BLOOMBERG TRANSCRIPTS AND REPORTS House Financial Services Committee: “Examining the SEC's Agenda, Operations, and FY 2016 Budget Request” March 25, 2015 09:03AM ET

CONGRESSIONAL HEARING REPORT

DATE OF HEARING: March 24, 2015

SUBJECT: “Examining the SEC's Agenda, Operations, and FY 2016 Budget Request”

COMMITTEE: House Financial Services

Members Present:

Republicans: Chairman Jeb Hensarling (TX), Representative Ed Royce (CA), Representative Scott Garrett (NJ), Representative Randy Neugebauer (TX), Representative Blaine Luetkemeyer (MO), Representative Bill Huizenga (MI), Representative Sean Duffy (WI), Representative Steve Stivers (OH), Representative Mick Mulvaney (SC), Representative Dennis Ross (FL), Representative Robert Pittenger (NC), Representative Ann Wagner (MO), Representative Andy Barr (KY), Representative Keith Rothfus (PA), Representative David Schweikert (AZ), Representative Bob Dold (IL), Representative Frank Guinta (NH), Representative Scott Tipton (CO), Representative Roger Williams (TX), Representative Bruce Poliquin (NH), Representative Mia Love (UT), Representative French Hill (AR)

Democrats: Ranking Member Maxine Waters (CA), Representative Carolyn Maloney (NY), Representative Nydia Velazquez (NY), Representative Brad Sherman (NY), Representative Michael Capuano (MA), Representative Stephen Lynch (MA), Representative Al Green (TX), Representative Emanuel Cleaver (MO), Representative Gwen Moore (WI), Representative Keith Ellison (MN), Representative James Himes (CT), Representative John Carney (DE), Representative Joyce Beatty (OH)

Witnesses:

The Honorable Mary Jo White, Chair, U.S. Securities and Exchange Commission (SEC)

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Overview:

On March 24, the House Financial Services Committee held a hearing entitled “Examining the SEC's Agenda, Operations, and FY 2016 Budget Request.” Many topics were discussed at the hearing, including the following issues: . (1) Financial Stability Board; (2) Volcker Rule/Bond Market; (3) Municipal Securities Market: (4) Investment Adviser Exams; (5) Disqualification of Bad Actors; (6) Asset Management; (7) Cybersecurity; (8) Crowdfunding; (9) Enforcement; (10) FSOC/Systemically Important Financial Institutions; (11) Fiduciary Duty; (12) Proxy Access; (13) Mergers and Acquisitions; (14) Conflict Minerals; (15) Glass-Steagall Act; (16) Tick Size Pilot Program; (17) Venture Exchanges; (18) SEC Budget; (19) Maker-Taker Model; (20) Insider Trading; (21) Accounting; (22) High Frequency Trading; (23) Comprehensive Automated Risk Data System; (24) Accredited Investor Definition; and (25) Business Development Companies.

Member Statements:

Chairman Hensarling (R-TX) in a statement said the Committee is committed to conducting vigorous oversight of the SEC. He stated that the SEC's budget has grown tremendously, including an increase of 35 percent since the passage of the Dodd-Frank Act (DFA). He said the Jumpstart Our Business Startups (JOBS) Act should be a top priority for the SEC, but it does not appear that they are treating it as such. Hensarling stated that the SEC has also delayed its implementation of the DFA, particularly in the derivatives area.

Representative Maloney (D-NY) said the U.S. has the largest and deepest capital markets in the world. She said the U.S. also relies more heavily on the capital markets than any other nation. She stressed the need for the SEC to constantly adapt to new trends and innovations in the market. She suggested that the SEC is doing so in two particularly important areas: asset management and equity market structure. Maloney expressed interest in the timeline for moving forward with these initiatives.

Representative Garrett (R-NJ) said the SEC should adopt a regulatory agenda focused on its core mission, but expressed concern that they are focused on a more political agenda. He pointed to the rising number of 3-to-2 votes at the SEC. He said the SEC has focused on “special interest rules,” such as CEO pay and conflict minerals, while failing to complete its equity market structure review or its DFA and JOBS Act mandates.

Ranking Member Waters (D-CA) stressed the need to fully fund the SEC. She commended White for supporting a uniform fiduciary standard. Waters said that while it is important for the SEC and the Department of Labor (DOL) to coordinate their rulemakings, the two agencies have differing missions. She expressed support for funding the hiring of additional

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investment adviser examiners through a user fee. She also raised concerns with the SEC process for granting waivers related to disqualification of bad actors, and noted that she has released draft legislation to require the SEC to have a more rigorous process related to bad actor disqualification waivers.

