk of the banks as they pose them.
Senator Brown. This is another yes or no question. Does
weakening rules for Wall Street banks help community banks?
Putting aside how you voted, does actually weakening the rules,
scaling back rules for Wall Street banks, does that help
community banks?
Ms. Bowman. I think with respect to community banks, it is
important that we understand the risks that they pose to the
system and target the regulations and rules that they are
required to abide by to their risks that they pose, the size,
the complexity, and the risks that they pose to the system.
They are a separate category of banks from Wall Street banks,
the largest of----
Senator Brown. We are not arguing that the community banks
pose--even in the aggregate pose much risk. It is the larger
banks where this Fed and the FDIC have weakened rules. It is
not the community banks that we focus on.
Let me ask you another question. You said community banks
are a priority, but the Fed's actions weakening the rules for
Wall Street, opening the door for shadow banks and for Silicon
Valley. The Fed is also considering a merger between two
regional banks, each with over $200 billion in assets. They say
it is too difficult for them to compete with the biggest banks'
investment in technology.
I hear from community bankers, some of your friends, I am
sure, in my State and across the country that this leads to
more consolidation making it harder for small banks to compete.
So my question is, Do you believe that consolidation of the
banking industry has an adverse effect on community banks?
Ms. Bowman. As consolidation applies in the community
banking space, my concern is more that the investment in the
local communities are distributed instead of located where the
charter was originally held, so as branches are acquired in
rural communities that home investment in the community tends
to be dissipated.
Senator Brown. Real quick, Mr. Chairman.
Yes or no. Will you support Fed actions and the FDIC votes
in this too, such as approval of BB&T and SunTrust merger?
Would you vote for that?
Ms. Bowman. It would depend on how the outcome of the
review of the application is. We have several statutory factors
that we must consider as we are reviewing that application.
If the statutory factors are met and a recommendation is
for approval, I would certainly consider that, as I would cast
a vote.
Senator Brown. OK. Thanks.
Chairman Crapo. Thank you.
Senator Toomey.
Senator Toomey. Thank you very much, Mr. Chairman. I
appreciate this hearing, and I want to thank our witnesses for
testifying today and coming before us.
Ms. Nikakhtar, am I pronouncing that right?
Ms. Nikakhtar. Yes, Senator.
Senator Toomey. Thank you.
I would like to start with you. My understanding is in your
recent position as Assistant Secretary for Industry and
Analysis at Commerce, you played a lead role in the Commerce
Department's investigation into whether auto and auto part
imports threaten U.S. national security.
As you no doubt know, that report is still being kept a
secret from the American public, but we now know that it
contained an affirmative finding that foreign car imports and
part imports were deemed to be a national security threat.
First of all, it is highly objectionable to me that this
report has not been disclosed to Congress and the American
public.
If Toyotas and Volkswagens really pose a national security
threat to the United States so great that we have to tax my
constituents when they purchase one, I think the American
people ought to know why.
So my first question to you, Ms. Nikakhtar, are you aware
that Federal law and regulations actually require that the auto
232 report be made public?
Ms. Nikakhtar. Yes, Senator. It is in the statute.
Senator Toomey. Yes. So do you know why it has not been
made public?
Ms. Nikakhtar. Senator, when we completed the report and we
delivered it to the Secretary and then to the President, it
sits with the White House right now, and per the statute, it is
up to the President to determine when he wants to release it
and when the timing for that.
Senator Toomey. Well, let me just say the post to which you
have been nominated obviously has a very significant national
security component. Your signature recent effort in this space
is that report, and it is hard for me to understand how
Senators can properly judge your qualifications without being
able to read that report.
I understand that is not in your direct control, but it is
important.
The President's May 29th proclamation repeatedly states
that--and I quote this phrase--``American-owned producers,''
end quote, must be able to increase R&D spending in order to,
quote, ``developing cutting-edge technologies that are critical
to the defense industry.'' And, as such, the proclamation
reaches the conclusion that, quote, ``Domestic conditions of
competition must be improved by reducing imports.''
So the conclusion that Toyotas and Volkswagens are a threat
to our national security seems to be premised on the notion
that the sales of those vehicles precludes sales that would
otherwise occur at American-owned producers, which would then
lead to additional, presumably sufficient R&D investment.
So let me ask a factual question here. So despite the fact
that foreign-headquartered auto companies have invested
hundreds of billions of dollars in the U.S., building plants,
hiring tens of thousands--hundreds of thousands of American
workers, is it true that auto report considers, quote,
``American-owned'' to include only GM, Ford, and Tesla?
Ms. Nikakhtar. Senator, I should put that in a little bit
more context.
Yes, American-owned is GM, Ford, and Tesla.
Senator Toomey. OK. I am going to run out of time here. So
you are confirming that it is only those three.
So for the purpose of considering the R&D investment of
American-owned companies, did you include in your analysis the
investment made by companies like Google and Apple and Uber
into the space, into especially automation of vehicles? Was
that included in your analysis?
Ms. Nikakhtar. Yes, Senator. A large part of our research
did include that.
Senator Toomey. Thank you.
It would be nice to be able to see that.
This very narrow definition of ``American-owned'', even
accepting that definition for this purpose, between Tesla, GM,
and Ford, my understanding is in 2017, they spent a combined
investment of $17 billion in R&D alone. NASA's budget, by way
of comparison, is about $16 billion. If the $17 billion is
inadequate, what is the correct number? What do the people at
the Defense Department tell you they need American-owned car
companies to invest in R&D in order to be able to defend
America adequately?
Ms. Nikakhtar. Senator, what I was trying to get at earlier
was the fact that the--to your point about the investments that
foreign-made auto--foreign-headquartered automakers have made
in the United States, without question, those contributions are
significant.
But because we allow for an open-investment climate, which
we absolutely encourage--and we have the SelectUSA Summit
forthcoming at the Department of Commerce--that is not the
point. The point is the excessive imports have basically--the
closed U.S. market now is being shared by American-owned and
foreign-owned producers, and that is fine. We have lost market
share here, but we have been unable to make up those lost sales
in foreign markets when less than 1 percent of autos sold in
Japan, for example, are from the United States, let alone
American-owned.
Senator Toomey. OK, OK. But we----
Ms. Nikakhtar. That is the focus, and that is the R&D,
erosion of the R&D that the report----
Senator Toomey. But the R&D is at a record level. It is $17
billion, and my question is, What did the Defense Department
folks tell you they need for American-owned car producers to
invest in R&D in order to be able to safeguard the United
States?
Ms. Nikakhtar. The Defense Department did not provide us a
number. We looked at our shrinking share of R&D vis-a-vis
Europe and Japan and our global competitors, and based on that,
the Secretary's assessment was that we needed to increase R&D.
And I should incidentally note that all of the surveys that
we issued to all automakers and armored vehicle producers had
inquired about their levels of R&D, and we took all of that
information into account.
Senator Toomey. Thank you, Mr. Chairman.
Chairman Crapo. Senator Tester.
Senator Tester. Thank you, Mr. Chairman, Ranking Member,
and I want to thank all the folks who are here today on the
panel. I appreciate it very much.
I am going to start with you, Ms. Bowman. The 2018 farm
bill decriminalized hemp and took it from the Controlled
Substances List. It is now as legal as soybeans or wheat to be
able to grow on the farms.
Producers in Montana are hitting the fields. Some has been
planted. It is kind of wet. Some has yet to be planted. The
problem is they still face barriers to access the financial
system, and not only the farms themselves who grow the hemp,
but also input suppliers are facing barriers if they supply
inputs for the growing of hemp as well as equipment dealers.
I understand that FinCEN will have to update their
guidelines, and I sent a letter to Director Blanco to tell him
to get moving on it.
As the primary regulators of our financial institutions,
can you give me an update on what you are telling banks and
credit unions today that will help them be able to do business
in the hemp sector?
Ms. Bowman. Senator, this is an important issue that when I
meet with bankers from across the country, many States have
engaged heavily in this crop for growth, and when we visit with
them and speak with them about the treatment by the prudential
regulators, the Federal Reserve, in particular, we refer them
to BSA/AML guidance to ensure that they are understanding the
risks of the customers that they face, and that those decisions
about who they are working with or who they choose to serve as
customers are appropriately vetted according to their business.
Senator Tester. So are you telling them they can bank them,
or are you telling them to go ahead, but you might end up
upside-down?
Ms. Bowman. No, we absolutely tell them that it is not our
job or our role to tell them who their customers should be, and
that they should understand what their business strategies and
risks are with respect to any customer that they have.
We do recognize that this is a challenging regulatory
environment based on the relationship with----
Senator Tester. When the Montana bankers were in a month-
and-a-half ago, they said that they could not bank them because
the regulators told them they could not bank them. Have you
told them they could bank?
Ms. Bowman. We have not told them that they cannot bank
them. We have told them that there are regulations in place.
Senator Tester. Let us be proactive about it because we
decriminalized it in the farm bill. And this is not pot; this
is hemp. Why not just tell them they can do it? Because, quite
frankly, I would just tell you prices are in the tank. These
tariffs are killing production of agriculture. I am not saying
hemp is going to bail anybody out, because it is not, but it
gives them another option.
But they are not going to do it. I would not do it. If you
cannot get the dough, you are not going to do it, and this
economic time for production in ag, they need the banks, so----
Ms. Bowman. I would agree with you, and we would not
discourage banks from banking these types of customers.
Senator Tester. OK. Well, maybe we are saying the same
thing, but I am not sure bankers are hearing the same thing,
OK?
Ms. Bowman. We will try to clarify that. Hemp is not an
illegal crop.
Senator Tester. Right. That is what I wanted to hear.
Thank you very, very much.
Mr. Feddo, good to have you here. Under the current
structure of CFIUS, you have been able to review--or the body
has been able to review several large agribusiness transactions
in recent years, including a biggie when Bayer acquired
Monsanto. And I would just tell you, unequivocally, this
company plays a huge role in production of agriculture across
this country. I believe that food security is equivalent to
national security. I do not think there is any debate about
that.
So do you believe CFIUS currently does enough to protect
our food systems here in the U.S.
Mr. Feddo. Senator Tester, I do. With respect to any
transaction that implicates national security, we bring in the
appropriate member agencies to assist us in that analysis.
Senator Tester. So do you agree that food security and
national security go hand-in-hand?
Mr. Feddo. It can. It depends on the facts and
circumstances. Yes.
Senator Tester. So if you have got people starving to
death, do you think that is good for national security? If you
have got people starving to death, do you think that is good
for national security?
Mr. Feddo. Sir, we take a look at who the investor is.
Senator Tester. Yeah, yeah, yeah. That is not the question.
If you do not have adequate food supply, it is my
contention that you have turned your national security on its
ear. That is why these mergers are so critically important.
And let me give you a statistic. Currently, with the
merger, Bayer, Monsanto, whatever you want to call them,
controls 25 percent of the seed supply, which if you control
the seed, you control the food, and 23 percent of the
chemicals.
The question, does CFIUS think about this stuff? And then I
will kick it back, but does CFIUS think about this stuff?
Because it is real, and if for a second that I thought we were
offshoring our food security to a foreign country, that is what
it appears to me.
Now, in retrospect, they may have offshored a lot of
liability, but the truth is when it happened, we did not know
that.
Mr. Feddo. We do think about that. It is part of our risk-
based analysis. We look at the threat from the actor, from the
investor. That is the intent and capacity to exploit a weakness
in our national security as well as the vulnerability of the
U.S. business. So we look at both of those factors to determine
the risk to national security.
Senator Tester. Well, I would just say I think 25 percent
is a lot. I mean, we are talking the whole shebang here, and so
I would just ask for you to specifically ask some tough
questions to the folks on that, OK?
Thank you very, very much.
Mr. Feddo. I will.
Chairman Crapo. Senator Tillis.
Senator Tillis. Thank you, Mr. Chairman.
Mr. Feddo, I am going to--first off, I share some of
Senator Tester's concerns. I am not going to ask you questions.
I am going to do a couple of questions for the record for
you specifically around U.S.-controlled private funds,
particularly when they are controlled by U.S. persons, because
I have a concern about some scoping and focus there, but we
will do that for the record.
Mr. Steff, in your opening statement, you said you had pet
ducks and a coin collection. I had a pet rooster named Pete and
a coin collection. So I am glad to see we share--in the rural
areas, so I am glad we share a common bound there.
Ms. Bowman, I am going to spend most of my time talking
with you, and some of this is--I do not normally speak from
notes, but this is something important for us to get on the
record because it is a priority that I hope I can get your
commitment, and it has to do with interaffiliate margins.
Number one, I think that we are out of step with the
European Union, Japan, and most other G-20 jurisdictions.
Number two, I think that we have a record across
Administrations on the issue. In 2013, we had the CFTC chair
provide an exemption. In 2015, we had the CFTC chair provide an
exemption. And now we have a situation where the Fed has not
provided an exemption from the initial margin from the 2016
rules, and I think as a result, U.S. banking entities collected
nearly $50 billion in initial margin from their own affiliates.
That is capital that could be deployed that right now is
sitting on the sidelines.
In 2017, the Treasury noted that this rule puts U.S. firms
at a disadvantage, both domestically and internationally,
recommending that your agencies provide an exemption consistent
with the margin requirements of the CFTC.
Do you agree that an initial exemption--an exemption from
initial margin is appropriate for interaffiliate transactions?
Ms. Bowman. Senator Tillis, we are very aware of this issue
and aware of your concern with respect to this issue.
We are actively reviewing the application of margin
requirements for interaffiliate transactions.
Senator Tillis. I would like to get--and we can follow up
and maybe give you an opportunity to respond to a question for
the record, but I would like to get a commitment to prioritize
the rule, to provide an exemption. And I think that it can be
done expeditiously. I do not think it has to necessarily be
done with Regulation W rewrite, which can take a couple of
years. I think it is something that can be done relatively
quickly.
For the record, we will go through mechanically how we
think we can get it done, and I would like to get your specific
response. We have been talking about this for a while. We have
met with a lot of the other Fed regulators. Everybody seems to
think it is a good idea. It has been a policy that has
transcended Administrations. So I do not think it is
politically volatile, and I would like to figure out a way to
expeditiously move and not have this be a 2- or 3-year matter.
I think putting $50 billion back into play is something that is
helpful and will let us continue our economic growth.
The last thing I want to talk with you about has to do with
the Fed payments proposal. It is another area where, again, I
am going to honor the time commitment. It is another area where
we will probably just submit context for the record, but I do
not believe that we need two systems. I think that we have
emerging opportunities that are in play with the private
sector. I think it is something that the Fed should think
seriously about not spending their time and resources on.
And I have gotten mixed responses. It feels like when you
go to a public hearing and you talk to some of the regulators,
they say, ``Thank you very much for your input,'' and move on,
but it gives me a sense that they are going to move in that
direction. And I think they should step back and really decide
if that is a good use of their resources.
I will give you a few minutes to respond, and then we will
put that as a question for the record for a more fulsome
response.
Ms. Bowman. Senator, this is an issue that has been active
within the Federal Reserve since 2014 when we had a working
group focused on this issue.
The Fed has had historically a strong role in payments
since its inception. This is something that we think is very
important, and we issued questions last fall so that we could
consider the comments back from the public regarding the
appropriate place and structure for this type of initiative.
We are continuing to review the work of the working group
and the comments that we have received through that
publication, and at this point, no decision has been made, but
I would be happy to answer your question for the record.
Senator Tillis. Thank you.
This is something our office will spend a significant
amount of time on.
Thank you all very much. I look forward to supporting all
of your confirmations.
Chairman Crapo. Thank you.
Senator Jones.
Senator Jones. Thank you, Mr. Chairman, and thank you to
all the witnesses that are here today. And thank you for your
service.
Mr. Feddo, I would like to talk to you a little bit about
CFIUS. I think Congress last year passed FIRRMA because of some
concerns, especially the rise of the way China has been doing
business in this country. I think Ms. Nikakhtar--and I
apologize for bumbling that--talked about that in her role.
I want to raise a transaction that occurred last year and
ask you about this, and when I do this, I am not making--
casting any aspersions, but something that troubles me because
it has an impact on Alabama and also I think national security
implications.
2018, a Chinese steel company formed a joint venture with
an American company that is known for its supply of highly
specialized stainless steel, which is used across defense and
aerospace sectors.
Now, stainless steel is a very technology-sensitive
industry. There are a lot of different recipes, and there was
no question that China was lacking in their ability to produce
high-quality stainless steel.
Given everything that we know about the Chinese practices,
it seems pretty clear that at least some portion of this
transaction was done simply to acquire manufacturing technology
and know how by the Chinese, but there is no evidence
whatsoever that CFIUS reviewed this transaction before it was
closed.
Again, I am not casting aspersions, but it seems--even
though this deal was slightly before FIRRMA passed, can you
confirm that this is actually the same kind of joint venture
deal that CFIUS had the authority to review for whatever
reason, resources or something did not? But this seems like the
exact kind of thing that they had the authority to review. Can
you confirm that for me?
Mr. Feddo. Senator, so as you alluded to, I cannot comment
in this venue on a particular transaction or whether a review
occurred or a pending review is under way.
I can talk about accomplished or completed reviews with you
in a closed setting with classified information as well.
But more to your point, though, it is important to protect
America's critical technology.
On the joint venture front, CFIUS can and does look at
joint ventures when there is a U.S. business involved. We have
the ability to look at investments in U.S. businesses engaged
in interstate commerce. This is something that was talked about
a great deal during the build-out of FIRRMA with respect to
outbound joint ventures and where CFIUS might have a gap.
Senator Jones. Can we do a look-back? If, for instance--and
I can talk to you in a different setting. If CFIUS did not
review this, can we do a look-back and review something that
occurred last year if it now comes to your attention?
Mr. Feddo. As a general matter, we do have the opportunity
and ability to look back at transactions that have already been
consummated and were not reviewed by the Committee. We call
those ``non-notifieds'', and we certainly do that often.
The one point I would make is that some joint ventures that
do not contribute a U.S. business are more appropriately
tackled through the export controls process, but I am happy to
continue----
Senator Jones. Well, I will get with you on that.
Ms. Nikakhtar, I want to follow up on Senator Toomey's
questions because I am exactly where he is on this automobile
tariff stuff. My State is sitting on edge right now, waiting to
determine whether or not the 60,000 jobs in Alabama are going
to go away because of these tariffs.
And did I understand your testimony earlier that with
regard to national security, the Commerce Department did not
contact or ask the Defense Department anything about the
security implications for foreign automobiles and foreign auto
parts?
Ms. Nikakhtar. No, Senator. Well, thank you for that
question.
The response only was in terms of the quantitative level of
R&D that we actually had a lot of proprietary information from
survey results. So we did not need to ask them about that, but
we have worked very closely, hand in glove, with the Department
of Defense all past summer for months and months, and we had a
really wonderful working relationship with them to understand
the interconnectedness between the commercial and the defense
needs for innovation.
Senator Jones. Did the Defense Department believe that
these foreign automobiles, the Volkswagens and the Mercedes-
Benzes and the Toyotas, posed a national security threat?
Ms. Nikakhtar. The Secretary of Defense submitted a letter
to the Secretary of Commerce noting the importance of the
commercial auto sector and the innovations they provide for the
defense sector.
Senator Jones. All right. Well, it sounded to me, with all
due respect--and I agree with Senator Toomey that without
having seen that in the analysis that went through that, it
seems to me--because a lot of your answer was purely market
driven. I mean, a lot of the answer that you gave Senator
Toomey was about the markets, and I do not know how many
foreign--I do not know how many American automobiles it would
take in Japan to make it not a national security threat.
But, with all due respect, it sounded to me in your answer
that somebody said, ``We need to use this as leverage to get
our market share up, and so let us find a way to make this
national security.'' I hope I am wrong about that, and I hope I
get to look at that report. I would love to be able to look at
that report before your nomination comes to the vote here or
certainly before the Senate, and I would encourage you to talk
to the Secretary of Commerce and the President of United States
to release that report to us, even in a closed setting that we
can look at it before your nomination.
Ms. Nikakhtar. And, Senator, I just wanted to assure you
that trade leverage, none of that constituted any of our
thinking when we were drafting the report. We used publicly
available data, and all of that was corroborated by
confidential survey information we received.
Senator Jones. All right. Well, thank you.
Thanks, Mr. Chairman.
Chairman Crapo. Senator McSally.
Senator McSally. Thank you, Mr. Chairman. Thanks for
holding this hearing today to consider these nominations for
many critical positions at a number of agencies.
I do want to specifically focus on Governor Bowman's
renomination to continue to be a member of the Federal Reserve
Board. You are off to a good start representing community banks
and being a voice to them, and I really appreciate that.
Community banks are really vital for us in Arizona. By
extending credit and other services to especially small
businesses, they really reach a lot of rural and underserved
populations that are just critical for our economy and
continuing to support people that I represent.
And we really feel the presence along the border of the
importance of community banks, and when they close, the impact
is severe. And the financial services that they provide are
just very critical for us in Arizona. So I am pleased that you
are providing that voice at the Federal Reserve Board with your
perspective, and I hope you will continue to do so.
Can you walk me through some problems you see that
community banks are currently facing, even with some of the
reforms that we have made and adjustments, and what the Federal
Reserve is doing to make sure that regulations are properly
tailored?
Ms. Bowman. Senator McSally, thank you for that. Community
banks are clearly important to our community, to our
businesses, our families, and our communities.
Let me first say that one of the first priorities for the
Federal Reserve is to implement the provisions of S. 2155. So
through my chairmanship of the Smaller Regional Bank and
Community Bank Subcommittee at the Federal Reserve, we are
working very diligently to finalize the CBLR, the Community
Banking Leverage Ratio proposal, which simplifies capital
requirements for community banks.
We have revisited that proposal, reengaged our State bank
supervisors for their input and participation in that process
as well since I came on board.
That proposal was issued prior to my joining the Board of
Governors, so it is something that we are taking another close
look at.
We are also looking closely at the call report reduction,
the burden for call report reduction and reduction of those
burdens. That is a priority for our subcommittee as well.
So there are many things that we are looking at. One thing
that is probably important to your community banks is the BSA
and AML procedure. So that is something that is on our agenda
as well to look at examination procedures and see where we can
find some efficiencies.
Senator McSally. Great. Thank you.
When Chairman Powell testified before our Committee, we
spent a lot of time talking about the rural-urban divide and
what is going on economically in the country. Again, I
represent a lot of rural communities. So from your perspective,
what does access to banking--or are there other factors that
you think are really causation for that divide and the
challenges for rural communities?
Ms. Bowman. The differences between rural communities and
urban communities is often vast. Ninety-seven percent of our
country is rural. I am from a rural community as well. I
recognize many of these economic challenges that we face in
those rural communities.
The importance of community banks in those communities is
leadership that is provided to the community. It is access to
credit for consumers and for small businesses. It is an
important cornerstone of many of those communities.
One of the concerns that we discussed earlier with Ranking
Member Brown was the consolidation of those rural institutions
and the continued commitment of the remaining entity in the
community that they are serving.
Senator McSally. Great. Thank you.
We also have some unique cross-border challenges right at
the border that are impacting our communities there, and we
have talked a lot about this on the Committee already. But we
need to continue to work across multiple agencies to make sure
that our legitimate cross-border commerce still has access to
banking.
I do not know if you have any comments on specifically the
border elements of that, but it is not just rural but also the
cross-border.
Ms. Bowman. Yes. We recognize that those are challenges for
the banks that are on the border.
I was recently in El Paso, Texas, and in Deming, New
Mexico, where we were able to observe some of those and visit
with bankers on the border. I would be happy to visit with you
further about that and continue to work with you on those
issues.
Senator McSally. Great. Thank you.
Yield back.
Ms. Bowman. Thank you.
Chairman Crapo. Senator Cortez Masto.
Senator Cortez Masto. Thank you, Mr. Chair.
Ms. Bowman, let me follow up on some of the conversation.
You just said you were in Texas.
I am curious. Friday, the regulators closed Enloe State
Bank in Texas. I think it was a $36 million bank. What went
wrong?
Ms. Bowman. My understanding--that was an FDIC-regulated
bank--was that there was fraud on behalf of one of the
management, representatives of management.
Senator Cortez Masto. OK. And my understanding is that the
cost to the FDIC because of this closure is about $27 million.
I guess my question to you, if this community bank had more
assets, would the loss have been such as great?
Ms. Bowman. I think the challenges when you are dealing
with the closure of an institution, as I mentioned when I was
testifying last May before this Committee as well, I closed a
similar situation, institution in Kansas during my time as the
State bank commissioner.
When you have fraud that is resident in the institution,
oftentimes it only comes to light during an examination. My
understanding is that the call report information that was
filed indicated that the bank was in good condition, and it was
revealed when the FDIC came to do an examination that that was
not the case.
Senator Cortez Masto. But the intent is--and I guess this
is my concern. Community banks, many have record profits, but
the goal here is to ensure that if there is a fraud of if there
is something happening, they have access, they have efficient
capital or assets for just this very reason, so that there is
not a big hit, and they have the ability to cover those costs.
So I guess my concern with this process that is happening
right now, in all due respect to the Chairman, there is no way
I am going to get to ask every single one of you a question,
but here is what I do know. Last time you were before us, we
had a short, limited time to ask questions, and when I did not
get the answers, I actually submitted questions for the record.
But your questions that you responded to me were similar, word
for word, to another individual that was on the panel at the
same time.
So I guess my concern is I do not have enough time to ask
you questions the way this has been presented here, and this is
ridiculous to me. These are important positions for every
single one of you, and to not even be able to have 5 minutes
with all of you, let alone a second, is outrageous to me.
And let me jump over here. For the last 2 years, the
Export-Import Bank has not been filled. We are finally filling
these positions, and I will tell you the Export-Import Bank is
important to Nevada. We have 21 firms that export electrical
equipment, machinery, minerals, and other products to other
Nations like Mexico, Turkey, and India, and we are now just
putting in place individuals that can help finalize and start
moving this forward.
I think, Mr. Chairman, with all due respect, this is no way
to conduct our business long term in the Senate. It is time for
us to start working together and start putting people in
positions but making sure we get the right people in these
positions and not crowd everybody in because there is no way I
am going to be able to ask everybody that is before us a
question that is important for my State.
So I appreciate you all being here, but at the same time, I
am frustrated with how this process is moving forward. And I
just do not think it does a service to anybody here in
Congress, let alone the people that represent--are in my State
that I am supposed to represent or any of the States that we
are supposed to be represent. This is not how we should be
doing business.
Chairman Crapo. Senator Menendez.
Senator Menendez. Let me echo the Senator from Nevada's
concerns. I expressed this to the Ranking Member as well.
Six people, major positions, in one hearing is almost an
impossibility to get what you need, but I am going to try to
get some of it. But I doubt I am going to get all of it.
So let me start off with Ms. Nikakhtar. I appreciated your
visit with me.
Are you aware that 3D gun blueprints are already available
online?
Ms. Nikakhtar. Yes, Senator, and I understand that it is
currently the subject of litigation.
Senator Menendez. So my concern is, my understanding of the
department which you have been nominated to takes the position
that once something has been published, it can no longer seek
to control it. So what will you do to allay the concerns of
Americans who are worried about the Administration's actions
that could make 3D gun blueprints more widely available?
And if you cannot control the release of those designs
under existing regulations, will you commit to changing those
regulations or simply change the proposed transfer to leave
such technical information under the purview of the State
Department?
Ms. Nikakhtar. Senator, I very much enjoyed our
conversation yesterday. Thank you for taking the time.
What you are referring to, it is the Cats I, II, III
transfer from the Munitions List to the Commerce Control List.
Once that happens--and I want to go on record saying it here
and as I communicated to you--I am committed to working with
every single Member of Congress to the extent that they would
like to engage with me and my bureau to make sure that we are
developing and implementing sound policies with respect to our
export controls, rules, and procedures
Senator Menendez. Well, I appreciate that, but that does
not answer my question.
So when it comes to 3D guns specifically, because of my
understanding of the regulations as they exist, since they are
supposedly published in some entity, they no longer can be
controlled. But we do not need the widespread distribution of
this.
So I hope that you will do something, and I would like to
see an answer in writing from you as to what you will do.
As I will repeat to you what I said in private, it is no
value, your offer to me, which I appreciate, to be engaged on
transactions if I do not know the transaction exists. If I have
no notification that you are in the midst of considering an
arms sale to some entity, if I do not know it, unless I find
out through some other source, I cannot comment on it. So there
has to be some way, if this goes through, in which you, if
confirmed, ultimately engage us in letting us know, at least a
simple notification, so we can comment and take value of your
offer. Otherwise, your offer is of no value. So I hope you
understand it in that respect.
Mr. Feddo, one of the provisions that I offered in FIRRMA
was to require CFIUS to develop regulations to ensure that
State-owned entities are declaring their transactions with
CFIUS and not using complex financial structures to conceal
their ownership or evade CFIUS review.
We saw this situation at work in December when the Wall
Street Journal reported that a firm owned by China's Ministry
of Finance was able to use offshore subsidiaries to purchase a
U.S. satellite firm and was thereby allegedly able to access
information that may have been restricted under U.S. export
controls.
Do you agree that CFIUS needs to do more to evaluate the
extent of foreign Government control or influence over foreign
firms seeking to invest in the United States? And, second, will
you commit to implementing this provision, which is law, of
FIRRMA so that foreign Governments seeking to invest in
critical American industries are required to file declarations
with CFIUS?
Mr. Feddo. Sir, I absolutely commit to implementing that
provision. I think it is a very important piece of FIRRMA with
respect to State-owned entities.
As you are well aware, there is a real challenge in
discerning ultimate beneficial owners, and so we are taking a
great deal of energy and attention to building out a team to
look at non-notified transactions and identify ultimate
beneficial owners when appropriate.
I cannot comment about the specific transaction that you
raise, but I am absolutely committed to implementing this
provision.
Senator Menendez. Well, I appreciate it and look forward to
working with you on that.
Mr. Shmotolokha----
Mr. Shmotolokha. ``Shmotolokha.''
Senator Menendez. ``Shmotolokha.'' Thank you very much.
I have always been a strong supporter of the Export-Import
Bank. Given in your experience in the private sector, how
important is it that we reauthorize a bank and do not let it--
to shut it down as we did in 2015?
Mr. Shmotolokha. It is critical, sir.
Senator Menendez. And do you believe it is appropriate for
Congress to increase the bank's exposure cap, the amount of
loans it can finance in light of the increased resources some
economic competitors like China are giving to their export
credit agencies?
Mr. Shmotolokha. Yes, sir.
Senator Menendez. If everybody gave me answers like that, I
could get through the whole process.
[Laughter.]
Senator Menendez. I have one last question, if I may, Mr.
Chairman, I would like to ask Ms. Lee.
I appreciate the conversation we had yesterday in my
office.
Do you believe that tough penalties are a successful
deterrent for future lawbreakers? I am concerned that we often
seem to have at the SEC a reticence to pursue the type of
enforcement and penalties that are a deterrent and ultimately
pursue what we want, which is conformance with the rules.
Should such an effective enforcement strategy incorporate tough
penalties as part of its strategy to prevent harm, deter bad
actors, and punish wrongdoers?
Ms. Lee. Yes. Thank you, Senator.
I actually think that compliance is the overall goal of
enforcement, and the best way to get at compliance is
deterrence. I think that includes tough penalties where they
are warranted on a case-by-case basis, but I do support strong
penalties in the right case because I do think that has the
best deterrent value.
Senator Menendez. I have other questions, Mr. Chairman. My
time has expired.
Chairman Crapo. Senator Van Hollen.
Senator Van Hollen. Thank you, Mr. Chairman.
Thank all of you for your testimony.
Governor Bowman, you and I have spoken about this. I think
the fact that the United States does not have a real-time
payment system is an embarrassment, and it is costing millions
of Americans billions of dollars, especially Americans who do
not have big balances in their bank accounts.
Now, I heard some questions from Senator Tillis along these
lines. I just want to point out to you an article by Thomas
Hoenig, a former vice chair of the FDIC and former president of
the Federal Reserve Bank of Kansas City, who wrote a recent
editorial regarding this issue stating, and I quote, ``The
needs of consumers and businesses and the depository
institutions nationwide that provide them services will be best
served by the Federal Reserve continuing to play its role as a
payments processor.'' He goes on to say, ``The alternative is
to award the clearinghouse a de facto monopoly resulting in a
less competitive and less efficient market for immediate
payments.'' Are you aware of that editorial?
Ms. Bowman. Senator Van Hollen, I am familiar with the
editorial, and I have read it. It is consistent with some of
the comments that we have received during our request for
comment on the questions we issued last fall.
Senator Van Hollen. And do you share some of those
concerns?
Ms. Bowman. There are many factors that are in
consideration as we are deliberating this issue within the
Federal Reserve System. It is a live discussion, and we are
actively in the process of considering all of the comments that
we have received.
Senator Van Hollen. All right. So part of your job, of
course, is to look out for the community banks----
Ms. Bowman. Yes, sir.
Senator Van Hollen. ----and the concerns expressed about
giving this monopoly to the clearinghouse come from community
banks in large measure. You are aware of that, right?
Ms. Bowman. Yes. I have heard from community banks about
this issue.
Senator Van Hollen. So, Ms. Nikakhtar, let me just follow
up on the use of Section 232 because, in my view, it has been
sort of a gross abuse of claims of national security when we
use that to place tariffs on our allies like Canada and others.
So count me in with those other Members who have said we
really want to get this report with respect to Section 232 and
automobiles.
Where I do agree with some of the actions the
Administration has taken is where I think we face a real
strategic threat, which is China's theft of a lot of our IP and
technology. So I supported the efforts that you at the Commerce
Department took last year with respect to ZTE after it was
found in violation of our sanctions. I was incredibly
disappointed that the President then tweeted out that he is
going to reverse the blocking order because he wanted to help
his, quote, ``friend,'' President Xi.
So now we have your measure putting Huawei on the entities
list because of 5G, and as I read the explanation for that--and
I think this is a move in the right direction, lots of
complicated issues, but a move in the right direction--it was
based not only on the finding that they violated the Iran
sanctions but also other findings that they pose a national
security threat. Is that right?
Ms. Nikakhtar. Senator, yes, that is what we have
indicated.
Senator Van Hollen. OK. So I am with you in addressing this
issue.
What I am concerned about is you are trading off something
that you agree is a national security issue as part of
concessions over a tariff fight. Can you tell this Committee
that you will not tradeoff legitimate national security
concerns in order to get some better deal in a tariff fight
with China?
Ms. Nikakhtar. Senator, you raise very important points. If
it is up to me, I want to make sure that we do everything we
can to protect national security. Trade is not in my
jurisdiction, national security.
With respect to ZTE, I completely get your points. Under
the compliance agreement, ZTE now is the most monitored company
in the world.
My commitment is to make sure that we never, ever
compromise national security threats, and to the extent that
you ever have any concerns, I am happy to engage with you or
your staff directly to make sure those concerns are addressed.
Senator Van Hollen. Right.
And so the actions that you have taken with respect to the
Huawei and 5G are a result of your conclusion that it poses a
national security threat. Is that correct?
Ms. Nikakhtar. A national security threat and undermining
foreign policy interests of the United States.
Senator Van Hollen. So I am going to be watching very
carefully to see if we somehow are trading off that legitimate
national security issue to try to get a better deal on some
tariff issues. Not only do I think it is wrong in compromising
our national security, it totally undermines our credibility
when foreign countries think that we are using national
security concerns as leverage in some other area like trade
because that is a very, very dangerous path to go down. Would
you agree with that?
Ms. Nikakhtar. You have my commitment, and I want to go on
the record that my singular focus is national security. That is
the purview of my job, and that is what I am committed to.
Senator Van Hollen. Thank you.
Chairman Crapo. Thank you, Senator Van Hollen.
That concludes our questioning for today's hearing. For
Senators who wish to submit questions for the record, those
questions are due to the Committee by the end of the day on
Friday, June 7th.
And we ask that our nominees respond to those questions no
later than the close of business on Friday, June 14th.
Senator Menendez. Mr. Chairman, may I make one remark
before we close?
Chairman Crapo. Yes. Yes, you may.
Senator Menendez. I have other questions. I am going to
submit them for the record. I would like to get substantive
answers. If I do not get substantive answers, then I will do
everything possible on the floor to impede the nominations
moving forward. Since we do not have time to go through a
second round here or have enough time, I would like to get
substantive answers to those questions.
Chairman Crapo. That is a fair request.
We would like to thank our nominees for being here today.
Thank you again for your willingness to serve. We have got a
vote that is already 15 minutes under way, so we are going to
wrap this up and leave quickly.
I just want to again extend to each of you our thanks for
your willingness to help keep our Country strong and to serve
in your respective capacities.
With that, this hearing is adjourned.
[Whereupon, at 11:21 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 CHAIRMAN MIKE CRAPO
This morning we will hear testimony on six nominees to serve at
five different agencies. Welcome, all of you.
I see friends and family behind you, and I welcome them here today
as well.
If confirmed, I look forward to working with each of these nominees
on many important issues within each of their respective policy areas,
including: continuing efforts from last Congress to right-size
regulations, making it easier for consumers to get mortgages and obtain
credit; encouraging capital formation, reducing burdens for smaller
businesses and improving corporate governance; exploring the proper
role of the Export-Import Bank in providing finance in response to
foreign Governments, like China, that provide aggressive subsidies and
place U.S. exporters at a disadvantage; and preserving the
technological edge and national security of the United States while
also preserving an open U.S. investment environment and ability of our
industry to export its products through the implementation of FIRRMA
and export control rule.
First we have, Mr. Thomas Peter Feddo, to be an Assistant Secretary
of the Treasury for Investment Security.
This is an important national security job that protects our most
critical technology companies from foreign takeovers and influence.
He currently leads the U.S. Department of the Treasury's Office of
Investment Security in executing Treasury's statutory role as the Chair
of CFIUS.
He also spent 7 years at the Treasury Department's Office of
Foreign Assets Control implementing and enforcing U.S. economic
sanctions.
As a graduate of the U.S. Naval Academy, Mr. Feddo served as a
lieutenant in the Navy's nuclear submarine force and as an officer at
the Navy Antiterrorist Alert Center.
Next, The Honorable Nazak Nikakhtar, to be Under Secretary of
Commerce for Industry and Security.
She was previously confirmed by voice vote to be an Assistant
Secretary of Commerce for Industry and Analysis
She is currently serving as the Acting Under Secretary, evaluating
and promulgating effective regulation of emerging U.S. technologies.
She comes to the Bureau of Industry and Security from her role as
Assistant Secretary for Industry and Analysis for the International
Trade Administration, or ITA.
While at ITA, she worked on policies to strengthen the
competitiveness of U.S. companies globally.
Previously, she was a trade attorney at several high profile
Washington law firms and an industry analyst at the Bureau of Industry
and Security.
Next, we have Mr. Ian Paul Steff, to be Assistant Secretary of
Commerce and Director General of the United States and Foreign
Commercial Service.
Mr. Steff's job is to open markets and sell whatever Mr. Feddo and
Ms. Nikahktar do not control, which is about 98 percent of what America
makes.
Mr. Steff currently serves as Deputy Assistant Secretary for
Manufacturing at the U.S. Department of Commerce's International Trade
Administration.
In that role, he oversees approximately 1,400 trade and investment
professionals based in more than 100 U.S. cities and 70 markets around
the world.
Prior to joining the U.S. Department of Commerce, he worked as vice
president of global policy and technology partnerships for the
Semiconductor Industry Association for nearly a decade and he started
his professional career as staff on the U.S. House of Representatives
Committee on Ways and Means.
Next, we have the Honorable Michelle Bowman, to be a Member of the
Board of Governors of the Federal Reserve.
Governor Bowman currently serves as a Governor on the Federal
Reserve Board and is the first person to fill the Federal Reserve's
community banking seat after her confirmation last year by a bipartisan
vote of 64 to 34.
While Governor Bowman's current 14-year term expires January 31,
2020, President Trump has renominated her to the same position for a
full 14-year term.
Prior to serving as a Governor, she was the State bank commissioner
of Kansas from January 2017 to November 2018, served as vice president
of a Kansas-based community bank, Farmers & Drovers Bank, between 2010
and 2017, and served in a number of Government roles.
Next, we have Mr. Shmotolokha, who has been nominated to serve as
First Vice President and Vice Chairman of the Export-Import Bank of the
United States.
As President Trump and other senior officials in his Administration
have noted, a fully functioning Export-Import Bank has the ability to
provide financing and level the playing field in response to
Governments, like China, which can provide almost limitless subsidies
from its Treasury, which places U.S. exporters at a disadvantage.
His career in the private sector has focused on international
business and trade, particularly in the fields of telecommunications,
technology and renewable energy.
He currently leads the international division for Alpha
Technologies.
Finally, we have Ms. Allison Lee who is nominated to serve as a
Member of the Securities and Exchange Commission.
As an SEC Commissioner, Ms. Lee would be responsible for helping
the SEC fulfill its mission of protecting investors; maintaining fair,
orderly and efficient markets; and facilitating capital formation.
Ms. Lee is currently a consultant with Congress Park Consulting
where she teaches courses on U.S. corporate and securities law in Spain
and Italy, and works as a contributing author on treatises in corporate
and securities law.
She previously served as Senior Counsel in the Division of
Enforcement's Complex Financial Instruments Unit, and as counsel to
former Commissioner Kara Stein.
Thank you all for your willingness to serve and for appearing
before our Committee today.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
Thank you, Chairman Crapo, for holding today's hearing on the
nominations of Mr. Thomas Feddo, Ms. Nazak Nikakhtar, Mr. Ian Steff,
Ms. Michelle Bowman, Mr. Paul Shmotolokha, and Ms. Allison Lee. I look
forward to hearing their views and would like to welcome their families
to the Committee.
Mr. Feddo is the first nominee to be Assistant Secretary of the
Treasury for Investment Security, a position created under the Foreign
Investment Risk Review Modernization Act of 2018--the bipartisan
legislation from this Committee that made major reforms to the
Committee on Foreign Investment in the United States.
We created this new position because of the critical role CFIUS
plays protecting U.S. national security from increasing threats from
certain foreign investments. Yesterday we heard about how China has
adopted new tactics to acquire American technology in sectors that are
vital to our national security. It's why we passed this bill, and it's
why this job will be so important.
Mr. Feddo is currently serving as deputy assistant secretary for
investment security, he played a key role in formulating the reforms
last year, and is now working to carry out the technical and structural
changes required under FIRRMA, including finishing the rulemakings to
expand CFIUS's scope, and filling new staff positions necessary for
enhanced review of potential investments that could pose risks to
national security.
If confirmed, Mr. Feddo, you will need to continue this critical
work. I know you've made progress, and I look forward to hearing from
you about next steps.
Ms. Nikakhtar has been nominated to serve as Under Secretary of
Commerce for Industry and Security, responsible for a set of key U.S.
national security, foreign policy, and economic objectives through
application of effective U.S. and multilateral export controls and
treaty compliance. Although Ms. Nikakhtar has extensive experience in
international trade, including at the International Trade
Administration, she has more limited experience in national security
and export control matters.
If confirmed, Ms. Nikakhtar will be responsible for administering
critical U.S. export control laws and regulations that cover emerging,
foundational, and other forms of sensitive technology--an area of
increasing importance.
Ms. Nikakhtar, I hope that you will work with your colleagues to
navigate the complex national security and political concerns that
surround the export of sophisticated U.S. technology.
Mr. Steff is nominated to be Assistant Secretary of Commerce for
Global Markets and Director General of the United States and Foreign
Commercial Service. In that role, he will be responsible for the
International Trade Administration's work to advance U.S. business
overseas and to promote U.S. exports and fair trade rules.
Mr. Steff's current experience as Deputy Assistant Secretary for
Manufacturing at Commerce, and his prior experience working on economic
development, in particular focusing on innovation and technology,
provide him with an understanding of how to strengthen the
competitiveness of U.S. industry, which ultimately should support
American manufacturing and jobs. That's good for the economy and for
workers.
Ms. Bowman was renominated to be a Member of the Board of Governors
of the Federal Reserve System for a full 14-year term, expiring in
2034.
As a former State bank commissioner, Ms. Bowman serves in the role
designated for a Fed Governor with community bank experience.
At her first nomination hearing, I was concerned that Ms. Bowman
would be a rubber stamp for Wall Street. I was right to be concerned.
Ms. Bowman, I know you possess a deep understanding of community
banks and are being nominated for a full 14-year term based, in part,
on that understanding.
But, time and again, you have taken the side of the big banks as
the Fed has done favors for Wall Street by relaxing capital standards
and weakening stress tests and other postcrisis safeguards meant to
protect taxpayers and the financial system.
If you are confirmed to a full term, I expect that you will do all
you can to ensure that the regulatory system works for community banks
and protects their customers.
Mr. Shmotolokha is the nominee to be First Vice President of the
Export-Import Bank.
For nearly 4 years, I have pushed for the EXIM to be fully
reopened, and with the confirmation of three board members last month,
the Bank is finally running at full capacity. To stay competitive as
they pursue business abroad American manufacturers need a reliable
Export-Import Bank that is authorized for the long term.
Mr. Shmotolokha is the final nominee to the Bank's board to appear
before our Committee. The full Senate needs to consider his nomination
and the nomination of Claudia Slacik, who our Committee reported with
overwhelming bipartisan support, so they can provide their expertise as
the Bank resumes full operations.
If confirmed, he would bring significant private sector experience
in the export of U.S. products to the global telecommunications
industry. When the EXIM Bank was fully functioning, it supported more
than 164,000 jobs a year. I look forward to hearing how we can expand
on the number of U.S. jobs supported by the Bank.
Ms. Lee has been nominated to be a Commissioner of the Securities
and Exchange Commission. If confirmed, Ms. Lee would return to the SEC
at a critical time. The agency is considering several issues that will
define the rights and protections for both individual and institutional
investors.
I expect Ms. Lee to draw on her SEC enforcement experience when
considering rules that could affect investors' rights and remedies
against wrongdoers and when weighing penalties in misconduct cases.
The SEC needs to promote integrity and fairness in the capital
markets so that investors can trust the markets and have faith in the
regulator.
I look forward hearing from all of you.
Thank you, Chairman Crapo.
______
PREPARED STATEMENT OF THOMAS PETER FEDDO
To be Assistant Secretary, Treasury for Investment Security
June 5, 2019
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee, I am honored to appear before you today. I am humbled to
be nominated by the President to serve as Assistant Secretary of the
Treasury for Investment Security, a new position created by the Foreign
Investment Risk Review Modernization Act of 2018 (FIRRMA).
Last August, FIRRMA was enacted with overwhelming, bipartisan
support from this Committee, both houses of Congress, and the
Administration. In creating this position--specifically through an
amendment by Chairman Crapo--the statute recognizes the need for
dedicated, accountable leadership of the critical national security
function executed by the Committee on Foreign Investment in the United
States (CFIUS). I am confident that my professional background affords
me the experience and knowledge to lead CFIUS, and to effectively and
faithfully implement FIRRMA over the coming months.
I grew up with two younger sisters, and attended public school near
Buffalo, New York. We had a full-time mom, and a dad who served in the
Marine Corps and then worked for the local electric company for nearly
25 years. My dad worked long hours to make sure that our family had all
that we needed, and a little more than he had as a child. He suddenly
passed away just months after seeing me graduate college, but I know
that he would be pleased were he here today. My mom dedicated herself
to building a warm and loving home for us. I am deeply grateful to my
parents for laying the foundation that has brought me to this point--by
example, they instilled the virtues in my sisters and me, and we came
to know the value of hard work, loyalty, and family.
I would not be here today without my extraordinary wife Muffet. She
has been an unwavering source of support and encouragement, while
selflessly devoting her many talents to raising our three wonderful
children.
Early in high school, I decided that I would serve our Nation in
the military, and sought to attend the Naval Academy. Since taking the
oath of office at Annapolis 33 years ago, it has been my privilege to
spend literally half of my life in public service--including first as a
lieutenant on a nuclear submarine, and then with the Naval Criminal
Investigative Service. After law school, I served as a counsel for the
House Energy and Commerce Committee, before stints as an attorney at
the Pentagon, and a civil servant at the Treasury Department. I have
served in all three branches of the Federal Government--with nearly 20
years in a national security related capacity. In the private sector, I
practiced law as a patent and trademark litigator, and most recently as
a partner in a large firm's international trade group.