Question and Answer:

Financial Stability Board:

Chairman Hensarling (R-TX) said White is a member of the Financial Stability Oversight Council (FSOC) and the SEC is a member of the Financial Stability Board (FSB). Hensarling said FSB has called for “shadow banking” entities to be subject to bank-like regulation. He asked if White agrees with the FSB. White said she does not believe the regulatory framework is deficient. Hensarling asked if the SEC objected to the FSB's declaration. White said she would get back to the Committee on this issue. Hensarling asked if the SEC has conducted an analysis of the impact of bank-like regulation on the capital markets. White said they have done some examination of this issue. She said FSOC can designate non-banks as systemically important financial institutions (SIFIs).

Representative Garrett (R-NJ) asked if White personally attends FSB meetings. White responded that she attends FSB Steering Committee meetings, while SEC staff attends plenary meetings. Garrett asked if White can push back on FSB positions she disagrees with, to which White responded in the affirmative. White emphasized that FSB positions are not binding on the SEC. She said FSB final reports go through the members for objections. Garrett asked if White has ever objected to FSB reports, to which White responded that the SEC has objected to a couple of FSB reports.

Volcker Rule/Bond Markets:

Chairman Hensarling (R-TX) said SEC staff released guidance on the Volcker Rule. He said multiple media sources have suggested that the Volcker Rule is harming liquidity in the bond markets. He asked if the Volcker Rule has contributed to the problems in the bond market, to which White responded that this question cannot be answered at this stage. White said there are concerns with the problems in the bond market. Hensarling urged the FSOC to examine the systemic risks posed by the diminution of the bond market.

Representative Garrett (R-NJ) questioned whether the SEC has conducted a cumulative study of the impact of the Volcker Rule and other regulations on the bond market. White responded that they are closely examining the bond market, but they have not done that

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specific analysis. She said this is an important issue to examine. Garrett urged White to call on the FSOC to conduct such a study.

Representative Neugebauer (R-TX) said about 100 SEC staff oversee the equity markets, while 6 staff oversee the municipal bond market and 1 person oversees the corporate bond market. He said he is troubled that the SEC has so few people examining the bond markets. He questioned why the SEC has so many staff dedicated to enforcement, but so few dedicated to bond market oversight. White stressed the importance of strong enforcement. She said she focused on restructuring the Division of Trading and Markets when she took over at the SEC. She suggested that the Division of Trading and Markets is structured properly, noting that several additional people also assist in examining the fixed income markets. She noted that the SEC is putting additional focus on the fixed income markets, but has not added dedicated employees in this area. Neugebauer raised concerns with the liquidity in the bond market. He asked if the SEC has done an analysis of the impacts of higher interest rates and a lack of liquidity in the bond market. White said the SEC put out guidance on liquidity risk associated with higher interest rates.

Representative Velazquez (D-NY) said the Volcker Rule included exemptions, including one related to collateralized loan obligations (CLOs). She asked what types of loans are included in CLOs. White said the Federal Reserve delayed implementation of the CLO provisions. Velazquez expressed doubt that the CLO requirements would have any impact on small business lending.

Representative Pittenger (R-NC) said in July 2015 banks of all sizes are expected to be in compliance with the Volcker Rule. He pointed to the industry proposal to create certain assumptions for legacy securitizations. White said she is aware of the proposal, but would need to comment on it in writing. Pittenger stressed the need to reduce the compliance burdens in this area. He asked if the SEC will issue a final pay ratio rule in 2015. White said this rule is congressionally mandated and she expects to proceed on it in 2015. Pittenger asked if the SEC works to tailor its rules to impose the least burdens on society. White said the SEC is focused on completing its statutory mandates in the most cost-effective way possible.

Representative Mulvaney (R-SC) expressed concern with the liquidity in the bond market, noting that the SEC issued guidance in this area in January 2014. He suggested that this decline in liquidity is partly due to increased regulations. White said this is the “working assumption.” She said FSOC has discussed this issue extensively.

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Representative Williams (R-TX) said earlier this year JP Morgan Chase said it would cut back on its fixed income trading desk due to regulations. White said she is concerned with the fixed income market.

Representative Love (R-UT) said the Federal Reserve attempted to include rules on trading and investment practices in the Volcker Rule. She asked if the SEC should have taken more of a leadership role in drafting the Volcker Rule. White said the SEC played an active role in drafting the Volcker Rule. Love asked if the Volcker Rule has made it harder for banks to manage inventory. White said the regulators attempted to make the exemptions of as workable as possible.