By virtue of these professional experiences, I understand the
importance of protecting American innovators' intellectual property--
our Nation's vital economic engine. And as a Navy submariner, educated
and trained as an engineer, I experienced firsthand how America's
superior technology ensures our warfighting edge.
As an attorney representing global businesses large and small, I
have gained a true appreciation for the importance of foreign
investment to our strong and vibrant economy, as well as the benefits
of regulatory certainty to business transactions.
If I am confirmed, you have my unqualified commitment that I will
work closely with this Committee, and Congress as a whole, to continue
what I have been doing as Deputy Assistant Secretary over the past
year: faithfully and transparently implementing FIRRMA; ensuring our
national security is protected while foreign investment is fostered;
and serving with humility, and a deep and abiding respect for our
dedicated and talented career professionals at Treasury and across the
Government who diligently execute the CFIUS mission.
Thank you again for the privilege and opportunity to appear before
you today. I am happy to answer any questions that you may have.
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PREPARED STATEMENT OF NAZAK NIKAKHTAR
To be Under Secretary, Commerce for Industry and Security
June 5, 2019
Mr. Chairman, Ranking Member Brown, and Members of the Committee,
thank you for the opportunity to appear before you today. In 2018, I
was honored to be confirmed as the Assistant Secretary for Industry and
Analysis at the Department of Commerce, and today I am extremely
honored to be nominated for the position of Under Secretary for
Industry and Security.
With me today are my husband Gene Degnan and my mother Manijeh
Nikakhtar. My father Bijan Nikakhtar passed away several months ago,
but he would have been beaming with pride if he were here today, as an
amateur political historian and one of the greatest American patriots I
have ever known. I am proud to say that my parents and my husband have
served our Government as Federal employees for many years. My husband
served for over a decade at the Department of Commerce, and my parents
served for over 40 years collectively as physicians at the VA hospital
taking care of our Nation's veterans. My brother, Nersi Nikakhtar, also
a physician at the VA hospital, had work obligations today. I am proud
to be part of a family that honors Government service.
I immigrated to America with my family 39 years ago. I can remember
from a very young age how proud I was to be an American and how I
marveled at American innovation and ingenuity. I knew at an early age
that I wanted to be part of the narrative of American growth.
This is what prompted me to study law and economics after college.
I obtained my Juris Doctor and Master's in Economics from Syracuse
University and, in 2002, I began my career at the Department of
Commerce, first at the Bureau of Industry and Security and subsequently
at the International Trade Administration. At the Department, I worked
with, and learned from, the incredibly smart and talented civil
servants. Many of those dedicated professionals are still there today,
and they are the pillars that shape our Government from Administration
to Administration. I have great respect for them and am privileged to
work with them again.
I joined the private sector several years later as a trade and
export control lawyer, representing industries in the aerospace and
steel sectors, in aquaculture, high-tech goods, chemicals, and
minerals. In private practice, worked to level the playing field for
U.S. industries and, on exports, I conducted internal investigations to
enforce compliance agreements that clients with the U.S. Government to
address the Government's national security concerns.
My training and experience as both a lawyer and an economist have
given me the expertise to determine how to protect U.S. national
security and simultaneously advance the economic interests of U.S.
industries.
Today, national security no longer begins and ends with military
strength. It is a fact in today's world that our national security is
dependent on our economic strength and technological leadership.
Yet, advancements in technology and the interconnectedness of our
economies make our national security challenges more complex than ever
before. Economic integration has emboldened some foreign Nations to
behave in ways that undermine our national security, expecting that
threats of economic retaliation will weaken our resolve to act. They
have increased illicit procurement of items to build weapons of mass
destruction and transshipped those items to terrorist organizations and
regimes. We are witnessing illegal acquisitions of sensitive
technologies to weaponize dual-use items and oppress millions of
innocent citizens. And we've seen for years how rampant intellectual
property theft displaces U.S. industries, stifles innovation, and
enables the advancement of strategic competitors.
The key to our success is maintaining U.S. technological
superiority and economic interests through multilateral coordination
that is more forward leaning, better use of intelligence data and
analytics, robust enforcement of our laws, and a tightly coordinated
whole-of-Government approach, that includes more proactive engagement
with Congress.
Time is of the essence, and during my 3\1/2\ months at the Bureau
of Industry and Security, I have been leading the Department's efforts
to update our regulations to incorporate ECRA reforms and address
global threats. We are engaging with industry to identify emerging
technologies that can undermine our national security. In addition, I
have begun an initiative to work with like-minded allies on better
export control coordination and wider end-use checks. It is imperative
that we better coordinate multilateral policies on sensitive technology
so U.S. companies can compete globally while Governments prevent those
technologies from being misused by adversaries.
At the Bureau, I challenge my colleagues every day to rethink how
we can modernize our policies to stay ahead of new threats. And I have
made it a priority to seek industry input, as today's complex
challenges cannot be solved without close engagement with U.S.
businesses; our policies must maintain and advance America's
technological and economic leadership.
My parents immigrated to America knowing that this is the greatest
country in the world. As an American, it is my responsibility and honor
to preserve this Nation's security for future generations. I thank you
again for the opportunity to be here in front of this Committee. I look
forward to your questions.
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PREPARED STATEMENT OF IAN PAUL STEFF
To be Assistant Secretary of Commerce and Director General, United
States and Foreign Commercial Service
June 5, 2019
Good morning, Chairman Crapo and Ranking Member Brown, Members of
the Committee. It is the greatest of honors to sit before you today. If
confirmed, it would be my privilege to serve as the Assistant Secretary
of Commerce for Global Markets and Director General of the United
States and Foreign Commercial Service. I thank President Trump for this
nomination. So too, I am grateful for the continued support of Vice
President Pence, both in my former capacities in my home State of
Indiana, and now in Washington, DC.
Speaking of Hoosiers, I am proud to be joined by my wife, Brittany.
I remain forever grateful for your incredible encouragement,
compassion, and flexibility as we serve the Nation we love and raise
our two little stars, Daniel and Owen. I am also joined by my parents,
Wayne and Lisa. Our childhood home was filled with love, faith,
respect, hard work, and an enduring sense of service to one's country.
Thank you, Mom, Dad, Gram, Aunt Lori, Aaron, and to all those family
members, friends, and teachers who helped me along the way.
My story started under a few feet of snow, thirty miles south of
Buffalo, New York, on my grandparents' dairy farm. My two younger
brothers, Eric and Levi often reflect on the comradery we developed
shoveling that never-ending lake-effect byproduct, raising our pet
ducks, and commiserating over our beloved Buffalo Bills. Childhood
summers encompassed exploring the pastures and woods, working on our
neighbor's berry and plant farm, and waiting for the rumble of Dad's
cycle as he returned home from his job in highway maintenance. This is
a glimpse of our small slice of country and my upbringing in rural
America.
Rural? Yes. Encouraged to dream big? Every step of the way. And
dream we did. I devoted nearly every penny earned on the farm to my
stamp and coin collection. Years later, as I arrived at American
University to begin my academic career in international affairs, I knew
unequivocally that my future involved fostering relations with the
foreign markets and the people personified in the postage and currency
I accumulated. That dream and future continue to be realized.
If confirmed, I would be incredibly honored to lead a world-class
team of professionals that provide export counseling to small- and
medium-sized businesses, while identifying new foreign markets for
their products and services; advocate on behalf of U.S. companies
competing for foreign Government procurements; attract foreign direct
investment, while working to grow the U.S. manufacturing base; and
reduce, remove, and prevent foreign trade barriers that impede market
access for U.S. goods in a free, fair, and reciprocal fashion.
As the Deputy Assistant Secretary of Commerce for Manufacturing
since June of 2017, I've seen the impact the Global Markets team has on
U.S. manufacturers and service providers. This vast network of more
than 1,300 trade and investment specialists in headquarters and the
U.S. Field, combined with the presence of the Foreign Commercial
Service in over 70 foreign markets, deliver daily.
Simply put, I have come to know the Global Markets team as: ``A
Team that Works, a Team that Chooses to Compete, and a Team that
Delivers.'' These professionals deliver ``one deal at a time'' and have
a tremendous impact measured at over $120 billion in FY2018 in the
areas outlined above.
In my former professional capacities, I accrued experience in
economic development, executive leadership, and trade policy. In my
past economic development roles, I worked successfully to attract
foreign direct investment. SelectUSA, which would be under my purview
if confirmed, is a valued economic development partner to States.
Likewise, during my time in the semiconductor industry, I witnessed
the contributions of the Commerce Department to ensure foreign market
access. I regularly engaged with the Commerce team while managing the
leading chip industry association's international engagements and
technology programs for a decade. I have seen the challenges posed by
unfair foreign trade measures and massive market distorting practices
that crippled companies looking to compete internationally.
Earlier in my professional career, I worked on the Trade
Subcommittee staff of the House Ways and Means Committee. I have a
profound appreciation for the vital role of Congress when it comes to
ensuring the global competitiveness of U.S. industry.
While my stamp and coin collections are now the responsibility of
my two young Hoosiers, I have no doubt that they and our country have a
limitless and prosperous future based on the unparalleled
accomplishments of the Global Markets team at Commerce. I aspire to
help this team continue to achieve its mission. If confirmed, I will
devote every working moment to its success on behalf of our Nation's
exporters. Distinguished Members of the Committee, thank you for your
consideration.
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PREPARED STATEMENT OF MICHELLE BOWMAN
To be a Member, Board of Governors of the Federal Reserve System
June 5, 2019
Chairman Crapo, Ranking Member Brown, and Members of the Committee,
it has been just over a year since this Committee first recommended my
nomination as a Federal Reserve Board Governor. While I am not the
first community banker to serve on the Board, I am humbled by the
opportunity you gave me to serve as the first Governor to fill the role
the Congress designated for someone with community banking experience
on the Federal Reserve Board. I am deeply honored the President has
renominated me to serve in that capacity.
I am also grateful to my family for their continued support. My
husband, Wes, and our children, Jack and Audrey, are here with me
today. The rest of my family are watching from home in Kansas.
Since my confirmation last year, I have worked to fulfill my unique
role on the Board by traveling widely and listening closely to
community bankers, consumers, small business owners, and community
leaders. I have visited with farmers, workers, and business leaders
from across the country to discuss the economy. I am making sure these
unique perspectives are represented in the Federal Reserve's
deliberations and decision making on both monetary policy and
regulatory matters.
During my time at the Board, I have also drawn on my experience as
a community banker and regulator to ensure that our work is guided by a
deep understanding of the practical realities confronting bankers and
the communities they serve across the country. The work done after the
crisis to address the weaknesses in the U.S. financial system and
ensure its future resilience was essential. However, during my time at
my family's community bank, I saw firsthand how the regulatory changes
created in the aftermath of the crisis impacted community financial
institutions. Small, solid institutions like this one are essential to
so many of our citizens and communities. As regulators, we need to
ensure that we are not imposing unnecessary burdens on community banks.
That is why one of my priorities as a Governor has been to
appropriately tailor our supervision and regulation to the size,
complexity, capacity, and risks posed by an institution.
To further this effort, I recently formed a working group of
experts from across the Federal Reserve System to launch a
comprehensive review of our supervisory work with smaller regional and
community banks. While serving as the Kansas State Bank Commissioner, I
was committed to treating every consumer and institution fairly and
respectfully and fostering open communication. This working group will
follow those same principles. We are looking for ways to optimize our
supervision and regulation to ensure it adapts to the on-the-ground
realities of an evolving industry and changing consumer expectations
while maintaining the safety and soundness of our banking system.
Let me close by saying a few words about monetary policy and the
Federal Reserve's dual mandate. As a community banker, it was my job to
support local businesses and consumers. I draw upon this experience
often when thinking about monetary policy, because it has given me a
personal and practical understanding of how the Federal Reserve's goals
of fostering maximum employment and stable prices directly affects
individuals as well as the broader financial system and economy. The
Congress has given the Federal Reserve independence to pursue these
goals, because our work is critical to our economy, to businesses, to
families, and to communities. I am deeply committed to fulfilling this
mandate.
If confirmed by the Senate, I will continue the important work I
have begun and be committed to accountability, transparency, and clear
communication in all of my responsibilities at the Federal Reserve.
Thank you for the honor of this hearing, and I look forward to
answering the Committee's questions.
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PREPARED STATEMENT OF PAUL SHMOTOLOKHA
To be First Vice President, Export-Import Bank of the United States
June 5, 2019
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee, thank you for considering my nomination to serve as
First Vice President of the Export-Import Bank of the United Sates. I
am deeply thankful to President Trump for selecting me and humbled by
the obligations that this role brings to American workers and
taxpayers.
I would like to introduce some family members who are with me
today. First, my parents Stephen and Christine who made the trip from
California. They came to America as child refugees of World War II and
I am always inspired by their contributions to our country. My father
worked as an engineer in the defense industry for more than 40 years
and my mother served tirelessly as a nurse. I am also joined by my
wife, and best friend, Dania, who guided the family through multiple
international moves and extensive overseas travels and Max, my son, who
is entering his senior year in college. My brother Adrian and many of
my friends, family and coworkers from around the world are also
watching online.
I sit before you as someone who has spent the past 16 years on the
front lines of global trade with a strong record in growing American
exports. I also bear the battle scars of leadership in a time of
unparalleled competition in global markets.
It is not simple for any manufacturer to export. They must overcome
political risks, economic hazards, import regulations and diverse
marketing environments. It takes diplomacy and mutual respect to forge
international customer relationships that help guide a business or an
institution through the process of closing a successful deal. Sometimes
it also takes extra financial support, especially when there are over
100 export credit agencies that are upping the ante and creating new
incentives for the end customer. In my travels, I have seen firsthand
how critical it is to support the current needs of the market and for
EXIM to be able to finance deals in a timely and relevant fashion when
the private sector cannot. My demonstrated commitment to this mission
and my international experience on both the buying and the selling side
of international trade over the last 30 years will allow me to
contribute strongly to the team at EXIM.
EXIM's mission is to help support and create jobs. I have
experienced firsthand the thrill of walking assembly lines in Georgia
and in Washington State and meeting the newest workers putting together
products for export, thanks to deals that my team closed. These are
some of my best experiences. My legacy and value as a business person
comes from the people that I mentor and the jobs that I help create. By
working with the President of the Bank, my fellow board members and the
talented staff at EXIM, I believe I can best serve America to multiply
the job creation effects of EXIM. Having served on numerous private
sector boards in various capacities, I understand board
responsibilities of proper corporate governance, the need for
transparency and how good strategic guidance and a positive leadership
attitude can enable organizations to realize their full productive
potential. I believe that every organization can do better and that
constant advancements to American competitiveness should match changes
in global market demand.
The EXIM board needs to make sure it doesn't lose sight of its role
as an important source of support for small businesses. Many of its
financial products in this area resonate with those looking to expand
to new markets. As an entrepreneur, I have worked in small companies
and faced the pressure of making payroll. Speed to market and effective
financing can make or break opportunities for these companies. I built
a significant export business in a medium-sized U.S. manufacturer that,
while a very successful domestic business, had yet to find its legs
overseas. All companies--small, medium, and large--all need help at
times in leveling the playing field in today's global economy.
If confirmed, I will bring a fresh perspective and a fiercely
competitive mindset to the Bank. My experience as an officer in the
U.S. Army taught me to lead from the front and I will work tirelessly
to support the ``Made in America'' brand that we all share and support.
I will ensure that American companies have full access to and
understanding of the programs authorized by Congress to maximize their
global reach and competitiveness. To this end, I would paraphrase Vince
Lombardi: ``Winning isn't everything, it is the only thing'' for
American business and the American worker and I pledge to bring a ``can
do'' winning attitude and to win responsibly for the American taxpayer.
Thank you for your consideration. I would be pleased to answer any
questions.
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PREPARED STATEMENT OF ALLISON HERREN LEE
To be a Member, Securities and Exchange Commission
June 5, 2019
Chairman Crapo, Ranking Member Brown, and distinguished Members of
the Committee. It is a tremendous privilege to appear before you today
and to be considered for the position of Commissioner at the Securities
and Exchange Commission, an agency in whose mission and dedicated staff
I believe deeply.
I'm very fortunate today to be supported by a large contingent of
family. I'd like to introduce my husband Jay Brown, four of the five
children in our blended family, Tess, Beth, Josh, and Zoey. Also, our
granddaughter, Emerson, is here, and our son-in-law, Colin, my sister
Laurie, my brother Wil, my niece Emily, and my brother-in-law, Jeff.
Unfortunately, my mother could not be here today, but I know she will
be watching.
I have spent the bulk of my legal career at the SEC for one very
straightforward reason: the SEC has a mission that is vital to the
economic well-being of Americans and American businesses. It navigates
the critical intersection between these two; between everyday Americans
striving to build savings to buy a home, to send kids to college and
eventually retire, and American businesses that need capital to grow
and prosper. This reciprocal relationship must be nourished from both
sides.
We are a Nation of investors, both retail and institutional,
protected by the SEC. This protection is especially important as we
continue the shift away from employer pensions toward individual plans
in which people must fund and select their own retirement assets and
manage their own risk.
The SEC works to ensure that investors are taking the kinds of risk
they sign up for--business and economic risk--not the risk of fraud,
and not the risk of poorly structured or opaque markets that may
disadvantage investors. This instills confidence which, in turn,
fosters capital formation.
Beyond instilling investor confidence, the SEC works to ensure that
American businesses of all sizes can access the capital they need to
grow their businesses, and thus create the kinds of opportunities
investors want and need. These businesses deserve thoroughly
researched, well-tailored, and clear rules.
I have seen, experienced, and understood this interdependence
between investors and business from nearly every angle. I worked in the
oil business, at both private and public companies. I've owned and run
my own small business. Since law school, I've worked for over two
decades as a securities lawyer, first in private practice as a
litigator and partner, and then I was privileged to work on the staff
of the SEC.
Like many Americans, I've worn a lot of hats and juggled a lot of
priorities, working my way through college and eventually through law
school, raising children, paying the bills, and investing my savings
for retirement. If I have the honor of being confirmed, I will bring
all of these perspectives to bear in my role as a Commissioner, and I
will reach out and listen to all constituencies served by the SEC to
further its critical mission.
Thank you for the opportunity to appear before you today, and I'm
happy to answer questions.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM THOMAS PETER FEDDO
Q.1. One of the many reasons it was important to increase
resources and staff at CFIUS with the FIRRMA reforms was to be
able to better monitor information about completed mergers,
acquisitions, or other investments where the parties to the
transaction did not file with CFIUS.
Has CFIUS been able to increase resources to this type of
monitoring, and has it identified any non-notified transactions
that need to be reviewed? How many transactions has CFIUS
pulled into the process this way, and is this an increase over
past efforts? Are you seeing any trends when it comes to
companies that do not file with CFIUS but should?
A.1. Since the enactment of FIRRMA, Treasury's Office of
Investment Security has established a new Office of Mitigation
and Enforcement whose mandate includes full-time monitoring for
non-notified and nondeclared transactions that could impact
national security. This team has dedicated resources to
accomplish its mission and is working with CFIUS member
agencies to refine the processes for identifying potentially
covered transactions that may pose national security concerns.
As Treasury and CFIUS dedicate further resources to this
mission, the number of non-notified and nondeclared
transactions screened by CFIUS will likely rise; it is
anticipated that the dedicated and increased screening will
consequently result in additional transactions being pulled in
for review.
In some cases when CFIUS contacts parties to transactions
identified through the non-notified process, the parties
indicate that they are planning to file. Because CFIUS filings
are largely voluntary, it can be difficult to determine which
cases were ultimately filed as a result of CFIUS initiating
engagement and which would have been filed even without CFIUS
contact. It is too early to discern any post-FIRRMA trends with
respect to non-notified transactions. Anecdotal evidence
suggests that FIRRMA has served to elevate the public's
awareness both of CFIUS and emerging national security risks
related to foreign direct investment. As a result, more
companies may be filing transactions without contact from
CFIUS, either as a declaration or a full notice, thereby
allowing the non-notified screening to focus on transactions
that in fact may be trying to evade CFIUS. The Office of
Mitigation and Enforcement will help to ensure that CFIUS
identifies and responds to any trends in parties attempting to
evade CFIUS review.
Q.2. The Government shutdown impacted CFIUS's ability to
implement important reforms. The shutdown stopped and/or slowed
down work on rulewriting, hiring, and implementation of the
pilot program to review foreign investments in critical
technologies.
What is your assessment of where CFIUS is on implementation
of FIRRMA, including the pilot program? Are you seeing any
other investment trends emerge, particularly from countries
like China that the 2018 reforms do not address?
A.2. Treasury's Office of Investment Security is fully engaged
with other CFIUS agencies in the rulemaking process necessary
to implement FIRRMA. CFIUS has made substantial progress on the
implementation of FIRRMA. In October 2018, CFIUS promulgated
regulations to implement, and make updates consistent with,
certain provisions of FIRRMA that were immediately effective.
In November 2018, CFIUS through regulations commenced a
tailored pilot program related to noncontrolling, nonpassive
foreign investments in certain U.S. businesses with critical
technologies, and simultaneously initiated the use of FIRRMA's
declaration process, including the issuance of a standardized
5-page ``short form'' for the more efficient electronic
submission of the declarations. Post-FIRRMA, Treasury
reorganized the Office of Investment Security into functional
offices to execute the various mandates of the statute,
including with respect to policy making and regulations
writing, increased engagement with allies and partners, and
enhanced mitigation and enforcement efforts. Since August 2018,
CFIUS has timely submitted reports required by FIRRMA and
conducted related briefings with Committee staff. Treasury is
utilizing additional resources appropriated in FY2019, as well
as FIRRMA's special hiring authority, to ensure that the Office
of Investment Security is appropriately staffed to carry out
new CFIUS authorities; this includes nearly tripling the
Office's personnel to date, and commencing development of an
end-to-end information technology infrastructure to support
additional caseloads and related work streams. CFIUS member
agencies are making similar resource upgrades and improvements
to support the CFIUS mission.
CFIUS anticipates publishing draft regulations for public
comment in the coming months. The Office of Investment Security
has engaged extensively with industry stakeholders throughout
the implementation process, and this timeline will allow ample
opportunity for public comment before these regulations become
effective by February 2020.
The pilot program, a tool provided by FIRRMA, was promptly
implemented to confront CFIUS's inability to review certain
noncontrolling investments in critical technologies, given the
rapid changes in those technologies. Since November 2018, the
pilot program has allowed CFIUS to review transactions that it
would not otherwise have had the opportunity to evaluate, as
well as to more fully understand the nature of foreign direct
investment as it relates to these critical technologies. Some
pilot program transactions have in fact raised potential
national security concerns that warranted the parties filing a
full written notice. CFIUS has also been able to clear a number
of transactions based upon the information provided in the
declarations. The critical technology pilot program continues
to inform the full implementation of FIRRMA as regulations are
being drafted.
CFIUS will be able to assess FIRRMA's impact more fully
including any resulting investment trends--after the
legislation is fully implemented. One of the legislation's
greatest strengths is that it provides important flexibility to
address new risks to U.S. national security as they emerge.
Q.3. One of the few ways that Congress is able to understand
and oversee foreign direct investment in the U.S., and the
national security threats posed by certain investments is the
CFIUS annual report. It is also why FIRRMA added new
requirements in the annual report going forward. The Department
of Treasury has not submitted the CFIUS annual report to
Congress since 2016 (covering transactions in 2015).
Why have the annual reports been delayed, and if confirmed,
what is your plan to ensure that annual reports are submitted
to Congress in a timely manner going forward? What is your plan
for submission of annual reports for years 2016, 2017, and
2018?
A.3. I agree that timely submission of CFIUS's annual report to
Congress is important to its ability to understand and oversee
CFIUS's execution of its national security mission. I am fully
committed to ensuring that annual reports are timely submitted
to Congress going forward. Having joined the Office of
Investment Security in mid-2018, it is my understanding that in
the past case volume and complexity strained the limited
resources of CFIUS member agencies, including Treasury. Shortly
thereafter, I identified the need to remedy the delay in
reporting, and directed my staff to dedicate resources to
complete the 2016 and 2017 annual reports as soon as possible.
Treasury anticipates submitting to Congress these reports as a
combined document by the end of July 2019. CFIUS anticipates
submitting the 2018 annual report thereafter. The additional
resources provided to implement FIRRMA will help to address
this issue in the future.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
FROM THOMAS PETER FEDDO
Q.1. During consideration of FIRRMA, Congress heard concerns
that extended timelines for CFIUS procedures could change the
economics of deals with U.S. companies, reduce their
competitiveness, and shift investment overseas, undermining the
pace of innovation in this country and possibly contributing to
the speed of acquisition of sensitive technologies by our
foreign adversaries. Regulations pursuant to FINSA and the
ongoing pilot program temporarily implementing portions of
FIRRMA require that CFIUS respond to notices and declarations
``promptly.''
What do you think is a reasonable amount of time to have
elapsed before taking initial action on a notice or
declaration? Would you direct your staff to write a regulation
codifying that window?
A.1. Section 1704 of FIRRMA requires that CFIUS provide
comments on a draft or formal written notice or accept a formal
written notice of a covered transaction no later than 10
business days after the date of submission of the draft or
formal written notice. This requirement applies when parties
stipulate that the transaction is a covered transaction. The
regulations for FIRRMA will implement this requirement. More
broadly, with the benefit of additional staff and resources, my
goal is to respond to parties in a timely, efficient, and
responsive manner on all written notices and declarations
submitted to CFIUS.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM THOMAS PETER FEDDO
Q.1. When implementing FIRRMA, Treasury needs to clarify how
the foreign entity definition will apply to U.S.-controlled
private funds. I understand that much of the responsibility for
implementing FIRRMA falls within your current position at
Treasury.
Do you agree with me that the final regulations should not
treat a fund as a ``foreign entity'' if it is controlled by
U.S. persons, even if a majority of the equity ownership is
held by passive limited partners? Investments from such
entities will not create a national security risk because of
the nature of limited partners and structure of their passive
investments.
A.1. I agree that a fund that is organized and headquartered in
the United States and is not controlled by a foreign person (as
that term is defined in 31 CFR 800.216) should not be treated
as a foreign person.
With respect to CFIUS's new jurisdiction over certain
nonpassive, noncontrolling investments, FIRRMA includes a
clarification for investment funds that addresses the practice
of foreign limited partners serving as members of a fund's
advisory board or committee. FIRRMA clarifies that such
membership does not, in and of itself, cause an investment by
the fund to be subject to CFIUS jurisdiction.
FIRRMA also carves out transactions involving investment
funds that meet certain specified criteria from being subject
to a mandatory declaration requirement. CFIUS is working to
implement these provisions as part of the rulemaking to fully
implement FIRRMA, and as part of this process, we are
considering whether additional clarification would be
appropriate.
Q.2. Will you commit to meeting with me, my staff and industry
representatives on this important issue and to follow up as
necessary so we can get this issue addressed correctly to
ensure that funds controlled by U.S. persons will not be
considered ``foreign entities'' under the regulations?
A.2. Since FIRRMA's enactment, my staff and I have met and will
continue to meet with various industry stakeholders regarding
this issue, among others. I also look forward to the
opportunity to meet with you and your staff. When Treasury
issues the proposed regulations implementing FIRRMA in the
coming months, the public will have the opportunity to provide
formal comments for CFIUS's consideration.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM THOMAS PETER FEDDO
Q.1. When implementing FIRRMA, Treasury needs to clarify how
the foreign entity definition will apply to U.S.-controlled
private funds.
Do you agree that the final regulations should not treat a
fund as a ``foreign entity'' if it is controlled by U.S.
persons, even if a majority of the equity ownership is held by
passive limited partners? Investments from such entities will
not create a national security risk because of the nature of
limited partners and structure of their passive investments.
A.1. I agree that a fund that is organized and headquartered in
the United States and is not controlled by a foreign person (as
that term is defined in 31 CFR 800.216) should not be treated
as a foreign person.
With respect to CFIUS's new jurisdiction over certain
nonpassive, noncontrolling investments, FIRRMA includes a
clarification for investment funds that addresses the practice
of foreign limited partners serving as members of a fund's
advisory board or committee. FIRRMA clarifies that such
membership does not, in and of itself, cause an investment by
the fund to be subject to CFIUS jurisdiction.
FIRRMA also carves out transactions involving investment
funds that meet certain specified criteria from being subject
to a mandatory declaration requirement. CFIUS is working to
implement these provisions as part of the rulemaking to fully
implement FIRRMA, and as part of this process, we are
considering whether additional clarification would be
appropriate.
Q.2. Will you commit to working with stakeholders and to follow
up as necessary so that funds controlled by U.S. persons will
not be considered ``foreign entities'' under the regulations?
A.2. Since FIRRMA's enactment, my staff and I have met and will
continue to meet with various industry stakeholders regarding
this issue, among others. I also look forward to the
opportunity to meet with you and your staff. When Treasury
issues the proposed regulations implementing FIRRMA in the
coming months, the public will have the opportunity to provide
formal comments for CFIUS's consideration.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM THOMAS PETER FEDDO
Q.1. As Vice Chairman of the Senate Intelligence Committee, I
see how our competitors are accessing critical U.S.
technologies through legal and illegal means, stealing our
intellectual property, and dulling America's competitive
advantage. This sustained, comprehensive, multiyear effort
shows no sign of slowing, but is rather accelerating: we are
seeing a ``whole of society'' effort on the part of some
adversaries--cyberattacks to steal intellectual property that
then mysteriously is fielded by our competitors, attempts to
acquire critical technology companies, or, more recently,
strategic investments that could be used to acquire technology.
That is the threat we face.
We are now 6-months into FIRRMA's pilot program. What are
your thoughts on the efficacy of the pilot program?
A.1. The pilot program has benefited U.S. national security.
Since November 2018, the pilot program has allowed CFIUS to
review transactions that it would not otherwise have had the
opportunity to evaluate, as well as to more fully understand
the nature of foreign direct investment as it relates to the
critical technologies falling within its scope. Some pilot
program transactions have in fact raised potential national
security concerns that warranted the parties filing a full
written notice. CFIUS has also been able to clear a number of
transactions based upon the information provided in the
declarations. The critical technology pilot program continues
to inform the full implementation of FIRRMA as regulations are
being drafted.
CFIUS will be able to assess FIRRMA's impact more fully
including any resulting investment trends--after the
legislation is fully implemented. One of the legislation's
greatest strengths is that it provides important flexibility to
address new risks to U.S. national security as they emerge.
Q.2. What is working and what challenges/gaps have come up?
A.2. The critical technology pilot program has benefited U.S.
national security. Since November 2018, the pilot program has
allowed CFIUS to review transactions that it would not
otherwise have had the opportunity to evaluate, as well as to
more fully understand the nature of foreign direct investment
as it relates to the critical technologies falling within its
scope. The pilot program will terminate upon the full
implementation of FIRRMA, but I anticipate that it will inform
various substantive and administrative adjustments to the final
regulations.
Q.3. FIRRMA contains a requirement, based on an amendment I
included, that Treasury exempt categories of investors from the
expanded CFIUS screening of certain minority investments. As
you know, the pilot program applies on a global basis and does
not exclude categories of investors from the scope of the
pilot. Is this authority being used to exempt investments made
by investors from friendly countries?
A.3. CFIUS appreciates the flexibility provided by FIRRMA's
``country specification'' authority. CFIUS is currently
examining how best to use this authority to more effectively
address national security concerns while maintaining the
longstanding U.S. open investment policy. CFIUS developed the
pilot program without exempting any country from the mandatory
declaration requirement to comprehensively understand and
examine the nature of foreign direct investment as it relates
to critical technologies and the specified pilot program
industries. CFIUS provided the public with an immediate
opportunity to comment on the interim rule in the 30 days prior
to the pilot program's effective date. The critical technology
pilot program continues to inform the full implementation of
FIRRMA as regulations are being drafted, including with respect
to the country specification authority.
Q.4. The pilot program identifies 27 ``critical technologies''
that if a U.S. business is involved with, would require a
filing with CFIUS in the event of a foreign investment. Through
the lifetime of the pilot program to date, has that list of
technologies been sufficient in providing the Committee the
jurisdiction necessary to protect U.S. national security?
A.4. FIRRMA defined the scope of ``critical technology'' as it
pertains to CFIUS, and provides future flexibility as
``emerging and foundational'' technologies are identified by
the Department of Commerce. The 27 pilot program industries
identified in Annex A to the pilot program regulations were
carefully developed by the U.S. Government to narrowly scope
the pilot program to include only those industries in which the
threat of erosion of technological superiority from some
foreign direct investment required immediate action. The
critical technology pilot program continues to inform the full
implementation of FIRRMA as regulations are being drafted,
including whether adjustments need to be made to the scope of
declarations for U.S. businesses with critical technology.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM NAZAK NIKAKHTAR
Q.1. Last year, there was bipartisan concern that when it came
to ZTE the Administration allowed trade, economic and political
considerations to drive what should have been exclusively law
enforcement and national security decisions. ZTE had clearly
repeatedly and willfully violated our export control laws, and
Commerce enforcement officials in the Government had inflicted
major punishments that were then reversed by the President.
Many in Congress are concerned that we are preparing to see
the same thing on Huawei, with the Administration making
certain trade concessions to China in return for not pressing
our national security concerns, including in developing 5G
systems around the world.
What is your view on this question? Do you think these
concerns are justified? What should Congress be doing to
reinforce our concern that law enforcement and national
security considerations should be treated as separate--and
paramount--in these situations?
A.1. When an action taken by the Bureau of Industry and
Security (BIS or the Bureau) is based on law enforcement or
national security concerns, then that action should only be
amended if the enforcement and security concerns which prompted
that action are addressed by that amendment. In the case of
ZTE, the 2018 superseding settlement agreement that replaced
the denial order contained three interlocking elements, each in
place for a decade and all of them enabling the Bureau to
protect U.S. national security: a suspended denial order; $400
million in escrow (in addition to the criminal and
administrative penalties paid by the company in 2017 and the
additional $1 billion penalty to the U.S. Treasury in the 2018
superseding settlement agreement); and a special compliance
coordinator selected by and accountable to the Department of
Commerce.
The facts and circumstances pertaining to the entity
listing of Huawei are different from ZTE, and any change to
Huawei's listing status will need to ensure that the national
security and foreign policy concerns that led to the listing
are no longer applicable or are addressed by the change. As a
national security arm of the U.S. Government, BIS's mission--
and my priority--is to protect the United States' national
security interests at all times.
Q.2. One of the most significant changes in last year's export
control reforms required the President to establish an
interagency process to identify emerging and foundational
technologies critical to U.S. national security--areas like
artificial intelligence, advanced computing, certain forms of
biotechnology, and the like. Commerce then was to establish a
licensing policy for those items. That is moving forward.
What do you think the Committee should be looking for in
the coming months as we assess whether these lists are
targeting the right technologies, and appropriately balancing
critical national security concerns vs. commercial
considerations? What has been the reaction of industry to the
preliminary lists already published?
A.2. The Bureau is working with interagency partners (including
the Department of Defense, Department of Energy, Department of
State, and the intelligence community) to identify emerging and
foundational technologies that are essential to U.S. national
security interests. As part of this work, BIS has also been
consulting with U.S. industry, research facilities, and
universities, and will be seeking input from its Emerging
Technology Technical Advisory Committee (ETTAC) this summer. I
also welcome engagement with Congress to ensure that the Bureau
is targeting the right technologies.
Additionally and consistent with the requirements of the
Export Control Reform Act of 2018, as well as the Bureau's
mandate to encourage technological innovation while also
protecting U.S. national security, the Bureau has been
evaluating the impact of export controls on such technologies.
Our evaluation includes the identification of any foreign
sources of such technologies both in like-minded countries and
countries of concern, and the effectiveness of various types of
controls on these technologies.
The public comments in response to the Advanced Notice of
Proposed Rulemaking (ANPRM), which were collected from November
2018 through January 2019, generally supported the need to
address national security threats arising from emerging
technologies. However, commenters stressed that national
security concerns should be balanced by the impact that
controls may have on innovation, the United States' competitive
position globally, foreign direct investment in the United
States, and the United States' ability to achieve multilateral
controls. These important factors are informing our analysis.
On the latter point, I have been actively working on a
multilateral initiative with like-minded allies to implement
controls on emerging technologies in a consistent manner. This
is particularly important, given that export controls are most
effective and better able to promote the growth of innovation
when applied with the same rigor across Nations.
Finally, BIS will be publishing an ANPRM for foundational
technologies in a few weeks. Our analysis of controls on
foundational technologies will also be informed by the above
outlined considerations.
Q.3. If confirmed, you will be part of the interagency CFIUS
review process. As you know, CFIUS is able to look at joint
ventures when there is a U.S. business involved. In the
confirmation hearing, Senator Jones asked Mr. Feddo about a
Chinese steel company that formed a joint venture with an
American stainless steel component parts company key to U.S.
national defense and aerospace sectors.
If a joint venture results in the Chinese company gaining
access to sensitive steel manufacturing technology and trade
secrets important for U.S. national security, and it
potentially disrupts the U.S. supply chain, should CFIUS review
it? If the same company's request for a Section 232 tariff
exclusion was denied, is that information relevant to the CFIUS
review? What experience and perspective would you bring to
CFIUS on matters similar to this one and as well as others
considered by the Committee?
A.3. In my current role performing the nonexclusive duties and
functions of the Under Secretary for Industry and Security and
as the current Assistant Secretary for Industry and Analysis, I
am deeply involved in the Department's CFIUS work, leading a
team of industry and policy experts at both BIS and the
International Trade Administration (ITA) that reviews CFIUS
transactions to analyze their impact on U.S. national security.
As part of the interagency CFIUS team, we work collaboratively
with the Department of the Treasury (chair) and the Departments
of State, Defense, Justice, Energy, and Homeland Security, as
well as the Office of the United States Trade Representative
and the White House Office of Science and Technology Policy, to
analyze each transaction and understand the potential national
security risks involved.
Further, I have encouraged the BIS and ITA CFIUS teams to
review transactions not only through the lens of presently
identifiable national security risks but also by accounting for
potential risks that may result from those transactions. This
analytical exercise requires that the Department of Commerce,
in partnership with other CFIUS agencies, keep abreast of
developments in U.S. supply chains, monitor influence by
foreign adversaries over the development of international
standards, and identify predatory patterns of investment that
may impede the growth of the domestic industrial base and
thereby threaten U.S. national security.
These considerations underscore the important role that
CFIUS reviews play, and the need to ascertain all relevant
information about each transaction under review. The
transaction described in the question raises national security
concerns, and I am committed to ensuring that the U.S.
Government has the tools to, and does, effectively respond to
all transactions that pose national security risks. All
relevant information should be considered in a U.S. Government
review.
CFIUS is one of my most important responsibilities at the
Department of Commerce, and I am committed to ensuring that we
continue to be forward-leaning in our analysis. The U.S.
Government must continue to encourage an open investment
climate in the United States, but we must also proactively
bring all transactions that undermine our national security
interests under CFIUS review. My combined experiences at BIS
and ITA, as well as my experiences as a lawyer and economist,
provide me with a comprehensive understanding of how to assess
foreign investments in the United States while protecting
national security so that the United States can continue to
attract capital to support technological advancements and the
growth of our industries.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR PERDUE
FROM NAZAK NIKAKHTAR
Q.1. USML to CCL Transition--Ms. Nikakhtar, as I'm sure you are
aware, the previous Administration implemented the transfer of
export licensing authority for dual-use items from the U.S.
Munition List to Commerce Control List to modernize our cold-
war era export licensing controls to enhance our national
security and to improve the ability of U.S. companies to better
compete in an increasingly global marketplace, increasing the
amount of U.S. exports and creating more American jobs. One of
the ECR's objectives was to rationalize the control lists and
pursuant to its authority under the Arms Export Control Act,
transfer export licensing authority for commercial or dual-use
items to the Commerce Department--Bureau of Industry Security
(BIS) and its Commerce Control List (CCL) from the State
Department's Directorate of Defense Trade Controls (DDTC) and
its U.S. Munitions List. The prior Administration moved
commercial and dual-use products covered in 18 of the 21 USML's
categories to the BIS's CCL.
However, 3 of the 21 categories--USML categories I, II, and
III (commercial and sporting firearms and ammunition
products)--were purposely singled out by the past
Administration for transparent political reasons and have not
realized the benefits of the USML to CCL Initiative. I am very
concerned of the impact this is having on our small businesses
and national security. Each day that passes with no action
taken on Categories I, II, and III American businesses are at a
competitive disadvantage and our national security is at risk
because the State Department is having to dedicate time on
commercial articles rather than on controlling those sensitive
articles with national security implications. Approximately 25
percent of DDTC's current export licensing workload now
involves Category I products like the single shot bolt action
.22 caliber rifle that are used at summer camps. I know that
several of my colleagues from both sides of the aisle share
these same concerns, and 29 Senators and 145 members of the
House sent bipartisan letters to Secretary Ross and then-
Secretary Tillerson urging the completion of the ECR
initiative. BIS published the proposed rule on May 24, 2018,
which was then opened up for public comment. The congressional
committees of jurisdiction received formal 30-day Section 38(f)
notification in February of the final rules, and it was our
understanding that the final rules were expected to be
published in about mid-March.
It is now June 5th--more than a year after the proposed
rules were published and 3 months since Congress received
notification. When can we expect the final rules to be
published to transfer to BIS the export licensing
responsibility for commercial and sporting products currently
on the USML categories I, II, and III? I am looking for a date
certain by which the final rules will appear in the Federal
Register.
A.1. The finalization of these rules is dependent on a White
House-led interagency review that is still under way. Because
this process is not under BIS's jurisdiction, I am regrettably
unable to give you a firm date for publication.
Q.2. If confirmed by the Senate, will you commit to having the
Commerce Department expeditiously as possible publish the final
rule to transfer from the State Department to the Commerce
Department the export licensing responsibility of dual-use,
commercial and sporting firearms and ammunition products
currently on the USML categories I, II, and III?
A.2. Yes, as noted above, I will work to quickly bring the
final rule into effect, once the White House-led interagency
review is finalized.
Q.3. What steps will BIS take to work with members of the
firearms and ammunition industry to ensure a smooth transition
to BIS from DDTC? It is my understanding that the industry's
trade association, the National Shooting Sports Foundation, has
done joint seminars and industry outreach with BIS, to ensure a
smooth transition. Can you commit that BIS will continue those
public-private cooperative efforts that work toward achieve
compliance with the legal and regulatory requirements under the
Export Administration Regulations (EAR)?
A.3. BIS will work with industry to make the transition from
the DDTC to BIS seamless and efficient. Once the transition
occurs, training on these Commerce-controlled items will become
part of BIS's regular outreach activities, which includes
direct engagement with industry through seminars as well as
online training. Moreover, like with other industries with
items subject to the EAR, BIS will support joint training
events with private industry upon request and consistent with
Federal ethics rules to continue its long-standing practice of
public-private cooperation to promote compliance with the EAR.
It is one of BIS's primary responsibilities to ensure that
industries comply with our export control laws and regulations.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR MORAN
FROM NAZAK NIKAKHTAR
Q.1. This Committee shepherded to passage the Export Control
Reform Act (ECRA), which enjoyed a strong bipartisan consensus
due to its careful approach toward pursuing important U.S.
national security objectives while preserving U.S. leadership
in technological innovation. The Commerce Department is now
leading implementation of export control reforms for emerging
and foundational technologies called for in the legislation.
If confirmed as Under Secretary, what steps will you take
to ensure that any new export controls do not undermine the
ability of U.S. companies to innovate and compete on at the
frontiers of technology?
A.1. This question touches the core of BIS's mission, which is
to counter national security threats while protecting the
United States' ability to innovate. Innovation, in turn,
results from global competition and the accumulation of revenue
that is invested to develop next-generation technologies. I
have represented many industries in my career and I understand
the direct relationship between access to global markets and
its impact on remaining at the forefront of technological
innovation. At the same time, I appreciate and fully support
the need for controlling exports to prevent adversaries from
using U.S. technologies to threaten our national security. This
is why BIS regulations must be carefully developed, and
encourage multilateral support, to protect U.S. national
security and foreign policy interests without impeding U.S.
technological leadership. At the intense pace of global
competition, U.S. companies cannot afford to take any step
backwards.
This reality underscores the importance of establishing
controls on emerging and foundational technologies with the
support of key allies and partners. My approach for a
multilateral framework consists of three critical components:
(1) the identification of dual-use technologies that pose
significant national security risks when misused by
adversaries, (2) the implementation of controls (e.g.,
licensing requirements) that are multilateral to the maximum
extent possible, and (3) fulsome information sharing among
allies to minimize potential circumvention and to maximize the
enforcement of controls. These three components are key to a
successful export control system, and further advance the
creation of an efficient and secure trading ecosystem among
like-minded allies and partners. By establishing a secure
ecosystem for trade and research in emerging technologies, the
United States and its partners will be able to continue to make
significant strides in technological advancements while
impeding our adversaries' attempts to exploit differences in
control frameworks among countries to obtain controlled items.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM NAZAK NIKAKHTAR
Q.1. If export control of the technical information to produce
handguns using 3D printers is transferred from the jurisdiction
of the Department of State to the Department of Commerce, can
the Bureau of Industry and Security prevent the posting of such
information on the Internet by U.S. persons without a license
from BIS? If not, why not?
A.1. Under BIS's Export Administration Regulations (EAR) as
currently written, information posted on the Internet on a site
available to the public is considered ``published'' and thus
not subject to the EAR. Since I began my role at BIS, I have
discussed this provision and other provisions of the EAR with
my colleagues across the U.S. Government to determine how to
best conform the EAR to the Export Control Reform Act of 2018,
how to use the export control regulations of other U.S.
Government agencies to complement the EAR, and, importantly,
how to modernize our regulations to keep pace with emerging
national security threats. I welcome your office's perspective
on improvements to our export control authorities to ensure
that we are keeping pace with all national security risks.
Q.2. If the Export Administration Regulations prevent that--
especially if someone has previously, illegally, posted such
information--why won't BIS seek to change such regulations?
A.2. As set forth above, I am actively engaged in an effort to
modernize our regulations to keep pace with existing and
emerging national security threats. I am also mindful of my
obligation to ensure that BIS's regulations are consistent with
U.S. law. To this end, I would welcome your office's input on
the effectiveness of our regulatory authorities.
Q.3. Should U.S. law be changed in order for BIS to maintain
control in all instances?
A.3. It is my responsibility at BIS to ensure that our
regulations on export controls are fully compliant with U.S.
law, including the statutory requirements of the Export Control
Reform Act of 2018. I am also committed to working through the
interagency process to provide input to Congress on any
amendments it proposes to update U.S. export control laws.
Q.4. If BIS will not be able to maintain positive export
controls over such information in all instances, then why does
Commerce seek to acquire regulatory control over such
information if it ultimately cannot control it? Isn't that
effectively the decontrol of such 3D gun printing information?
A.4. In May 2018, an announcement was made to transfer firearms
under the International Traffic in Arms Regulations' U.S.
Munitions List (USML)--Categories I-III including 3D gun
printing technology--to the Commerce Control List (CCL). That
transfer is ongoing and, once the transfer occurs, BIS will not
be seeking to decontrol the technology. Pursuant to the current
regulatory framework under the EAR, BIS will control and
license technology for the development, production, operation,
installation, maintenance, repair, overhaul, or refurbishing of
firearms that are moved from the USML to the CCL. In addition,
EAR license requirements will apply to the export of firearms
themselves.
Q.5. The Export Control Reform Act states that the Secretary of
Commerce shall control emergent technology for national
security purposes, and in a public notice for comment last year
in the Federal Register, identified 3D printing or ``additive
manufacturing'' as an example of an emergent technology. So,
shouldn't the use of such an emergent technology to produce
lethal weapons be controlled in all instances? If not, why not?
A.5. 3D printing and ``additive manufacturing'' are activities
currently being reviewed closely as part of the process of
identifying emerging technologies that may warrant control as
required by the Export Control Reform Act of 2018. This review
is ongoing, and BIS notes that discussions are presently
underway with partner countries on where multilateral controls
are warranted. As noted above in the response to Question 4,
BIS, under current regulations, would regulate ``technology''
for the ``production'' of firearms, as well as the other
elements of ``technology'' that are subject to the EAR.