Municipal Securities Market:

Representative Moore (D-WI) said the SEC has shown renewed interest in the municipal securities market. White said the SEC is limited in its reach in this area, but noted that the SEC started its Municipalities Continuing Disclosure Cooperation (MCDC) initiative. She said the SEC is looking at structural issues in the municipal market. She said they are considering best execution rules and riskless principal transaction rules.

Representative Stivers (R-OH) raised concern with the MCDC program. He suggested that the fees in the program could squeeze out smaller issuers. He asked what the SEC has learned from the MCDC program. White said the MDCD program has been quite successful and is scaled for the size of issuers.

Representative Hill (R-AR) raised concerns with the liquidity of the government finance market. He raised concern with MSRB Rule G-23. White said the SEC has approved this rule. She said she supports moving forward with best execution and riskless principal rules.

Investment Adviser Examinations:

Ranking Member Waters (D-CA) said she has long been concerned that the SEC is only able to examine investment advisers once every ten years. She said she has supported legislation to allow the SEC to impose user fees on investment advisers in order to increase the frequency of examinations. She noted that White testified that the SEC is considering the use of third party examiners. Waters suggested that third party exams would be more expensive than imposing a user fee. White said it would be difficult to compare the cost of third party exams to a user fee. She said she shares the concerns about the need for additional examinations. She stated that she is considering the use of third party exams, but suggested that they are not “optimal.” Waters asked how the SEC would resolve conflicts of interest with third party exams. White said there would need to be disclosure requirements.

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She said the SEC examines only ten percent of the industry annually. Waters asked about the danger from such a low rate of oversight. White stressed the need to have boots on the ground. She noted that the SEC is engaging in more data analysis to supplement its exams.

Representative Green (D-TX) said the SEC oversees 11,000 investment advisers and 9,000 public companies. He asked what the Committee can do to support SEC oversight. White said her issue of greatest concern is having adequate resources to be an adequate cop on the beat. Green said the SEC has requested a $222 million increase in its budget. White emphasized the importance of this budget increase.

Representative Rothfus (R-PA) said the SEC has a mission to facilitate capital formation. He asked if the SEC will move forward with any of the suggestions discussed at the small business capital formation forum. White said SEC staff is reviewing the suggestions. Rothfus asked if the SEC has removed or consolidated rules which are outdated or ineffective. White said the SEC does retrospective reviews periodically. Rothfus asked why the SEC budget focuses on hiring additional examiners, rather than on completing the DFA and JOBS Act rulemaking processes. White said the Division of Economic and Risk Analysis (DERA) is the SEC's fastest growing division, noting that the SEC has also requested additional funding for DERA. She also emphasized the importance of examining investment advisers.

Disqualification of Bad Actors:

Ranking Member Waters (D-CA) pointed to the issue of bad actor disqualification waivers. She noted that she has drafted legislation to require a more rigorous and transparent waiver process. White suggested that there is a robust process, but that she supports adding more transparency. She said the Commission is focused on this issue.

Asset Management:

Representative Maloney (D-NY) said last year White called on SEC staff to create recommendations related to the asset management industry. Maloney asked about the status of this initiative. White said the staff is actively working on these initiatives. She said the data reporting initiative is further along than the others, but that she hopes to complete all of them this year. She stated that the initiatives will be acted upon as they are ready, which should begin in the third quarter of this year. Maloney asked about the need for enhanced risk management programs for asset managers. White said the staff is working on recommendations for enhanced risk management. Maloney asked if White is committed to enhanced standards for liquidity risk, to which White responded in the affirmative.

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Representative Ross (R-FL) expressed concern with the application of bank-like regulations on asset managers and life insurance companies. He suggested that these entities would be better overseen by their primary regulators than the Federal Reserve. White said the DFA gave the FSOC the authority to designate non-banks as SIFIs. She noted that the FSOC review of asset managers is focused on activities. Ross asked how the asset management industry contributed to the 2008 financial crisis. White stated that not much blame has been directed at the asset management industry. Ross asked if White would support codifying the changes to the FSOC SIFI designation process. White said the FSOC is a young organization and certain processes should not be locked in place. Ross noted that he has introduced the FSOC Improvement Act of 2015 (H.R. 1550). He said the American Action Forum did a study indicating that SIFI designations of asset managers could reduce returns by more than 20 percent.