Q.6. The Congress has acted to place heightened oversight over
the sale of lethal firearms to ensure that they are not going
to dangerous or unreliable end-users. They have also been
subject to a decades-long informal process of consultation,
which has in the past prevented just such sales. BIS could
inform the Congress, specifically the Senate Foreign Relations
Committee, which has jurisdiction over the export of lethal
arms abroad, before licenses are granted, if it chooses to do
so. Will you so inform us?
A.6. In May 2018, at the time of the Department of Commerce's
and the Department of State's publication of the proposed rules
to transfer firearms and related items from the USML to the
CCL, the Export Administration Act (EAA) did not include a
Congressional notification requirement for firearms, nor did
any other governing statute. On August 13, 2018, the President
signed the National Defense Authorization Act for Fiscal Year
2019, which included the Export Control Reform Act of 2018.
Congress did not include in the Act a specific requirement for
Congressional notification for firearms and related items
exports. Should Congress wish to issue such a requirement, BIS
will certainly comply.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM NAZAK NIKAKHTAR
Q.1. As Commerce compiles its emerging and foundational
technologies list, are there sectors concerned may not receive
enough coverage or inclusion?
What areas of China's Made in China 2025 priority list or
in terms of the gaps in their military capabilities development
are not covered?
A.1. China's Made in China 2025 strategy contains a broad swath
of technologies, some of which are more easily identifiable as
military-related or military-enabling. \1\ To initiate the
review of emerging and foundational technologies mandated by
the Export Control Reform Act of 2018, BIS published a November
2018 Federal Register notice that listed 14 emerging technology
categories for which the Bureau sought industry input on
controls. \2\ This list was developed after receiving technical
insight from interagency colleagues based on subject matter
experts' evaluation of technology categories that were
considered to be most critical to U.S. national security
interests, for example due to potential uses as conventional
weapons, conduits for intelligence collection, use as weapons
of mass destruction, or facilitators of terrorist activities.
Technologies that could potentially provide the United States
with a qualitative military or intelligence advantage were also
identified. Many of these technology categories fall under one
of China's 2025 priority sectors.
---------------------------------------------------------------------------
\1\ The China 2025 ten priority sectors are: (1) new advanced
information technology; (2) automated machine tools and robotics; (3)
aerospace and aeronautical equipment; (4) maritime equipment and high-
tech shipping; (5) modern rail transport equipment; (6) new-energy
vehicles and equipment; (7) power equipment; (8) agricultural
equipment; (9) new materials; and (10) biopharma and advanced medical
products.
\2\ The 14 categories were: (i) biotechnology; (ii) artificial
intelligence; (iii) Position, Navigation, and Timing (PNT) technology;
(iv) microprocessor technology; (v) advanced computing technology; (vi)
data analytics technology; (vii) quantum information and sensing
technology; (viii) logistics technology; (ix) additive manufacturing;
(x) robotics; (xi) brain-computer interfaces; (xii) hypersonics; (xiii)
advanced materials; and (xiv) advanced surveillance technologies.
---------------------------------------------------------------------------
At the same time, BIS recognizes that the technologies
listed in the Federal Register notice do not, by themselves,
represent the full range of emerging technologies that warrant
control. There are numerous additional technologies on the
China 2025 priority list that also may warrant evaluation for
control. Further to this point, China's civil-military
integration strategy is a national strategy that incentivizes
virtually the entire civilian sector to enter the defense
market. This whole-of-Government effort by China now informs
BIS's analysis of dual-use emerging technologies and how
commercial technologies may be used as weapons. Of course,
China is not the only country that poses this type of
technological threat through the integration of its civil and
military sectors.
Given these realities, we are actively engaging with U.S.
industry, interagency colleagues, and academia, as well as
ETTAC members, to assess the full range of emerging
technologies that warrant control and their potential
commercial and military applications. We are also assessing the
level of development of each of these technologies in the
United States and in foreign countries to determine when those
technologies are expected to mature into real-use applications.
Finally, we are analyzing potential harmful uses of these
technologies by foreign adversaries.
We are mindful of the fact that our identification of
emerging technologies is a complex exercise, and so we have
been actively collaborating with industry, interagency
colleagues, and academia to obtain all pertinent information
for our analysis. The answers we are pursuing will help us
determine the range of technologies that warrant control, and
given the nature of each technology, the most effective mode of
control. We encourage engagement with all members of the
Legislative Branch to ensure that we are able to benefit from
Congress' insight as well.
Q.2. What steps should be considered to address the problem of
companies seeking to redefine the technologies or products to
skirt review?
A.2. Since my start at BIS, I have stressed the need to
modernize our mechanisms for control. In light of the ever-
changing nature of technology, controls must be implemented in
ways that adapt to technological advancements over time. For
example, we have seen adversaries forego the acquisition of
high-tech items subject to controls and opt for lower-tech
items that fall outside of current controls but can be used to
create the functional equivalent of the controlled item. While
we intend to define controls with sufficient specificity to
allow industry to identify what is regulated from what is not,
controls on technologies need to be better fashioned with
flexibility to avoid loopholes or circumvention of the
controls.
Of course, the manner by which each control is defined is
dependent on the particular type of technology, but I am
confident that with continued and proactive engagement on this
issue, BIS is developing effective controls that keep pace with
the evolution of technology. Just as important, we must make
every effort to ensure that our controls are implemented
multilaterally so that U.S. industries are able to complete on
a global playing field that is level. I have already begun
proactive engagement with foreign-Government counterparts to
secure multilateral cooperation on emerging technologies.
Q.3. As one of the most persistent critics of Huawei's
concerning relationship with the Chinese Government and its
pattern of behavior, I was pleased to see the Trump
administration finally take steps to place Huawei on the Entity
List.
At the same time, I have concerns that this move reflects a
haphazard and not-coherent approach to these issues--
particularly when we see the President suggest that the
designation could simply be a bargaining chip, to be trade away
in the context of a trade deal. Huawei represents a real--not
speculative--security risk and one that will not be resolved in
the context of a trade agreement.
We see a number of technology companies that boast
unusually intimate relationships with the Chinese Government,
are instrumental in domestic efforts within China to harness
technology to conduct in censorship, surveillance and social
control, and that receive significant support--in the form of
digital infrastructure grants and loans--to help China export
its model of tech-enabled authoritarianism abroad. We even see
municipalities in the U.S. buying security cameras from
companies like Hikvision because--as in the case of Huawei--
it's artificially priced below products from legitimate
vendors.
Would you support entity list designations with other
technology providers, such as Hikvision and Dahua, that are
engaged in activities that are contrary to the U.S. national
security and U.S. foreign policy interests?
A.3. BIS continually evaluates information from multiple
sources to assess possible additions to the Entity List that
meet the criteria specified in part 744 (Control Policy: End-
User and End-Use Based) of the EAR. When BIS or any other
member of the End-User Review Committee (ERC) identify
activities by a party that meet the criteria set forth in
Section 744.11(b) of the EAR (acting contrary to the national
security or foreign policy interests of the United States) and
a majority of ERC members approve its addition, BIS will add
that party to the Entity List.
Q.4. Given the pattern of behavior we've seen from a company
like Huawei--with well-documented allegations of a concerted
effort to evade sanctions on Iran, a longstanding and
comprehensive strategy of IP theft from U.S. companies, and a
close relationship with the Chinese Communist Party and Chinese
military--would it be appropriate for the President to roll
back the Entity List designation in exchange for minor trade
concessions by the Chinese Government?
A.4. When an action taken by the Bureau of Industry and
Security (BIS or the Bureau) is based on law enforcement or
national security concerns, then that action should only be
amended if the enforcement and security concerns which prompted
that action are addressed by that amendment.
Huawei and its affiliates were added to BIS's Entity List
(Supplement No. 4 to part 744 of the EAR) on the basis of
activities that were contrary to U.S. national security or
foreign policy concerns. Any change to Huawei's listing status
will need to ensure that the national security and foreign
policy concerns that led to the listing are no longer
applicable or are addressed by the change. As a national
security agency, BIS's mission is to uphold the United States'
national security and foreign policy interests; that is and
will continue to be our focus specific to the Huawei listing.
Q.5. What is your view on the scope of the Temporary General
License the Trump administration issued with respect to Huawei?
Are there areas where a more relaxed policy would be
warranted?
A.5. BIS implemented the Temporary General License to provide
U.S. companies impacted by the listing time to adjust and BIS
continues to evaluate the scope of the Temporary General
License based on information from a variety of sources,
including input from U.S. companies and other potentially
affected parties. We want to ensure the scope of the Entity
List listing and Temporary General License are appropriate to
address the national security and foreign policy concerns and
are well-understood by industry.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM NAZAK NIKAKHTAR
Q.1. Would you agree that trade and international cooperation
have a direct impact on tourism?
A.1. Fostering long-term mutually beneficial trade relations
and cooperation with Nations has been one of my priorities as a
U.S. Government official and, as we seek to expand jobs in our
economy, we have been intimately aware of the impact that
international travel and tourism has had on this objective. In
2018, international visitors supported 1.2 million American
jobs and spent a record-breaking $255.5 billion experiencing
the United States, an increase of nearly 2 percent when
compared to the previous record set in 2017. Additionally,
these travel trade exports accounted for 31 percent of total
U.S. services exports and 10 percent of all U.S. exports, goods
and services alike. Spending by international visitors who stay
one night or more in the United States for leisure, business,
education, or medical purposes is counted as a U.S. travel and
tourism export. Our two largest visitor markets (defined by
country of residence) both increased last year: Canadian
visitation to the United States was up 4.9 percent and
visitation from Mexico increased 3.9 percent. Despite the fact
that the number of Chinese visitors to the United States
decreased last year by 5.7 percent, visitation from western
European countries--France, Spain, the U.K., and Italy--also
increased between 3.9 and 6.0 percent. In 2018, the United
States finished the year with a trade in travel surplus of more
than $69 billion. As we forge closer trade ties with our
allies, we expect to see continued increases in inbound tourism
numbers and greater positive contributions to the U.S. economy.
I am committed to encouraging such growth.
Q.2. What specifically will you do on a regular basis in this
role to help expand the interests of bringing international
visitors to one of America's best destinations for both indoor
and outdoor activities, namely Nevada--where we saw over eight
million international visitors in Las Vegas alone in 2016,
accounting for $11 billion in spending?
A.2. Having grown up in California, Nevada was a frequent
travel destination for my family, friends, and me. Through many
frequent visits, I have watched Nevada flourish as a tourist
destination for international travelers. Nevada's bourgeoning
tourism industry has not only boosted U.S. economic growth, but
it has also encouraged a greater understanding of U.S. culture
and values, which are important components of fostering better
international cooperation between the United States and its
global partners.
During my time at the International Trade administration, I
worked to support the long-term growth and competitiveness of
the travel and tourism sector and to encourage more
international visitors to the United States. I worked with my
colleagues across the agency to connect U.S. companies and
destinations to opportunities in growth markets of interest to
Nevada and other U.S. destinations. For example, while in
India, my staff at the National Travel and Tourism Office
(NTTO) met with Herb Santos, Jr., Nevada Tourism Commissioner,
and Carson City Culture and Tourism Authority Executive
Director David Peterson, to discuss a number of issues
important to the State of Nevada.
Additionally, in 2018, I personally worked with U.S.
Customs and Border Protection to resolve an issue related to
the country of residence data it was collecting so that ITA
NTTO's statistical program could provide the most accurate
traveler data to U.S. businesses in order to improve their
competitiveness and effectiveness in the international travel
marketplace. Many State tourism offices and convention and
visitors' bureaus are dependent upon the program as the source
for comparable State and city visitation and international
traveler trend information. In my former ITA role and current
BIS role, I continue to be committed to advancing policies that
will encourage tourism across the United States, including the
State of Nevada.
Q.3. Can you provide us a sense of how we can continue to
improve our outreach worldwide?
A.3. The Department of Commerce proactively examines all export
markets to identify opportunities for future growth. The
Department's NTTO and U.S. Foreign Commercial Service Officers
(including professionals in embassies worldwide) work together
as a focused travel and tourism team, to increase U.S. exports
in the travel and tourism sector.
One particular example is India. Under the U.S.-India
Commercial Dialogue, we have a travel and tourism work stream
where the NTTO and India's Ministry of Tourism collaborate on
opportunities to increase tourism between our Nations. The
Department of Commerce also works directly with the private
sector both in the United States and in our source markets to
support efforts to secure more business for companies and
destinations across the United States.
Q.4. During your consideration by the Senate Commerce Committee
last Congress, you stated in your response to me the importance
of ``initiatives that facilitate travel to the United States,
such as aviation liberalization, the streamlining of visa
application processes, improvements to customer service at
ports of entry, and the enhancement of passenger screening.''
How do you reconcile that statement with the lack of progress
in these areas under the current Administration, even going so
far to employ the questionable tactic of moving passenger
screeners from the Transportation Security Administration (TSA)
to the southern border where they have not been trained and are
vacating their security posts at our Nation's airports and
surface transportation outlets?
A.4. The Department of Commerce welcomes international visitors
and forward-thinking policies that may be implemented to
increase travel and tourism to the United States. An example of
a recent initiative that ITA has undertaken to facilitate the
travel process is its work with CBP to develop a pilot a
biometric entry and exit system that, once fully deployed, will
help create a more secure and seamless travel experience. To
this end, the United States Travel and Tourism Advisory Board,
an advisory committee established pursuant to the Federal
Advisory Committee Act and overseen by ITA, is tasked with
providing recommendations on how the public and private sectors
can collaborate to accelerate progress on the implementation of
the biometric entry and exit system at U.S. ports of entry. The
Board provided recommendations on this topic in April 2019, and
Department officials are reviewing them with interagency
partners to determine how to best implement the
recommendations. We welcome further engagement with your office
on initiatives that the Department may pursue to further
facilitate travel to the United States.
Q.5. While I received your assessment during consideration of
your nomination last Congress, can you please provide an update
to the trends we are currently seeing in international tourism
given the rhetoric and policies toward some Nations or groups,
of this Administration?
A.5. International visitation and international visitor
spending both set records in 2018. A record 79.6 million
international visitors enjoyed the United States and spent a
record-setting $255.5 billion. International tourism supports
1.2 million jobs in the United States. Thirty-one percent of
all services exports in 2018 were travel and tourism-related
and travel and tourism accounted for 10 percent of all exports,
goods and services alike, in 2018. In terms of growth in
visitation by residents from specific markets, the United
States saw increases from the two biggest visitor markets,
Canada (4.9 percent) and Mexico (3.9 percent). South America
was up 8.5 percent with Brazil up 15.5 percent and Colombia up
12 percent, among our biggest gainers. Western Europe saw
increases in several key markets--U.K. (3.9 percent), France (6
percent), Spain (6 percent), and Italy (4 percent). Visitation
by residents of countries in Asia was mixed. Down markets
included China (5.7 percent), South Korea (5.3 percent) and
Japan (2.8 percent). Visitation from India increased by 7.2
percent.
Q.6. I also previously asked you for your thoughts on the
Federal Brand USA program, for which I didn't receive a
specific answer to whether you supported Federal funding of
this specific successful program?
A.6. The Administration understands the value of travel and
tourism to the economy. The Department continues to be very
engaged with Brand USA; the Secretary has appointed the Brand
USA board of directors, approved Brand USA's annual objectives,
and transmitted the Brand USA annual report to Congress. The
Department is committed to exploring all ways to increase
travel and tourism to the United States.
Q.7. In your previous response on Brand USA, you stated ``I
will commit to being a strong advocate for public-private
partnerships that promote the United States as a tourist
destination, and will do so based on the Administration's and
Congress' approved budgets and policies.'' From that statement,
please help me reconcile what your position will be toward that
program as the Trump administration has again proposed to cut
funding for Brand USA in their FY20 budget?
A.7. For the reasons described above, the Department and I
fully support travel and tourism to the United States, and we
will continue to advocate for the economic growth that such
tourism brings, including through private-public partnerships.
I will faithfully execute the budget that Congress passes and
that the President signs into law, and should that budget
include funding for Brand USA or some other type of public-
private partnership, I and the Department will support Brand
USA and continue to work to leverage all possible resources to
maximize international travel to the United States.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM IAN PAUL STEFF
Q.1. The Foreign Commercial Service is critical to many U.S.
exporters who struggle to navigate complex foreign markets and
need advocates on the ground to help them succeed. I've been
disheartened to see President Trump propose to slash this trade
office's funding in the last couple of budgets. This office
deserves a leader who will advocate for its programs and staff,
and communicate its importance to Administration leadership and
the public.
Do you believe in the mission of Foreign Commercial
Service?
A.1. If confirmed, I would be incredibly honored to lead the
U.S. and Foreign Commercial Service, with its global network of
more than 1,300 international trade and inward-investment
professionals at our U.S. Embassies and Consulates in 76
countries and 108 cities across the United States. I
wholeheartedly believe in their mission to help business create
jobs and grow our economy through exports and inward
investment. I also know unequivocally that our U.S. and Foreign
Commercial Service is unique and the only group in the U.S.
Government that is equipped, experienced, and capably dedicated
to lead the charge on behalf of U.S. exporters, particularly
small- to medium-sized companies, into a future of increasingly
aggressive and competitive global business. I have the utmost
respect for this global team of professionals who deliver daily
on behalf of our Nation's exporters. I also know that in terms
of value, no organization within the U.S. Government has a
greater return on its investment on behalf of U.S. exporters
than the U.S. and Foreign Commercial Service. I believe in
their mission, and I plan to help grow that value.
Q.2. Can you commit to me today to work toward strengthening
the office and fight against the President's budget cuts?
A.2. I stand behind the President's budget and will direct the
use of our appropriation to its maximum efficiency and
effectiveness for our exporters. I commit to working with you
and your colleagues throughout the budget and appropriations
process. My top priority will be to dedicate those allocated
resources to make the U.S. and Foreign Commercial Service the
strongest advocate it can be for U.S. companies doing business
in an increasingly competitive world, while equipping the team
with the tools they need to compete.
Q.3. Building stronger economic links with our neighbors in
Latin America has always been a priority of mine. The region
presents tremendous opportunity for the U.S. to develop export
markets and to form partnerships to boost our Nation's
competitiveness as we look to compete in the global economy
with China and others.
If confirmed, will you prioritize developing relationships
with our partners in Latin America?
A.3. I share your view that Latin America presents many
important growth opportunities for the United States. The
Commerce Department has led productive engagements, talks, and
visits with their respective counterparts in the region,
enhancing our commercial and economic relationship. The fact
that the United States has sought to bring the NAFTA into the
21st century by way of the new U.S.-Mexico-Canada agreement,
demonstrates a strong commitment to the Americas. Modernizing
and rebalancing our trade relationship with Mexico will foster
a better investment climate for reciprocal trade, that supports
high-paying jobs for Americans and will grow the overall North
American economy.
Creating a more level playing field for American workers to
boost our Nation's competitiveness is an important first step
in expanding opportunities for U.S. exports in Latin America,
and as we look to compete in the global economy with China and
others. In addition, I look forward to continuing Global
Markets' strong focus on Latin America through our advocacy and
Select USA efforts. We've seen many strong delegations from
Latin America looking to invest in the United States.
Q.4. Will you commit to expanding the Foreign Commercial
Service's footprint in the region?
A.4. I recognize that the increasing heat of global competition
faced by our U.S. exporters is right in our back yard in Latin
America. Over the last decade, many of our exporters have lost
ground to Government-supported foreign competitors in Latin
America and other markets around the world. We cannot afford to
cede further ground, and we need to show our trading partners
around the world that we choose to compete, and that we mean
business on behalf of our Nation's exporters.
If confirmed, I will strategically allocate those resources
available to us to ensure our companies pursue opportunities to
compete for and gain back market share and win new business in
Latin America and around the world. I commit to working with
you and your colleagues to find opportunities where we can
further strengthen our effectiveness and services in the
region, while supporting a multitude of action oriented
commercial dialogues in Latin America. Likewise, I look forward
to working with the private sector to grow our commercial
relationship in sectors of mutual interest in the region.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM MICHELLE BOWMAN
Q.1. Please provide to the Committee a detailed list of all
meetings with individuals or groups not directly affiliated
with the agency you serve, from the date of your confirmation
by the Senate to present.
A.1.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Q.2. In a recent speech entitled ``Community Banking in the Age
of Innovation'', you explained that ``FinTech firms originate a
larger share of personal loans than banks,'' but ``we should
not simply assume that gains by FinTech lenders are necessarily
at the expense of banks.'' You highlight the opportunities for
community banks to partner with fin tech firms.
Do you support these same FinTech firms competing directly
with community banks through industrial loan company (ILC)
charters or OCC special purpose national bank charters?
A.2. I support innovations in financial services because I
believe it can benefit consumers and small businesses through
expanded access to financial services, greater efficiency,
increased convenience, or potentially reduced transaction
costs. The question of FinTech companies operating through
industrial loan company (ILC) charters requires careful
consideration. As you know, the Federal Reserve does not
supervise ILCs or their holding companies.
The Office of the Comptroller of the Currency's (OCC)
proposed special purpose national bank charter raises
interpretive and policy issues for the Federal Reserve Board
(Board), for example, questions relating to Federal Reserve
membership, status under the Bank Holding Company Act, access
to Federal Reserve accounts and services, or access to the
discount window. The Board would have to analyze these issues
closely if any FinTech firm was to obtain a special purpose
national bank charter.
Q.3. During your testimony, in response to my question about
consolidation making it harder for small banks to compete, you
said that your concern was investment in local communities and
that as branches are acquired in rural communities, home
investment in the community tends to be dissipating.
What actions is the Fed taking to ensure that acquiring
banks continue to invest in communities where all acquired
branches are located?
How will you ensure that banks distribute their investments
in all communities, not only the location in which the charter
is held?
Would you support requirements for banks to continue to
invest in these communities after an acquisition?
A.3. My interest is to see credit flowing to consumers and
businesses in all communities consistent with safe and sound
lending. This includes meeting credit needs in low- and
moderate-income areas and furthering economic development and
financial inclusion. The Community Reinvestment Act (CRA) is
one of the tools we have to accomplish this goal. The CRA
encourages banks to serve their entire community, in particular
the credit needs of low- and moderate-income communities. To
ensure that this is accomplished, the Federal Reserve evaluates
the records of State member banks in helping to meet the credit
needs of their communities. The CRA regulations define a bank's
``assessment area''--the area within which we evaluate their
CRA performance--as those areas around the bank's branches and
deposit taking ATMs. We are currently in discussions with the
OCC and Federal Deposit Insurance Corporation (FDIC) regarding
possible revisions to the CRA regulations. One aspect of the
regulation that we are discussing is a better way to delineate
the community served by a bank to provide better incentives for
providing credit in every assessment area, not just its major
markets.
When two banks merge, we evaluate the CRA performance of
the resulting bank in all the areas where they retain a branch
presence. In evaluating the convenience and needs of the
communities to be served following a merger, an institution's
most recent CRA performance evaluation is a particularly
important consideration in the applications process because it
represents a detailed on-site evaluation of the institution's
performance under the CRA by its appropriate Federal
supervisor. In addition to CRA performance, Federal Reserve
System staff considers recent actions taken to improve CRA
performance, comments submitted by interested parties and the
applicant's response to those comments, and the potential
effects of the proposal on the convenience and needs of the
communities to be served.
Q.4. In your remarks at the Conference of State Bank
Supervisors in April, you said that ``we must continue to
ensure that the institutions we supervise are proactively
managing their risks to remain strong'' and that ``it's the
[financial supervisors'] job to identify emerging risks to
community banks and to ensure bankers are identifying and
managing their risks appropriately.''
What are the emerging risks to community banks today?
A.4. Despite generally favorable economic and financial
conditions, community banks continue to manage a moderate level
of risk. Some emerging risks include cybersecurity, deposit
competition, and agricultural and commercial real estate ( CRE)
lending.
Cybersecurity continues to be an area of elevated risk
across the banking system as threats evolve and the banking
industry continues to face challenges in establishing and
maintaining adequate cyberdefenses. Threat actors are active
and innovative in seeking ways to exploit weaknesses in people,
processes, and technology.
Agricultural-based lending remains an area of concern. Net
farm income has declined since 2012 and continues to be an
issue. Low commodity prices, trade uncertiainty, and recent
unfavorable weather conditions in the Midwest have added to an
already challenging situation. Lower incomes and increasing
debt-servicing costs are impacting borrowers management of
operational debt. Weaknesses in credit at agricultural banks
can be seen in the form of carryover debt from prior operating
years, increasing levels of nonperforming assets, and modest
increases in the number of problem banks with significant
agriculture-related exposure.
CRE risk is an area of elevated risk, mainly due to the
widening gap between real estate values and property income
used to service outstanding debt. For most property types, the
primary driver of price appreciation appears to be new investor
demand rather than increasing rents or other property-level
fundamentals.
Q.5. Please describe what specific proactive measures the Fed
is taking to ensure that banks are managing these risks.
A.5. With respect to these risks, the Federal Reserve has
adopted common work programs to help examiners assess overall
IT operations, including cybersecurity of community banks. The
Federal Reserve also has included mandatory training for all
community bank examiners in the area of IT in order to
consistently identify and provide feedback to the banks
supervised by the Federal Reserve.
Building on earlier supervisory guidance on managing
agricultural lending, the Federal Reserve has sponsored a
number of training and educational opportunities for examiners.
In addition, the Federal Reserve closely monitors and provides
updates on farming conditions and agricultural lending
conditions to examiners.
As discussed in SR letter 19-9, Bank Exams Tailored to Risk
(BETR), the Federal Reserve has revised its procedures for
credit and liquidity risk to better identify risk and tailor
exam procedures based on the risk profile of a particular bank.
CRE concentrations and a bank's use of volatile funding sources
are among the factors that examiners consider in determining
whether a bank's activity is low, moderate, or high risk, which
will determine the procedures examiners will complete during
the examination.
Q.6. What additional steps should the Fed take to address these
risks?
A.6. With respect to cybersecurity, we continue to review our
program and have placed a high priority on building our
expertise to ensure we and the institutions we supervise
understand and manage the associated risk. With respect to
agriculture lending, the Federal Reserve will continue to
gather current information on industry factors that (1) affect
the ability of farm producers to repay loans, (2) influence
collateral values, and (3) affect the ability of producers and
banks to hedge potential losses. We will continue to focus on
examining banks with concentrations in agricultural lending,
with particular emphasis on ensuring banks hold capital
commensurate with their portfolio compositions. And, as
mentioned, with respect to CRE concentrations, this remains to
be an area of focus.
Q.7. In your capacity as community bank designee, what is your
definition of a community bank?
What is the largest firm, by assets, that you consider to
be a community bank?
In how many States can a bank operate and still be
considered a community bank?
Are there any financial activities that you think
disqualify a firm from inclusion as a community bank?
What is the maximum number of distinct subsidiaries and
affiliates at a bank or bank holding company that you would
still consider to be a community bank?
A.7. There are a number of statutory definitions for community
banking organizations, but the Board uses $10 billion in total
assets as the threshold for its supervisory and regulatory
purposes. It is my view that $10 billion is a reasonable
ceiling. However, various statutes tailor requirements for
community banks using differing threshold. For example, the
Small Bank Holding Company policy statement provides relief for
firms under $3 billion, while banks under $10 billion would be
eligible for Community Bank Leverage Ratio.
While no formal restriction on financial activities exists
that would disqualify a firm from being considered a community
bank, community banks tend to have more traditional, low-risk
banking operations. Additionally, there is no formal limit on
the number of subsidiaries and affiliates a community bank may
have and no restrictions exist on the number of subsidiaries
and affiliates, according to the Federal Reserve's current
operating practices. That said, as noted above, community banks
tend to have simpler banking operations than large banks.
In general, I do not believe a community bank should be
defined by the number of States in which it operates. Rather, a
bank's size, risk profile, capacity, and complexity, tend to be
more important factors.
Q.8. If confirmed to a full 14-year term, what will be your top
priorities as a member of the Board of Governors that serves as
the community bank designee?
A.8. My top priority as a member of the Board of Governors will
continue to be fulfilling the vital responsibilities Congress
has given us: to support full employment and stable prices,
regulate and supervise the banking system to ensure it remains
safe and sound, enforce consumer protection laws that require
everyone be treated fairly, and carry out the Board's important
payments-related responsibilities.
As the first governor to fill the role the Congress
designated for someone with community banking experience on the
Board, I will continue to travel widely and listen closely to
community bankers, consumers, small-business owners, and
community leaders. I will make sure these diverse perspectives
are represented in the Federal Reserve' s deliberations and
decision making on both monetary policy and regulatory matters.
As I noted in my testimony, I firmly believe that, as
regulators, we need to ensure that we are not imposing
unnecessary burdens on community banks. That is why one of my
priorities as governor has been to tailor appropriately our
supervision and regulation to the size, complexity, and
capacity and risks posed by an institution. To further this
effort, I recently formed a working group of experts from
across the Federal Reserve System to launch a comprehensive
review of our supervisory work with smaller, regional and
community banks.
In carrying out each of my responsibilities, I am committed
to accountability, transparency, and clear communication.
Q.9. Systemic regulatory failures, like the savings and loan
crisis and 2008 financial crisis, have been the largest
contributors to community bank failures over the last 30 years.
What actions are you taking to ensure that excessive risk-
taking in corporate debt will not result in harm to the
financial sector broadly and community banks specifically?
A.9. Widespread failures of community banks are indeed risks to
economic growth, particularly in the communities they serve.
The wave of community bank and savings and loan failures in the
late 1980s and early 1990s was a strong headwind to the
economy, requiring coordinated action by Congress and bank
regulatory agencies. We absolutely want to avoid the need for
such extraordinary measures in the future.
Community banks emerged from the financial crisis
substantially more resilient than they were in the precrisis
period. Their regulatory capital ratios are higher, and they
now rely more on capital instruments with greater loss
absorbency. There is no substitute for high quality capital in
limiting stress on institutions from the risks they take in the
normal course of the bank. The use of wholesale funding--
another source of pressure during stressful periods--by
community banks remains significantly below the levels that
were typical prior to the financial crisis. We continue to
closely monitor the solvency and liquidity risks among
community banks.
Community banks traditionally have little exposure to
leveraged loans, and legal lending limits combined with the
minimum participation sizes would limit most banks of that size
from becoming significantly active in that market. Community
banks are exposed to the small business sector as well as
unincorporated businesses through traditional commercial and
industrial lending. The current credit performance in the small
business sector is quite strong, and during the past two
downturns, small business lending has not generated outsized
losses after accounting for the size of the economic
contraction. We also closely monitor community banks that do
have high concentrations of business-related debt to ensure
they have appropriate risk management processes in place.
That said, some community banks do have significant
concentrations of CRE loans. We pay close attention to this
sector, because it has played a role in previous episodes of
widespread banking stress. The Commercial Real Estate Guidance
issued in 2007 includes expectations that banks with
concentrations in CRE have in place enhanced risk management
programs, and the fraction of banks with large CRE
concentrations is much lower than it was heading into the 2008
financial crisis. Moreover, our financial stability assessment
highlights the attention we have given to CRE prices and
lending standards. We will continue to closely monitor this
sector as well as supervised banks with concentrated exposure
to CRE.
Q.10. Are you concerned that the deregulation of foreign
banking organizations (FBOs) as proposed in April will create
additional competitive pressures on community banks? Are FBOs
direct competitors with community banks in activities like
small business and residential mortgage lending? If not, what
activities do FBOs engage in that distinguish their business
and risk profile from community banks?
A.10. Most branches and agencies of foreign banks are not
direct competitors of community banks, as foreign banking
organizations (FBOs) tend to have a wholesale business model
focused on large borrowers and home country customers operating
in the U.S. FBOs generally engage in limited residential
mortgage lending, most of which flows to employees of the bank.
Some U.S. commercial banks owned by FBOs may directly
compete with community banks. Of the 4,751 commercial banks
operating in the U.S. as of year-end 2018, FBOs operate 39 of
them.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM MICHELLE BOWMAN
Q.1. The community bank leverage ratio (CBLR) created pursuant
to S. 2155 is of paramount interest to community banks in South
Dakota. I am particularly concerned about how the CBLR was
created because the current CBLR includes changes to the Prompt
Corrective Action framework that would effectively eliminate
any relief achieved from the creation of the leverage ratio.
I've heard from several institutions in my State that they will
decline to take advantage of the CBLR as a result.
Why was 9 percent chosen for the community bank leverage
ratio?
A.1. The Federal banking agencies jointly issued a proposal
that would allow community banking organizations that meet
certain qualifying criteria to opt into a simple, leverage-
based capital framework. Firms that opt into the framework
would not be subject to the capital rule's risk-based capital
requirements.
Under the proposal, a qualifying community banking
organization may elect to use the community bank leverage ratio
(CBLR) framework if its CBLR is greater than 9 percent. A 9
percent CBLR should generally maintain the current level of
capital held by these banking organizations, while supporting
the banking agencies' goals of reducing regulatory burden for
community banking organizations and retaining safety and
soundness in the banking system. Before finalizing the CBLR
rule, I, along with my Federal Reserve Board (Board) colleagues
will consider all public comments received as well as the input
received from State bank supervisors.
Q.2. S. 2155 required Federal regulators to engage in a
dialogue with State banking regulators regarding how the
leverage ratio should be set. How did the Federal Reserve
fulfill this requirement?
A.2. The banking agencies have worked closely with State bank
supervisors over the past several months to inform the
rulemaking process, and are considering their constructive
input and feedback as we work to finalize the CBLR framework.
Q.3. What changes will be made to the community bank leverage
ratio so that community banks can actually avail themselves of
this relief?
A.3. The banking agencies are still considering the public
comments received on the proposal as well as the input received
from State bank supervisors. Moving forward in the rulemaking
process, the banking agencies will strive to develop a CBLR
framework that is consistent with congressional intent.
Q.4. I am honored to be the sponsor of the Financial Stability
Oversight Council Improvement Act of 2019, which would require
FSOC to determine whether potential nonbank threats to
financial stability could be better solved by allowing
companies to work with their primary regulator or through the
development of a risk reduction plan. This legislation is
important because most FSOC members are banking regulators and
applying banking regulations to nonbank companies would be
harmful to our capital markets and to Main Street investors.
Do you agree that FSOC should focus on empowering primary
regulators so that true systemic risks can be addressed?
A.4. I believe that the Financial Stability Oversight Council
(FSOC) should work closely with the relevant primary regulators
when addressing systemic risks, and my understanding is that
the proposed activities-based approach to nonbank designation
strengthens such coordination.
Q.5. Do you agree that it's important for FSOC to consult with
primary regulators before voting on a SIFI designation?
A.5. Yes, I agree on the importance of consultation with
primary regulators before any FSOC vote on a systemically
important financial institution designation to leverage the
expertise of that regulator and explore alternative solutions
to mitigate systemic risk. The activities-based approach
envisions close cooperation between the FSOC and the relevant
regulators.
Q.6. Do you agree that addressing nonbank risk does not always
have to include a SIFI designation?
A.6. Yes, I believe that there are ways to address nonbank
risks other than through designating firms as systemically
important. Indeed, it is my understanding that the proposed
amendments to the nonbank designation guidance are intended to
capture instances where designating an entity may not
effectively address the risk to the system.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS
FROM MICHELLE BOWMAN
Q.1. The Federal Reserve's (Fed) regulatory approach to
interaffiliate margin transactions is an outlier. The margin
requirements have the effect of locking up capital that could
otherwise be used for economic growth and they discourage
centralized risk management practices among firms. In addition,
the current approach results in the movement of collateral out
of the U.S. insured depository institutions. These are all
suboptimal policy outcomes. Regulatory authorities in the
European Union, Japan, and most other G20 jurisdictions each
currently provide such an exemption for these transactions. You
have indicated you are aware of the issue but, to date, I've
seen no official action from the Fed to fix the problem.
The recognition for the need for an exemption began under
regulators nominated by President Obama. In 2013, CFTC Chairman
Gary Gensler provided an exemption for central clearing and
trade execution. In 2015, CFTC Chairman Tim Massad provided an
exemption, determining that initial margin was not warranted
and it was a ``very costly and not very effective way'' to
enhance risk management. Yet, the Fed did not provide an
exemption from initial margin in the 2016 margin rules, and as
a result, as of the end of last year, U.S. banking entities
collected nearly $50 billion in initial margin from their own
affiliates. In 2017, the Treasury Department noted that this
rule puts U.S. firms at a disadvantage both domestically and
internationally, recommending that your agencies provide an
exemption consistent with the margin requirements of the CFTC.
Do you agree that an exemption from initial margin is
appropriate for interaffiliate transactions?
A.1. The Board is actively discussing this aspect of the rule
with the other prudential regulators. The goal is to assess
what, if any, changes can be made consistent with the statutory
directive that margin requirements help ensure the safety and
soundness of covered swap entities and are appropriate for the
risk associated with noncleared swaps.
Q.2. Will you prioritize a rule to provide an exemption for
interaffiliate transactions, separate from any broader
regulatory effort such as a Regulation W rewrite?
Please provide an explicit timeline for when the Fed will
take action.
A.2. Discussions with the other prudential regulators as
mentioned above are separate and apart from any broader
regulatory efforts. While I am not able to provide a specific
timeline for you, we will strive to address the issue as soon
as possible as we coordinate with other relevant agencies.
Q.3. The reason a ``Reg W'' rewrite is suboptimal is that it
will be counterproductive and slow. Most believe it will take 5
to 6 years to complete. This capital needs to be released soon
because we have geopolitical risk emerging over the world that
could destabilize markets. If we have a Brexit, the number of
entities will double and more capital will be unfairly
sequestered. With potential trade volatility, Middle East
uncertainty, and other risks, our banks need to be able to use
capital for risk management, not have it trapped for no reason.
Could a Reg W action be done outside of providing an
exemption?
A.3. The swap margin rule, codified in the Board's Regulation
KK, is different than and separate from Regulation W. I
understand this question to be asking about the treatment of
interaffiliate transactions in the swap margin rule. The swap
margin rule requires that a covered swap entity collect initial
margin from an affiliate. If the Board were to change this
requirement, it would do so through the normal public notice
and comment rulemaking process consistent with the
Administrative Procedure Act.
Q.4. Please explain any reasoning for not allowing this
exemption this year.
A.4. While we are actively discussing this aspect of the rule
with the other prudential regulators, I am not able to confirm
a timeline on the result of our collaboration. I understand the
importance of moving as quickly as possible.
Q.5. In October of last year, the Fed issued a request for
public comment on ``actions the Federal Reserve could take to
support faster payments in the United States.'' We understand
the Fed has been working collaboratively with the banks and
other private sector stakeholders for years on how best to
facilitate faster payments. As Chairman Powell noted at a
recent press conference, the Fed has thus far been ``more of a
convener, bringing industry and the public and public interest
groups . . . around the table and . . . playing a constructive
role'' in encouraging the private sector in this area. In
October, however, the Fed issued a request for public comment
indicating that ``it will probably enter the market for faster
payments as a direct competitor of the private sector solutions
with its own Real-Time Gross Settlement'' (RTGS) system.
Is it possible the Fed's proposal could hamper and delay,
rather than facilitate, the arrival of real-time payments?
A.5. In its 2018 Federal Register Notice (2018 Notice) request
for public comment, the Board of Governors (Board) requested
feedback on the impact of Federal Reserve action(s) in faster
payments settlement. In particular, the 2018 Notice
specifically asked whether Federal Reserve action would help or
hinder adoption of faster payment services by the financial
services industry. This matter is still pending before the
Board, and we are carefully reviewing the comments received.
Q.6. Please explain why the Fed is proposing the creation of a
Government-run real-time payments system when the private
sector has already created one that is up and running?
A.6. The Federal Reserve has not committed to any action at
this time. Any decision made by the Board will consider
carefully the importance of the views of the private sector on
this issue.
Q.7. The Fed's own policy statement on ``The Federal Reserve in
the Payments System'' requires that the Fed satisfy three
conditions before proposing a new service.
Among those is a finding that the private sector ``cannot
be expected to provide such service with reasonable
effectiveness, scope, and equity.'' Has the Fed made this
finding, and, if so, on what grounds was it made?
A.7. The Board has not made a determination at this time.
However, throughout the Board's deliberations, it will adhere
to the requirements of the Federal Reserve Act, the Monetary
Control Act (MCA), and longstanding Federal Reserve policies
and processes.
Q.8. How long would it take for the Fed to create its real-time
system?
A.8. At this time, the Federal Reserve has not committed to any
action. If the Board determines to pursue a Real-Time Gross
Settlement (RTGS) service for faster payments, a subsequent
Federal Register notice would be issued that outlines
additional details of the proposed service.
Q.9. Would the Fed's proposed RTGS and the existing private
sector real-time payments network be interoperable and, if so,
why--specifically--do you believe that will be the case?
A.9. The Board's request for comment asked for feedback on
several areas, including interoperability with existing or
potentially new Real-Time Gross Settlement (RTGS) service
providers. Various commenters responded to such questions. The
Board is assessing these comments and seriously taking them
into account.
Q.10. If you believe the systems would interoperate, would such
interoperability require the private sector system to
significantly alter its current design?
A.10. As I mentioned above, the Board is reviewing the comments
received on the proposal, including those comments on
interoperability, and will take this feedback into account
throughout its deliberation.
Q.11. My understanding is that the Fed seeks to justify this
potential action in part on a perceived need for
``resiliency''. The notion that having two systems would
provide resiliency necessarily assumes that every bank in the
country (or at least an overwhelming majority of them) would
have to connect to two systems: the private sector system and
the yet-to-be-built Government-run system, which would create
enormous inefficiencies and impose needless costs on the
American taxpayer and the private sector.
Have you done any cost-benefit analysis, particularly in
light of the other faster payment options currently in the
market that already serve as near substitutes, like payments
over the card networks, same-day ACH, PayPal, Venmo, Zelle,
Fedwire Funds Service itself, to determine whether or not this
proposal makes any sense?
A.11. The Board is considering the comments of the broad range
of stakeholders throughout its deliberation, including the
points you raise on resiliency and costs. We note that the
Monetary Control Act of 1980 requires that Federal Reserve
services must be priced to recover actual expenses associated
with providing the services as well as certain imputed costs,
including the taxes and cost of capital that would be paid by a
private sector competitor. Importantly, the Board is
considering the comments from the broad range of stakeholders
throughout its deliberation.
Q.12. Doesn't the Fed already regulate and supervise the
private sector real-time payments operator, which we understand
has an impressive track record for resiliency, operating with
multiple data centers, redundant systems, etc? Are you
contending that your regulatory and supervisory powers over the
private sector operator are deficient in terms of your
supervising the private sector's plans to ensure resiliency?
A.12. The Board does not have plenary regulatory or supervisory
authority over the U.S. payment system. Rather, the Board has
limited authority to influence the operations of private sector
retail payment services providers in certain circumstances and
pursuant to specific laws. For example, assuming the private
sector operator is subject to the Bank Service Company Act
(BSCA), the Board and other Federal banking agencies would have
authority to regulate and exam third party service providers
that perform certain services for depository institutions that
the agencies regulate. The BSCA, however, does not grant
enforcement authority to the Board or other Federal banking
agencies over the third party service providers.
Q.13. In light of the recent Fedwire Funds outage, which we
understand came at a critical part of the day when private
sector settlement relies on Fedwire, should the Fed's
resiliency focus perhaps be on the Fedwire Funds system, which
has vital systemic importance, rather than committing time and
resources to standing up new infrastructure that may or may not
provide resiliency?
A.13. I recognize the critical role that the Fedwire Funds
Service plays in the financial system. Maintaining and
enhancing the resilience of this service is, and will continue
to be, an area of focus for the Board. The Board, through its
oversight of the Reserve Banks, holds the Fedwire Funds Service
to the standards included in Part 1 of the Federal Reserve
Policy on Payment System Risk, which include robust operational
resilience expectations. These expectations are consistent with
the international standards applicable to systemically
important financial market infrastructures operated by the
private sector. The Federal Reserve Banks strive to not just
meet these standards, but to continuously strengthen Fedwire
Funds' resiliency posture, and doing so will remain an ongoing
area of focus.
The Fedwire Funds Service has historically provided a very
high level of operational reliability. Having responded to the
outage's immediate cause, efforts are underway to identify,
understand, and respond to the outage's proximate causes so
that the same high levels of operational reliability continue
going forward.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM MICHELLE BOWMAN
Q.1. My home State of New Jersey is moving toward legalization
of recreational marijuana, and I have concerns that these new
businesses as well as existing medical marijuana businesses in
the State will continue to find themselves shut out of the
banking system. And when these businesses are forced to operate
exclusively in cash, they create serious public safety risks in
our communities.
I've already heard support from Chair Powell and
Comptroller Otting on this issue, but I'd also like to know if
you agree that financial institutions need legislative clarity
on this issue?
A.1. Yes, I do. However, only Congress can provide financial
institutions legislative clarity on the conflict between
Federal and some State laws on the legalization of marijuana
and whether banks can service marijuana businesses that are
legal under State law. The Federal Reserve is monitoring the
various legislative proposals Congress is considering to
resolve this issue.
Q.2. Closely related to the provision of banking services is
the ability for such businesses to access insurance products, a
necessity for those looking to secure financing. Would it be
helpful for Congress to also consider the role of insurance
companies as States move toward legalization?
A.2. Access to insurance products is an important aspect of
commerce. If Congress decides to address the conflict between
Federal laws and some State laws on the legalization of
marijuana and whether banks can service State legal marijuana
businesses, it would likely be helpful to also address any
similar issues related to insurance companies and products.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM MICHELLE BOWMAN
Q.1. The Federal Reserve Board of Governors is engaged in an
interagency process to rewrite the Community Reinvestment Act
(CRA) rules.
In your view, what is problem with the current Community
Reinvestment Act (CRA) regulations?
A.1. The Federal Reserve Board of Governors (Board) takes our
Community Reinvestment Act (CRA) responsibilities seriously and
strives to conduct meaningful CRA evaluations. There has been
considerable change since the time the regulations implementing
the law were last revised. The Board supports modernizing CRA
to improve the clarity, consistency, and predictability of how
CRA performance is assessed, as well as the predictability of
which community development investments and loans qualify for
CRA consideration. While there is a lot that is good about the
current regulations, many stakeholders have said that they are
too complicated and that if they were made simpler and more
transparent both banks and communities would benefit.
I believe that the regulations should recognize that banks
serve communities with different credit needs. Additionally,
the regulations should be tailored to evaluate a bank's CRA
performance in light of its size, business strategy, capacity,
and constraints as well as its community's demographics,
economic conditions, and credit needs and opportunities. I also
understand the need to update assessment areas to reflect how
technology and other advancements have significantly changed
how financial services are accessed and delivered.
My Board colleagues and I support working with the Federal
Deposit Insurance Corporation and the Office of the Comptroller
of the Currency (OCC) to modernize CRA and believe the agencies
should find a way to preserve this statutory intent in any
future update of the regulation. We are continuing to evaluate
public input from a wide range of stakeholders on ways to
modernize the CRA, including through the OCC's Advanced Notice
of Proposed Rulemaking and the roundtables that the Federal
Reserve held across the country from October 2018 through
January of this year. \1\
---------------------------------------------------------------------------
\1\ See https://www.federalreserve.gov/publications/files/
stakeholder-feedback-on-modernizing-the-community-reinvestment-act-
201906.
Q.2. Currently, more than 98 percent of banks pass their CRA
examinations but lending discrimination and banking deserts
still exist in communities all across the country. Does this
---------------------------------------------------------------------------
suggest that CRA examinations are too early?
A.2. The CRA regulations are very specific with respect to the
criteria necessary to achieve a ``Satisfactory'' or
``Outstanding'' rating. In general, banks work to avoid poor
CRA ratings, which can lead to community relations and public
reputational issues, result in more frequent CRA evaluations,
and pose a significant barrier to any future plans for
expansion. Ratings also are made public, giving banks
additional incentives to establish effective CRA programs.
Given these factors, I believe that our CRA examination process
is robust and rigorous.
Q.3. More than half of mortgages are now made by nonbank
mortgage companies. Should these nonbank lenders have CRA or
other similar obligations to serve the whole communities in
which they are located?
A.3. I have heard this concern expressed in my meetings with
community bankers. As you know, decisions about which financial
institutions to exempt from certain laws or rules are a matter
for Congress or, if granted the authority by Congress, by the
regulator with responsibility for promulgation of regulations,
which in this case is the Consumer Financial Protection Bureau.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM MICHELLE BOWMAN
Q.1. I am very concerned about climate-related financial risks.
The most recent National Climate Assessment said the U.S.
Southwest could lose $23 billion per year in region-wide wages
as a result of extreme heat. Since you joined the Federal
Reserve Board, what have you done to prepare community banks
for long-term shifts in climate patterns, like increasing
extreme heat and more severe and more frequent storms?
A.1. Congress has placed the responsibility to address climate
change within other agencies. The Federal Reserve Board's
(Board) supervisory framework guides supervisors in their work
with these institutions on a wide range of risk management
practices, including those around severe weather events. To
supplement that broad framework, the Board also has issued
guidance on lending to sectors where assessments of severe
weather-related risks are especially critical, such as
agriculture and energy lending. I can assure you that I
appreciate the distinct concerns of community banks in this
space, because of both their size and their important social
role; I will continue to urge Federal Reserve examiners and
supervisors to do the same in their daily work.
Q.2. In March, Glenn Rudebusch published an economic paper on
Climate Change and the Federal Reserve. The paper notes that
droughts, floods, and hurricanes amplified by climate change
could result in more infrastructure damage, agricultural
losses, and commodity price spikes. Rudebusch notes that ``some
have advocated that central banks use their balance sheet to
support the transition to a low-carbon economy, for example, by
buying low-carbon corporate bonds.''
Do you think Congress should consider changing the law to
support ``green'' quantitative easing as an option for the Fed?
A.2. The Federal Reserve conducts monetary policy to promote
its statutory goals of maximum employment and stable prices.
Decisions about how to foster new technologies, new industries,
or about channeling credit to particular sectors of the economy
inevitably involve competing political interests. The Congress
and the Administration are in the best position to make
judgments balancing those interests on behalf of the U.S.
taxpayer.
Q.3. Which other Central Banks allow green quantitative easing?
Do you believe those models could translate to the American
financial system and economy?
A.3. I am not aware of any advanced-economy central bank that
has a ``green quantitative easing'' program. As I noted in my
response to Question 2, Congress and the Administration are in
the best position to evaluate this question.
Q.4. In the Federal Reserve's Supervisory Report released
November, there was a section on merger and acquisition risks.
The banking law passed last year changed the asset threshold
for a small bank holding company from $1 billion to $3 billion.
It also reduced capital requirements and other rules for banks
above $50 billion. We have seen more bank mergers since the law
passed.
Do you expect to see more bank mergers this year and next
year than in previous years?
How much of merger activity is due to changes from S. 2155
and other regulatory actions?
A.4. Merger activity is affected by a number of factors,
including economic environment, industry outlook, and factors
unique to particular institutions or business models. As such,
I am not able to draw conclusions on the effect of S. 2155 or
other regulatory actions at this time. Following the
implementation of S. 2155, we have not seen a significant
change in applications for bank acquisitions and mergers
submitted to the Federal Reserve System to date. In fact, the
number of these types of applications submitted to the Board is
lower now than in the years before the financial crisis.
Between May 24, 2018, the enactment date of S. 2155, and
December 31, 2018, the Federal Reserve System received 113
applications for the proposed merger and acquisition of banking
organizations under the Bank Holding Company Act, the Bank
Merger Act, and the Home Owners Loan Act. This number is lower
than the number of merger and acquisition applications
submitted during the same period for each year from 2006 to
2017.
Q.5. What do you see as the risks from mergers and acquisitions
beyond the impacts on the customer?
A.5. Like any firm, a variety of risks are always present, but
when firms merge or make acquisitions, the chief risk is
operational. Operational risk could present during the
integration of systems related to risk management, information
technology, Bank Secrecy Act/Anti-Money Laundering, and the
Community Reinvestment Act. In reviewing bank merger and
acquisition proposals, the Federal Reserve considers the
applicant's plans for implementing the proposal and its
capacity to do so effectively.
Q.6. What are the risks to communities when banks merge?
A.6. Congress has given the Federal Reserve a set of statutory
factors to use during the evaluation of a merger or acquisition
application, one of which is the convenience and needs of the
communities to be served and public benefits. Furthermore, the
Federal Reserve also must analyze the competitive effects of
the proposal, including whether the proposal would
substantially lessen competition in any section of the country.
In addition, the Board considers the applicant institution's
business model, its marketing and outreach plans, and the
institution's plans following consummation of the proposal. I
take this role seriously and intend to be thorough in my review
of all current and future applications.
Q.7. Are you concerned about a loss of branches? Types of
products? Jobs?
A.7. I understand and am sympathetic to the concerns raised
with respect to the potential loss of branches, products and
services and jobs following financial institution mergers. In
evaluating convenience and needs factors in bank acquisition
and merger proposals, the Board considers all relevant
information, including the addition of new products, extended
hours of service, or additional branch locations that will be
subsequently available to the public. With respect to branch
closures, banks are required to adhere to Federal Deposit
Insurance Act public notice requirements \1\ before closing
branches, which include the following:
---------------------------------------------------------------------------
\1\ Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
183 1r-1), as implemented by the Joint Policy Statement Regarding
Branch Closings (64 FR 34,844 (1999)). The Joint Policy Statement
Regarding Branch Closings states that the Federal banking agencies will
examine institutions for compliance with branch closure requirements in
accordance with each agency's consumer compliance examination
procedures.
The bank is required to provide reasons and other
supporting data for the closure, consistent with the
---------------------------------------------------------------------------
institution's written policy for branch closings.
For branches to be closed in low- or moderate-
income geographies, affected persons have the ability
to request a public meeting to explore the feasibility
of obtaining adequate alternative facilities and
services for the area.
The bank also is required to provide the public
with at least 30 days' notice, and the appropriate
Federal supervisory agency with at least 90 days'
notice, before the date of a proposed branch closing.
A pattern of branch closures in minority communities also
may be relevant in determining whether a bank is in compliance
with fair lending laws. For example, it may be a consideration
in determining whether a bank is engaging in redlining.
Branching is one of the factors that is considered in a
redlining analysis, along with the bank's CRA assessment area,
lending, marketing, and outreach practices. In evaluating
branching for these purposes, we analyze whether there are bank
branches in majority-minority census tracts.
The Federal Reserve considers applicants' plans for
products and services to be offered by the combined
institution, including significant anticipated changes to
products and services currently offered by the individual
institutions and plans to offer new, replacement, or enhanced
products and services. Many acquiring banks plan to offer the
products and services of both the acquiring bank and the target
bank throughout the footprint of the combined bank, resulting
in increased availability of products and services for
customers of each bank.
The Federal Reserve reviews applications for consistency
with the applicable statutory factors. These factors include
the applicant's current and pro forma financial condition and
future prospects, managerial resources, the convenience and
needs of the communities to be served and public benefits, the
competitive effects of the merger or acquisition, and impact of
the proposal on financial stability.
Q.8. At a time when community banks are earning record profits,
why have you voted repeatedly to lower the amount of regulatory
capital they hold?
A.8. The Board has not acted on any proposals to lower capital
levels for community banks. However, as I stated in my
testimony, as regulators, we need to ensure that we are not
imposing unnecessary burdens on community banks. This is why I
believe we must tailor our supervision and regulation to the
size, complexity, capacity, and risks posed by an institution.
Community banks are critical to so many local economies, which
is why it is important to adapt our approach to supervision and
regulation as the industry evolves.
Q.9. Why have you never joined Governor Brainard in a dissent
of all these deregulatory actions, including those that
weakened rules for the biggest banks?
A.9. As I stated in my testimony, the core reforms that
resulted from the crisis were crucial to ensure the resilience
of the U.S. financial system. At the same time, I believe that
our regulatory and supervisory framework should be tailored
according to banking firms' size, complexity, and risk profile,
in a way that minimizes costs and is consistent with statutory
provisions. I have appreciated the value placed on getting a
broad range of external and internal views throughout our
deliberative process.
Q.10. How does your support for revising the capital and
liquidity requirements for large banks help community banks?
A.10. One of the key goals of the recent tailoring proposals is
to better reflect the differences in risk profiles between
firms that qualify as U.S. global systemically important banks
and other large banking organizations. U.S. firms with the most
significant risk profiles would remain subject to the most
rigorous existing requirements under the proposals. These
proposals build on the Board's existing efforts to tailor its
rules and experience implementing those rules, and account for
changes to the enhanced prudential standards made by S. 2155,
the Economic Growth, Regulatory Relief, and Consumer Protection
Act.
Q.11. How does your support for weakened stress test regimes
for large banks help community banks?
A.11. I believe that a strong, resilient financial sector is
important to banking institutions regardless of their size.
Stress testing remains a core tool for the Federal Reserve. Our
proposal aligns compliance requirements for firms with less
risk while maintaining more stringent requirements for firms
with more risk and more systemic importance. The proposal also
provides banking organizations with additional transparency, so
that they can better comply with the tests.
Q.12. How does your support for changing the formula for
derivatives so that less capital is held against derivative
positions help community banks?
A.12. The Board, the Federal Deposit Insurance Corporation
(FDIC), and the Office of the Comptroller of the Currency (OCC)
(together, the agencies), estimate that the proposal would not
significantly change the amount of regulatory capital in the
banking system. The proposal updates standards for how large
banking organizations measure counterparty credit risk posed by
derivative contracts under the agencies' regulatory capital
rules. The proposed changes are designed to better reflect the
current derivatives market and incorporate risks observed
during the 2007-2008 financial crisis. The new approach, called
the ``standardized approach for measuring counterparty credit
risk'', or SA-CCR, is intended to better reflect the current
derivatives market and to provide important improvements to
risk sensitivity, resulting in more appropriate capital
requirements for derivative contracts exposure. The proposal
would require large banks to adopt SA-CCR, but permit smaller
firms to use the existing current exposure methodology (CEM).
While the agencies recognized that the proposed
implementation of SA-CCR would offer several improvements to
CEM, it may require, particularly for firms with relatively
small derivatives portfolios, internal systems enhancements and
other operational modifications that could be costly and
present additional burden.
Q.13. How does your support for reducing resolution plans for
big banks from once a year to every 4 or 6 years help community
banks?
A.13. Changing the frequency of resolution plan submissions for
large firms will not have an impact on community banks.
Community banks have total assets of $10 billion or less and
therefore, are not subject to the Dodd-Frank Wall Street Reform
and Consumer Protection Act (Dodd-Frank Act) resolution
planning requirement. The change in resolution plans is
consistent with the Board's broader efforts to tailor
supervisory expectations to the size and complexity of our
supervised firms.
Q.14. How does your support to end risk-reducing margin
requirements for derivatives transactions between affiliates of
large complex banks help community banks?
A.14. The banking agencies have not taken action on this
matter. However, I believe it is sensible to review our
regulatory requirements periodically to assess whether they can
be made more efficient, consistent with the Dodd-Frank Act and
considering other regulatory requirements applicable to the
firm.
If the U.S. prudential regulators (the Board, FDIC, OCC,
Farm Credit Administration, and Federal Housing Finance Agency)
propose to eliminate interaffiliate margin requirements, that
change would likely have limited effects on community banks
because community banks are already exempt from the swap margin
rule. Community banks and other small financial institutions do
not have to post margin for their noncleared swap transactions.
On August 1, 2016, the prudential regulators announced their
final rules exempting banks, savings associations, Farm Credit
System institutions, and credit unions with $10 billion or less
in total assets from the OTC margin requirements under the
Dodd-Frank Act. This relief is designed to allow such firms to
use OTC derivatives to hedge normal business activity as they
have done in the past (e.g., hedging the interest rate risk of
loans).
Q.15. If a fair lending exam detects a violation after a bank
has been graded for its Consumer Reinvestment Act exam, do you
think the bank should receive a retroactive downgrade?
A.15. I find discriminatory and other illegal credit practices
unacceptable and they have no place in civil society. Moreover,
such practices can have a negative effect on a bank's CRA
rating. The Board's current regulation is explicit about how to
consider illegal credit practices when assigning ratings.
Consistent with the regulation, our process entails a fact-
specific review of the matter before deciding whether it should
prompt a downgrade of a CRA rating, including the nature of the
practices, any corrective actions taken to address them, and
the policies and procedures in place to prevent them.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
FROM PAUL SHMOTOLOKHA
Q.1. As First Vice President of the Export-Import Bank (EXIM),
how will you work to assist Congress in reauthorizing EXIM's
charter, which expires on September 30, 2019?
A.1. If confirmed, I will work with Congress on any issue of
concern and provide insight from 30 years of business
experience in export and managing overseas market conditions
and customers. If confirmed, I would participate in areas where
I have the most prior experience, so I would seek to ensure
that the small business perspective is considered as well as
the views of the international customer base. I would advocate
a sense of urgency for having the Bank be fully able to fulfill
its mission of creating American jobs, and follow the direction
of the Chairman in my work.
Q.2. EXIM President Kimberly Reed has pledged to make reforms
to improve the Bank's operations and to address certain
concerns with regard to credit assistance offered by the Bank,
such as ensuring that EXIM does not compete with private
financing.
As the Bank pursues reforms, whether through proposals for
action by EXIM's board of directors or a proposal for
reauthorization of the Bank's charter, will you pledge to
provide transparency in reform efforts?
A.2. Yes, I would provide transparency in reform efforts within
the parameters of the position of First Vice President and in
accordance with EXIM's Charter and Bylaws, as well as with my
experience of best business practices.
Q.3. If confirmed, are there any specific policies or
procedures of the Export-Import Bank that you would work to
alter or change?
A.3. If confirmed, I look forward to reviewing EXIM's policy
and practices and to reviewing implementation of all reforms
previously mandated by Congress and to ensure that EXIM
complies with all provisions in the Charter and Bylaws. As I do
not currently have access to internal EXIM information
concerning policies and procedures, I do not currently have
specific proposals to alter EXIM's policies or procedures. If
confirmed, I am interested in looking closely at what can be
done to improve small business application processes to
potentially reduce turnaround times while maintaining or even
improving EXIM's risk management practices. Additionally, given
my background, I would be interested in reviewing business
development, operations efficiency, customer service, brand
perception and values, product management, performance metrics
and goal setting, ethical standards, transparency, strong risk
management practices, and maintenance of client confidentiality
at appropriate times during a deal cycle. I would also like to
support EXIM's strategic plan and work collaboratively to chart
a new future for the Bank.
In order to make recommendations, I expect that my
colleagues and I on the Board of Directors would conduct a
review process that could involve congressional and EXIM staff
meetings, a review of EXIM-related GAO reports, surveys of U.S.
manufacturers (including those who are not clients of EXIM),
private sector financing sources (including community banks,
regional, and multinational banks), foreign EXIM customers,
United States Foreign Commercial Service staff in key markets
and U.S. and International Development Banks.
Q.4. Do you believe it is important to seek public comment from
EXIM customers and the general public before making any changes
that would significantly affect the availability of credit from
EXIM for certain products or economic sectors?
A.4. Yes, I believe that listening to the ``voice of the
customer'' is a critical tool to ensure best practices are
being followed in any organization. Public comments from
American manufacturers, international customers and taxpayers
add value in any decision-making process and I would seek to
combine that with input from Congress and the Administration
before making any changes that would significantly affect the
availability of credit from EXIM for certain products or
economic sectors.
Q.5. If confirmed, will you publicly defend the Export-Import
Bank against false or misleading charges of fraud?
A.5. Yes, I would publicly defend EXIM Bank against false or
misleading charges of fraud.
Q.6. Do you see a need to impose an upper limit on doing
business with any particular industry or commercial sector,
like aerospace manufacturing, that has previously relied
heavily on EXIM to access foreign markets? Or should EXIM's
lending be driven by demand from qualified applicants, to the
extent permitted by the Bank's charter?
A.6. If confirmed, I will faithfully execute all laws
consistent with the intent of Congress and within the authority
of my office. I will review each transaction independently, on
its merits, and in accordance with the EXIM Charter established
by the Congress, the Bylaws approved by EXIM's Board, and other
policies and procedures established by the Bank for review of
individual transactions. It is my understanding that Congress
has established EXIM to serve as a demand-driven institution.
EXIM must also consider the risks associated with individual
transactions and its overall portfolio. If transactions meet
the requirements as laid out in the Bank's Charter and the
risks can be appropriately managed, I do not see the need
currently to put a limitation on financing for sectors that
support American jobs.
Q.7. If confirmed, would you work to ensure that the comment
process for environmental and social impacts from projects is
properly structured and adequately resourced to ensure that
comments from concerned parties are meaningfully considered?
A.7. Yes, I would work with fellow Board members and EXIM staff
to ensure that the comment process for environmental and social
impacts from projects is properly structured and resourced to
ensure that comments are meaningfully considered.
Q.8. If confirmed, do you commit to providing all documents and
materials that the Office of Inspector General requests?
A.8. Yes. I believe that Inspector General requests are
critical to good governance, transparency, and ensuring
compliance. I would provide all documents and materials that
the Office of Inspector General requests of me.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM PAUL SHMOTOLOKHA
Q.1. The EXIM Bank is one of the most underutilized tools in
our toolkit for supporting U.S. exports and protecting our
national security interests. As of 2017, the export credit
agencies of Japan and Korea had $187 billion in medium and
long-term exposures; Canada, Germany, France, Italy, and the
United Kingdom had $306 billion; and China had an estimated
$363 billion.
By comparison, America's EXIM has an exposure of about $70
billion--about one dollar for every five of China's.
Do you agree that the EXIM Bank is an important piece of
our trade infrastructure that will help us compete with foreign
ECAs?
A.1. Yes, EXIM Bank is a critical part of our trade
infrastructure and it should assist in levelling the playing
field.
Q.2. Do you agree that the lack of a quorum at the EXIM Bank
over the past several years has had significant negative
consequences for U.S. competitiveness in markets like nuclear
energy and aerospace?
A.2. Yes, working for a company that was a supplier to large
power generation manufacturers I have personally observed the
negative consequences of the lack of a quorum at EXIM and the
inability to approve transactions over $10 million.
Q.3. As we go into reauthorization at the end of 2019, what are
your top priorities for the Bank?
A.3. Should I be confirmed, I expect that my top priorities
will include, but not be limited to: compliance with the
mandates in the Charter and Bylaws of the Bank and implementing
reforms mandated by Congress. I would also expect to focus on
improving transparency, reviewing the existing pipeline of
deals, and ensuring that EXIM is available to provide financing
that will help support and create jobs across the country.
In order to do so, I believe outreach to small, medium, and
large businesses and building closer cooperation with regional
and community banks will be necessary to revitalize the brand
and confidence in EXIM as a stable partner both inside and
outside the USA. Constant improvement is necessary to improve
EXIM's relationships and support for small business. Should I
be confirmed, I would expect to explore how cooperation with
other funding sources such as regional or national development
banks can help American business win supply contracts in
emerging markets, especially for infrastructure projects that
may require closer cooperation with private sector lenders.
Finally, should I be confirmed I would be interested in
working with the business divisions of the Bank to develop more
medium term financing opportunities, and examining what can be
done to improve small business application processes to
potentially reduce turnaround times while maintaining or even
improving EXIM's risk management practices. I believe EXIM can
continue to strengthen efforts to educate owners, finance
teams, and management at more American manufacturers on EXIM
products in order to respond to more aggressive tactics being
used by foreign competition.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM PAUL SHMOTOLOKHA
Q.1. Can you give me a few examples of U.S. companies you
worked with that financed deals with the Export-Import Bank?
A.1. While being respectful of business confidentiality
considerations, I can share the following anecdotes.
A regional cable TV company owned by a media group in
Brazil wanted to purchase quality American-made products and
turned to a global distributor of broadband network products
located in Florida, who worked with EXIM and put together
financing for a basket of products from several American
manufacturers. Financing from a private bank coupled with a
medium-term (5-year) loan guarantee from EXIM allowed the
company to source American products, including powering
equipment from my current employer, Alpha Technologies. This
Florida-based company is working to secure contracts for
additional opportunities in South America. Those transactions
will require financing from a Government-backed export credit
agency because the private sector is unwilling to finance such
transactions in certain markets.
In my own circumstances at Alpha Technologies, we had
decided to turn to EXIM Bank in 2017 for export financing
support. In order to continue to grow our export business, we
needed to balance the growing demand for our products with the
risks of exporting to certain fast-growing emerging markets in
Central and South America, Africa, and Asia. Private sector
export insurance was not readily available. Alpha had two
options: require that customers pay in advance of shipment or
offer to finance the transactions at lower values and assume
all the risk. An export credit insurance policy could have
helped Alpha offer more competitive terms at less risk to the
company's bottom line and would have increased deal sizes
significantly. Ultimately, due to an unrelated issue, Alpha's
internal resources were diverted from this initiative and
foreign buyers either purchased fewer products or moved to
other suppliers.
As a manufacturer of critical back up power systems for
large capital equipment, we sold these systems to a U.S.
manufacturer who then bundled it into their multimillion dollar
solutions that they marketed worldwide, often with EXIM
financing. In 2015, when EXIM lost its ability to provide
financing over $10 million, we noticed that the U.S.
manufacturer moved some of its procurement sourcing locations
overseas and utilized the export credit agencies of other
countries. We lost some sales to foreign competitors as a
result of these developments.
In my work in international sales, I have also been
informed by a number of leading international
telecommunications companies who, despite a desire to purchase
U.S. goods, have made purchases from other countries, including
China, because of the financing made available.
Q.2. Now that we have President Reed, and Commissioners Bachus
and Pryor, the board has a functioning quorum. How quickly do
you think the Export-Import Bank can finance the backlog of
sales--about $40 billion--that have been delayed over the past
4 years?
A.2. As my nomination is still pending and I am not involved in
EXIM's internal decision making, I cannot give an exact
timeline. To answer this question, I would need to know more
about the quality of the transactions in the pipeline and the
status of the deals as they have been in suspension for some
time. What I can say is that working through a large backlog
takes a solid plan based on resource availability and
priorities but no business has anything more important than
customers waiting for their products or services. Should I be
confirmed, I would seek to ensure that the Bank is being
diligent in its underwriting of current and new transactions
and is processing transactions efficiently, while being mindful
of the statutory obligations of EXIM's financing and our role
as responsible stewards of taxpayer dollars. I would also be
mindful of my own experience: that customers are impatient and
the market is efficient, and that suppliers may turn to other
means that are not necessarily in the American worker's best
interests.
Q.3. At any given time, the bank can have only $135 billion in
loans, loan guarantees, and other types of financing assistance
outstanding. After 4 years of restricted operations, it has
about $60 billion in credit out, leaving about $75 billion
available. The Export-Import Bank needs to be reauthorized by
September 30 of this year. Do you think Congress should raise
the credit exposure cap?
A.3. As I said when I testified before the Committee, I do
think that Congress should raise the overall financing
authority of the Bank. The exposure cap should be set at a
level that is based on forecasted need and that enables EXIM to
meet its statutory mandate to support U.S. jobs by facilitating
exports, to level the playing field for U.S. exporters, and to
supplement private sector capital. Regardless of where the
exposure cap is set, EXIM must maintain its robust risk
management procedures and be responsible stewards of taxpayer
dollars.
Q.4. There are more than 100 foreign export credit agencies
providing their companies with billions of financing. What have
you learned about how other Nations assist their companies with
exporting goods that we should emulate?
A.4. The most significant development that I have seen is the
increased provision of medium-term loans at terms that are
extremely aggressive. I believe it is worthwhile for EXIM to
consider how its medium-term program can continue to be
enhanced while maintaining alignment with the Organization for
Economic Cooperation and Development's Arrangement on
Officially Supported Export Credits. Globally, I have observed
an increase in large scale funding for infrastructure projects
that is then tied to exports. Should I be confirmed, I look
forward to learning more about the ways in which other
countries are using export financing and how EXIM can best
fulfill its mission of supporting U.S. jobs through exports.
Should I be confirmed, I believe it will continue to be
important to partner with like-minded countries to ensure
companies are competing on the price and quality of the product
rather than the terms of Government-backed financing.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
FROM PAUL SHMOTOLOKHA
Q.1. What ideas do you have to improve EXIM's visibility and
outreach to small businesses? If confirmed, what metrics would
you use to measure the Bank's success in doing so?
A.1. In my personal experience, the EXIM network of outreach
professionals performs an admirable job with their resources. I
have personally been marketed at trade shows, and through in-
person visits to our company and via digital means. I cannot
provide ideas to my fullest extent to improve EXIM's visibility
and outreach to American small business without having the
benefit of working internally with the staff. However, should I
be confirmed I would set this goal as a priority and advocate
for the proper allocation of resources to succeed. Based on my
own experience, I believe that any strategy should include
outreach to both the U.S. and international customer base. The
education of EXIM product features and benefits should be
amplified through cooperation with export promotion agencies
such as U.S. Trade Development Agency and U.S. Foreign
Commercial Service.
Education needs to reach more small business owners,
salespeople, and finance teams. All those stakeholders have to
buy into the need to invest the time, energy, and resources in
order to engage effectively. Most companies do a great job in
marketing their products, but focusing on the customers'
``why'' and linking that to EXIM's products and services
increases the chance for success. In my experience, a focus on
digital marketing can be the best multiplier to reach wide-
ranging customer base nationally and globally. I would also
advocate that EXIM continue to enhance its efforts to work with
community and regional banks as multipliers as they are closer
to local businesses.
Metrics development and measurement is an essential tool
for achieving success, especially for specific initiatives or
campaigns. Metrics should be linked to strategic plans and
annual goal setting. Should I be confirmed, I would make it a
priority to understand which, if any, Customer Relationship
Management (CRM) platforms or tools are being used so that we
can improve visibility of the customer among EXIM's units,
measure organizational performance, and help staff gain key
insights about which businesses could benefit from utilizing
EXIM's financial tools. These platforms can also be used to
make course corrections or adjustments without having to wait
for lengthy research and reports. The power is at the keyboard
and the data is the data.
Without internal EXIM information available to me, based on
my previous experience, I expect there are several metrics that
could be used to measure the Bank's success in tracking its
outreach and visibility to small businesses. These include:
measurement from the source of the lead generation, lead
assignment, qualifying leads from follow up and indication of
interest, total applications submitted, total approved
applications, total nonapproved applications (and reasons why),
status of lead before closing, total number of transactions
closed, reasons transactions are not closed, and customer
surveys at the end of any successful or unsuccessful process.
Should I be confirmed, I would also be interested in tracking
the timeline from lead generation to close, and application
submission to close. Having different metrics by product, size
of company and approvals process, will help Bank staff assess
where changes ought to be made. Average deal size, average
number of employees per transaction or dollar deployed,
analysis by product, specific market segment targets,
geographic spread and reach, and many other customer oriented
metrics can be added.
Accurate metrics tracking can help EXIM ensure it is
meeting its congressional mandate to support small business
exports, could help identify areas where product improvements
can be made, and could also be helpful in new lead generation
(defined as new leads from existing accounts or new account
leads).
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS
FROM ALLISON HERREN LEE
Q.1. I am pleased to be the sponsor of the Financial Stability
Oversight Council Improvement Act of 2019, which would require
FSOC to determine whether potential nonbank threats to
financial stability could be better solved by allowing
companies to work with their primary regulator or through the
development of a risk reduction plan. The SEC is the only FSOC
member that focuses on capital markets. In order to protect
investor access to our markets, the SEC must guard against a
blunt SIFI designation when other more appropriate methods of
remediation are available.
Do you agree that the SIFI designation process needs to be
reformed to prevent unnecessary designations?
A.1. The Financial Oversight Stability Council was created in
the aftermath of the 2008 financial crisis in part to help
identify and reduce systemic risks confronting the financial
system.
I agree that the improper designation of a nonbank SIFI
unnecessarily imposes heightened regulatory oversight without
necessarily reducing systemic risk. It is the Chair of the
Commission who acts as the voting member from the SEC on FSOC,
and if confirmed, I would be interested in understanding his
and others' views as to whether changes could be made to reduce
any risk of an improper designation while continuing to
adequately protect against systemic risk. I am open to
considering all facts and data, and to hearing from and working
with you, your staff, Members of this Committee and all
relevant constituencies on this issue.
Q.2. Do you agree that it's important for FSOC to consult with
primary regulators before voting on a SIFI designation?
A.2. In general, yes. It is likely that primary regulators will
have significant information and expertise relevant to a SIFI
determination. Moreover, it is my understanding that FSOC rules
provide for such a consultation.
Q.3. Do you agree that addressing nonbank risk does not always
have to include a SIFI designation?
A.3. A SIFI designation, and the consequences that flow
therefrom, represent one method of addressing systemic risk in
the financial system. Primary regulators overseeing nonbank
institutions may also be in a position to implement certain
changes that can address systemic risk.
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RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM ALLISON HERREN LEE
Q.1. I worked to include the honest broker provision in the
Wall Street Reform law, and Congress' clear intent was for the
SEC to establish a uniform standard of conduct. However, the
SEC's ``best interest'' proposal fails to establish a uniform
standard of conduct for broker-dealers and investment advisers,
and it puts the burden on the retail investors to understand
the difference between brokers and investment advisers.
Moreover, the SEC's own Investor Advisory Committee recommended
in November that everyone--investment advisers and brokers--be
held to a uniform standard.
Do you believe the average retail investor understands the
difference between brokers and investment advisers?
A.1. No. I agree with Chairman Clayton who stated ``it has long
been recognized that many investors do not have a firm grasp of
the important differences between [broker-dealers] and
[investment advisers]--from differences in the variety of
services that they offer and how investors pay for those
services, to the regulatory frameworks that govern their
relationship.''
Q.2. Do you believe retail investors should bear the burden of
trying to decipher complex legal relationships to understand
whether they are making good investment decisions?
A.2. No. I believe that both investors and registered entities
deserve rules that clearly delineate the nature and extent of
requirements regarding their relationship. Retail investors
should receive a full, fair, and simple explanation of these
requirements, including, among other items, how any differing
standards compare to one another, so as to allow them to make
well-informed choices.
Q.3. Do you believe the SEC can do more to encourage brokers to
put retail investor's interest first?
A.3. Yes. In my view, there are approaches the SEC can consider
to encourage brokers, where needed, to focus on ensuring that
retail investors' interests are paramount. These can include,
among others, working closely with FINRA in implementing and
interpreting Regulation BI in a manner that optimizes the
protection of retail investors, and focusing enforcement
efforts through programs such as the Enforcement Division's
Retail Strategy Task Force.
Q.4. In its post-mortem of the financial crisis, the Financial
Crisis Inquiry Commission concluded that ``compensation
structures were skewed all along the mortgage securitization
chain, from people who originated mortgages to people on Wall
Street who packaged them into securities.''
What is your view on the impact of incentive-based
compensation structures in the years leading up to the
financial crisis?
A.4. In my view, compensation structures at financial
institutions in the period leading up to the financial crisis
in 2008 often incentivized and rewarded short-term results,
with little accountability for long-term success. This
encouraged the creation of excessive levels of risk that later
proved damaging to these financial institutions and, in some
cases, to the entire financial system.
Q.5. If confirmed as Commissioner, would you push the SEC to
finish the incentive-based compensation rule required by Dodd-
Frank?
A.5. Yes. If confirmed, I would work with the Chairman, the
other Commissioners, the staff and, where appropriate, other
regulatory agencies to encourage completion of the Joint Agency
Proposed Rule on Incentive-Based Compensation Arrangements.
Q.6. If so, what you think this rule should look like?
A.6. Given the pending rulemaking, I do not want to prejudge
the final rule. That said, the areas I would want to consider
closely in any final rule would include, among others (a)
whether the rule is broad enough to cover the appropriate
institutions, the appropriate persons within those
institutions, and the appropriate types of compensation; (b)
whether the rule is appropriately tiered and tailored between
smaller and larger institutions; (c) whether restrictions on
excessive compensation are adequate and clearly defined; (d)
whether enhanced requirements at larger institutions are
adequate with respect to areas such as downward adjustments,
deferrals, forfeitures, clawbacks, and various other
limitations; (e) whether the rule adequately addresses
governance and compliance issues such as board oversight,
control, policies, and recordkeeping.
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM ALLISON HERREN LEE
Q.1. In an article published in 2016 in the Cornell Law Review,
Professor Urska Velikonja called the SEC enforcement measures
deeply flawed. She identified numerous problems, including
double or triple counting of enforcement actions and defendants
and counting tangential or follow on proceedings that do not
meaningfully reflect a separate action, etc. Given your
extensive experience at the SEC and background in enforcement,
do you believe the SEC consistently follows the same policies
and procedures with respect to enforcement statistic reporting,
from year to year?
A.1. I believe that enforcement statistics should be gathered,
analyzed, and reported in a consistent and transparent manner
that provides a depth of information on the nature, extent, and
success of enforcement activities. Such an approach supports
well-informed internal assessments at the SEC, and equally
important, public assessment and accountability. I have read
Professor Velikonja's article on SEC enforcement statistics,
and if confirmed, would look forward to hearing the staff's
views and exploring the areas she has highlighted as
potentially revealing inconsistencies, as well as considering
more broadly whether changes that increase consistency should
be made.
Q.2. Could the SEC could improve the quality, reliability, and
consistency of its enforcement statistics?
A.2. Improvement in each of these areas merits careful
attention and consideration. Identifying and understanding the
nature of, and trends in, enforcement over time is critical to
instilling investor confidence. Moreover, consistent and
reliable data is necessary to support the public's confidence
in regulators, and to aid Congress in its oversight
responsibilities. If confirmed, I would look forward to hearing
from the staff, you, your staff, Members of this Committee, and
all interested constituencies on how improvements may be made
to the quality, reliability, and constituency of SEC
enforcement statistics.
Q.3. If confirmed, will you commit to looking closely at this
issue and to the extent possible, work with the GAO--which is
conducting a study on this issue at my request--to provide more
transparency into enforcement statistic reporting?
A.3. Yes.
Q.4. As you know, on June 5, 2017, the Supreme Court in Kokesh
v. Securities Exchange Commission (SEC) ruled that the SEC only
has 5 years to bring disgorgement claims against bad actors to
try to compensate harmed Main Street investors. The practical
effect of this Supreme Court decision for retail investors who
have been harmed in fraud, pump-and-dump schemes, and other
malicious activity is significant. The SEC, in its 2018 annual
enforcement report, said that with respect to matters already
filed by the Commission, ``the court's ruling in Kokesh may
cause the Commission to forgo up to approximately $900 million
in disgorgement, of which a substantial amount likely could
have been returned to retail investors.'' As you know, I have a
bill with Senator Kennedy that would address this problem by
giving the SEC new authority to seek restitution for harmed
investors, subject to a statute of limitations of 10 years.
I understand that you can't comment directly on the
legislation, but I am interested to get your views--as a former
enforcement attorney--regarding the impact of the Kokesh case
on the Commission's ability to effectively carry out its
mission to protect investors?
A.4. The ruling in Kokesh has significantly diminished the
SEC's ability to recover and return funds to investors. The
$900 million in forgone disgorgement is money left in the hands
of fraudsters that will never be returned to their victims. By
its nature, fraud is often well concealed for many years, thus
under this ruling, some serious misconduct will go unaddressed.
For example, while at the SEC, I helped bring a case against a
broker who had been paying secret cash kickbacks to a State
treasurer in exchange for business over a 6-year period. The
misconduct was by its nature hidden, and not uncovered until
years after the scheme ended.
Accordingly, most of the misconduct had occurred more than
5 years prior. The SEC was able to obtain a judgment requiring
the broker to disgorge all of the profits from kickback scheme,
but likely could not have done so had it been subject to a 5-
year statute.
In addition, during my time in the Enforcement Division, I
spent many hours meeting with and talking to the victims of
fraud--people who were tricked into emptying their retirement
accounts, maxing out their credit cards and even taking out a
second mortgage on their homes on the false promise of high
returns. I once spoke at length with a couple, a retired
teacher and a retired insurance agent, who had to take jobs in
a fast food restaurant just to keep a roof over their heads
after being defrauded in a ponzi scheme. The statistics on
foregone disgorgement are striking, and the real-world stories
behind those numbers are equally jarring.
Q.5. One of my top SEC priorities is improving public
disclosures around human capital management. I've had a good
dialogue with the Chairman on this issue, specifically around
improving Reg S-K disclosures to require public companies to
provide more qualitative and quantitative information regarding
their human capital management policies and practices.
Do you believe there's value to be gained by investors to
have additional information on human capital management and
practices at reporting companies?
A.5. Yes. Increasingly, the value of public companies is driven
by the nature, quality, and skill of their workforces.
Understanding human capital management policies and practices
can thus provide an important basis for investors to assess the
nature of, and risks associated with, a company's business.
Indeed, investors have indicated strong interest in additional
information regarding human capital. As Chairman Clayton has
noted, ``the historical approach of disclosing only the costs
of compensation and benefits often is not enough to fully
understand the value and impact of human capital on the
performance and future prospects of an organization.'' In
addition, Regulation S-K contains no specific obligation to
disclose this type of information other than the number of
employees at a company. While periodic reports also must
include information deemed material to investors, this
requirement generally has not led to human capital disclosures
that are sufficiently robust, consistent, or comparable.
Q.6. If confirmed, would you push for the SEC to dedicate
resources to explore this topic or otherwise undertake a
rulemaking?
A.6. Yes, if confirmed, I will work with the Chairman, the
other Commissioners, and the staff to identify methods of
improving the quality, extent, and comparability of human
capital disclosures, including potential rulemaking.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN
FROM ALLISON HERREN LEE
Q.1. On the June 5, 2019, the Securities and Exchange
Commission (SEC) voted to adopt new rules on standards of
conduct for investment advisers and broker dealers.
How would you have voted on this rule package had you been
a Commissioner on the SEC?
Why?
A.1. I have not had the benefit of discussions with the
Chairman, other Commissioners, or staff on the choices made in
this rule package, or their views and analysis of the
voluminous comments filed. That said, based on my reading of
the final rule, I do have serious concerns.
They include, among others, the adequacy of the standard
for broker-dealers. I am concerned that the new, but undefined,
``best interest'' standard fails to establish a higher standard
of conduct than that which was required of broker-dealers
before the rule. The reason for the rulemaking was to improve
on the prior standard which experience had shown often led to
increased costs to retail investors. In my view, and depending
on how the new rule is interpreted and implemented, it appears
that the undefined standard may not improve the prior standard
to a measurable degree.
My concerns also include the Commission interpretation
related to the standards applicable to investment advisers, and
specifically the removal of proposed language that interpreted
the duty of loyalty as requiring investment advisers to put
their client's interest first. In addition, I am concerned that
Form CRS may fail to adequately inform investors regarding all
relevant conflicts, and lacks comparative information regarding
the types of choices investors have. The information on Form
CRS should provide relevant, meaningful, and understandable
information to investors at a critical juncture in their
decision-making process.
Q.2. In a departure from the proposed rule, which described
current law as ``require[ing] an investment adviser to put its
client's interest first,'' the final rule said an investment
adviser ``must not place its own interest ahead of its client's
interest.'' Do you understand there to be a meaningful
difference between those two standards? Which do you think
better describes the standards of conduct in place before the
new rule was finalized on June 5?
A.2. I am concerned that the changed language could be read as
meaningfully different and used by some to justify practices
that are not in the best interest of investors.
As to the standard in place prior to the final rule
package, in my view, the state of the law, as well as its
interpretation by many, supported the concept that investment
adviser fiduciaries must put their clients' interests first. If
confirmed, I would look forward to obtaining a better
understanding of the staff's views regarding the changed
language, including how the SEC will enforce compliance with
the standard.
Q.3. Based on your understanding of the new standards of
conduct for broker-dealers, are there any instances that would
have been permissible under the previous standards that are now
unlawful?
A.3. As suggested by the concerns expressed in your July 20,
2018, letter to FINRA, the interpretation and enforcement of
the new rule will be a pivotal factor in achieving a higher
standard for broker-dealers. Based on my reading of the rule, I
believe there are areas where the new rule could accommodate
such an outcome, including, among others, precluding some types
of sales contests, requiring mitigation of certain conflicts,
and requiring certain disclosures related to conflicts. If
confirmed, I would support efforts to interpret and enforce the
new rule in a manner that would preclude certain types of
conduct that were previously permitted under the suitability
standard.
Q.4. The SEC uses fines to punish companies for violating the
law and deter future bad behavior. According to a recent report
in the Wall Street Journal, the SEC had only collected 55
percent of fines assessed from 2013-2018 and 60 percent of
fines for the previous 5 years. Apparently ``unpaid fines are
written off as uncollectable after 2 years.''
How would you ensure that fines are collected from people
of companies that have violated the law?
A.4. I share the concerns indicated by your question.
Maximizing the collection of disgorgement and penalties at the
SEC is essential. This is particularly important because the
funds collected come straight out of the hands of bad actors,
and a substantial amount can go straight to harmed investors.
Few endeavors could be more worthwhile in terms of fairness,
accountability, and deterrence. If confirmed, I would look
forward to working with the Chairman, the other Commissioners,
and the staff to better understand what factors contribute to
difficulties in collections and to develop approaches that
could increase the collection rate. Staffing levels and
expertise in the collections area must meet current needs.
Collection difficulties also arise when, as can frequently
occur, fraudsters hide or dissipate assets. The use, where
feasible, of asset freezes, contempt motions, and
whistleblowers may help increase the availability of funds to
be collected after a judgment has been obtained.
Q.5. Who at the SEC is responsible for collecting delinquent
fines?
A.5. My understanding is that there is a specific group of
attorneys and staff tasked with the job of collecting and
disbursing, either to investors or to the U.S. Treasury,
penalties and disgorgement from enforcement matters.
Ultimately, however, it is the Commission that is responsible
for maximizing the collection of these funds.
Q.6. What tools does the SEC have to pursue delinquent fines?
A.6. It is my understanding that the SEC can and does institute
legal proceedings to seek property liens against, and seize
certain assets of, those owing disgorgement and/or penalties.
If confirmed, I would look forward to learning more about
additional specific tools and approaches that can be taken. As
fraudsters often dissipate or hide assets, there may be steps
that staff can take that could help reduce collections issues.
I know, for example, that SEC Enforcement Division staff works
hard to seek, where appropriate, orders freezing ill-gotten
gains in the early stages of an investigation, but courts
rightly require a high standard of proof in order to grant such
requests. Careful monitoring of asset freezes that are granted,
and seeking contempt motions where violations occur could, in
some cases, further prevent dissipation. In addition,
whistleblowers can often provide assistance in preventing asset
dissipation and locating hidden or improperly transferred
assets. If confirmed, I would work with the Chairman to ensure
that staff has the resources and support they need to maximize
collections.
Q.7. Are there any additional authorities or resources that
would be helpful for the SEC to have in pursuing companies that
owe fines?
A.7. If confirmed, I would look forward to gaining a deeper
understanding from the staff as to whether greater resource
allocation and/or specialized staff training could be of help.
I would welcome the opportunity to work with you, your staff,
and Members of this Committee to identify any additional
authorities or resources that may assist in the collections
effort.
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR CORTEZ MASTO FROM ALLISON HERREN LEE
Q.1. Last week, Stephen Brandon Anderson, who previously ran
River Source Wealth Management LLC, agreed to pay about
$405,000 in disgorgement and another $100,000 in civil fines.
The SEC has a critical role to holding people accountable who
cheat or lie to investors. I'm worried about recent press
articles that only a bit over half of the fines assessed in
settlements or court judgments is collected by the SEC. Why do
you think the SEC has had trouble collecting fines?
A.1. I am aware of the recent press articles, and I share your
concerns. Maximizing the collection of disgorgement and
penalties at the SEC is essential. This is particularly
important because the funds collected come straight out of the
hands of bad actors, and a substantial amount can go straight
to harmed investors. Few endeavors could be more worthwhile in
terms of fairness, accountability, and deterrence. As a former
enforcement attorney, I know that collection difficulties can
arise when, as can frequently occur, fraudsters hide or
dissipate assets. And I would want to ensure that SEC staffing
levels and expertise in the collections area meet current
needs. If confirmed, I would look forward to working with the
Chairman, the other Commissioners, and the staff to better
understand what factors contribute to difficulties in
collections and to develop approaches that could increase the
collection rate.
Q.2. If you are confirmed as an SEC Commissioner, what can you
do to ensure fines assessed are fines collected and paid to
victims of fraudsters?
A.2. If confirmed, I would look forward to gaining a deeper
understanding as to what specific factors contribute to
collection difficulties so that solutions can be well-tailored
toward improvement. For example, I would be interested in
understanding whether greater resource allocation and/or
specialized staff training could be of help. Further,
fraudsters often dissipate or hide assets so there may be steps
that staff can take that could help reduce collections issues.
I know, for example, that SEC Enforcement Division staff works
hard to seek, where appropriate, orders freezing ill-gotten
gains in the early stages of an investigation, but courts
rightly require a high standard of proof in order to grant such
requests. Careful monitoring of asset freezes that are granted,
and seeking contempt motions where violations occur could, in
some cases, further prevent dissipation. In addition,
whistleblowers can often provide assistance in preventing asset
dissipation and locating hidden or improperly transferred
assets. If confirmed, I would work with the Chairman to ensure
that staff has the resources and support they need to maximize
collections.
Q.3. Do you think the newly enacted Regulation Best Interest
appropriately protects retail investors from being overcharged
by their financial advisors? Would you support a fiduciary
standard?
A.3. I have not had the benefit of discussions with the
Chairman, other Commissioners, or staff on the choices made in
Regulation BI, or their views and analysis of the voluminous
comments filed. That said, based on my reading of the final
rule, I do have serious concerns. They include, among others,
the adequacy of the standard for broker-dealers. I am concerned
that the new, but undefined, ``best interest'' standard may
fail to establish a higher standard of conduct than that which
was required of broker-dealers before the rule. The reason for
the rulemaking was to improve on the prior standard which
experience had shown often led to increased costs to retail
investors. In my view, and depending on how the new rule is
interpreted and implemented, it appears that the undefined
standard may not improve the prior standard to a measurable
degree.
A fiduciary standard, on the other hand, could have relied
on longstanding legal precedent that traditionally emphasizes
placing the interests of investors over those of fiduciaries.
Such a standard would need to be carefully considered, weighing
all costs and all benefits, but could lead to better, less
costly and less conflicted financial advice for retail
investors.
Q.4. The hiring freeze at the SEC has led to a 10 percent
reduction in staff and an inadequate number of administrative
judges. What do you recommend to ensure adequate staffing at
the SEC?
A.4. Although an agency's efficiency and use of assets cannot
be judged solely on the basis of a headcount, I am nonetheless
concerned that the SEC's resource requests and allocations keep
pace with the vast complexity, technological advances and
resources in the specific markets it oversees. Moreover, a
hiring freeze can subject the agency to arbitrary changes in
resource allocations overall, and between and among divisions,
that flow from random attrition. While I am pleased to see that
the Congress' recent funding of the SEC allowed it to lift the
hiring freeze, if confirmed, I would look forward to obtaining
a better understanding as to how the budget requests are
developed and supported, and would support efforts to ensure
that any decisions regarding such requests are based on a
careful analysis of the facts related to specific needs in each
division.
Q.5. Are you concerned about the decline in SEC enforcement
actions, the lower monetary settlements and low average
settlement amount in the past 2 years? If so, what will you do
to ensure bad actors are held accountable?
A.5. An effective enforcement program requires both a
sufficient number, as well as sufficient quality and scope, of
actions. Effective enforcement is critical to the SEC's mission
because it instills investor confidence, ensures
accountability, and deters misconduct. During my time working
in Enforcement at the SEC, I spent many hours meeting with and
talking to the victims of fraud--people who were tricked into
emptying their retirement accounts, maxing out their credit
cards, and even taking out a second mortgage on their homes on
the false promise of high returns. In my view, the broader goal
of compliance with the securities laws, and thus deterring
potential bad actors, is critical. Individual accountability
for misconduct is an important deterrent, and should be
carefully considered and actively sought, particularly in cases
involving fraud. This can involve a number of approaches
including, among others: (1) efforts to work closely with
cooperating companies to identify and gather evidence relating
to culpable individuals; (2) working to sustain and, where
possible, improve the whistleblower program which can often be
a vital component in uncovering evidence of individual
culpability; (3) shifting resources toward litigation in
certain cases when a settlement with a culpable individual
cannot be reached; and (4) in certain cases, accepting greater
litigation risk.
Additional Material Supplied for the Record
LETTER SUBMITTED BY SENATOR BOB DOLE IN SUPPORT OF THOMAS PETER FEDDO
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
LETTER SUBMITTED BY THE INDEPENDENT COMMUNITY BANKERS OF AMERICA IN
SUPPORT OF MICHELLE BOWMAN
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]