Representative Royce (R-CA) commended the SEC for putting the Office of Financial Research (OFR) study on asset management out for public comment. He asked if the OFR should put all of its reports out for public comment. White said she could not tell another agency how to how handle their reports, but that the SEC benefits from public input.

Representative Poliquin (R-ME) emphasized the importance of the capital markets to small businesses. He said the DFA created the FSOC, which is responsible for designating SIFIs. He expressed concern that money managers will be designated as SIFIs. He suggested that clients naturally move to better performing fund managers. He contended that there is no systemic risk from money managers. He urged White to oppose designations in the pension fund and mutual fund markets. White said she will “speak up on all of those issues.” Poliquin emphasized that the authority to regulate asset managers should remain with the SEC and not be transferred to the Federal Reserve.

Representative Love (R-UT) asked if the SEC regulates markets which are inherently risky, to which White responded in the affirmative. Love asked if the FSOC rejects the SEC's authority to oversee asset managers, to which White responded in the negative. White noted that the SEC is moving forward with several regulations in the asset management space.

Cybersecurity:

Representative Maloney (D-NY) asked about the SEC's role in addressing cybersecurity. White emphasized the need to address this risk. She said the SEC has specific responsibilities related to the systems of their registrants. She noted that Regulation SCI

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deals with cybersecurity to some degree. She said the SEC participates in Financial and Banking Information Infrastructure Committee (FBIIC).

Crowdfunding:

Representative Velazquez (D-NY) said it has been a year and a half since the SEC proposed rules on equity crowdfunding. She expressed concern the rules could make the process prohibitively expensive. She asked when this rule will be completed and how the costs will be addressed. White said she hopes to complete the rule in 2015. She said there are still a number of issues which must be resolved. Velazquez asked if there will be a wave of new businesses entering the crowdfunding market, to which White responded that it is “hard to predict.”

Representative Mulvaney (R-SC) said the SEC has not completed its crowdfunding rules under the JOBS Act. He asked when these rules will be completed. White said this rulemaking is complex, but that she hopes to complete the rule by the end of the year.

Representative Schweikert (R-AZ) expressed concern with the delays in adopting a crowdfunding rule and the changes to Regulation A. White said she has prioritized crowdfunding. She noted that the SEC has received a very large number of comments on the proposal. Schweikert asked if it would be helpful if Congress were to implement more prescriptive legislation with self-executing deadlines. White said there are challenges with being more or less prescriptive. Schweikert asked if the SEC will allow states to agree to crowdfunding recognition compacts. White said the SEC is examining this issue.

Representative Love (R-UT) asked if White could commit to finalizing the crowdfunding rule in 2015, to which White responded that this issue is a priority for her.

Enforcement:

Representative Velazquez (D-NY) asked if the SEC has made changes to its enforcement policies. White said in June 2013 the SEC implemented a new policy to require admissions in certain types of cases. She said the SEC still does “no admit, no deny” for the majority of cases. She emphasized the importance of public accountability.

Representative Cleaver (D-MO) questioned whether SEC enforcement resources should be focused solely on larger cases. White stressed the need to not neglect smaller offenses. She said the SEC has focused on raising the bar for compliance.

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FSOC / Systemically Important Financial Institutions:

Representative Luetkemeyer (R-MO) noted that the SEC is a voting member of FSOC. He noted that three insurance companies have been designated as SIFIs. He asked what criteria were used to designate these firms as SIFIs. White said the FSOC released the basis for its designation of MetLife. She said the FSOC looks at ten statutory factors. Luetkemeyer questioned whether there is a way for firms to be de-designated. White said firms can request an annual review.

Representative Luetkemeyer (R-MO) asked if there should be regulatory relief to prevent non-designated banks from falling under SIFI regulations. White said there is a great deal of focus on preventing burdens from falling on community banks. Luetkemeyer asked if White would support legislation to “rein in” the application of SIFI regulations. White said she could not comment on legislation, but that these issues should be examined.

Representative Tipton (R-CO) asked about the cost-benefit analysis conducted by the SEC. He raised concerns with the impacts of regulation on the economy. White said she has been focused on the small business space. She said the SEC considers the impacts of its rules on capital formation. Tipton raised concerns with the regulatory burdens associated with stress testing. He said the DFA requires the FSOC to conduct certain analysis before designating SIFIs. He noted that the FSB chose to designate the three insurance companies before the FSOC chose to do so. He suggested that FSB designations “taint” the FSOC designation process. White stated that her decision making is independent of the FSB. She said national authorities decide on what is done domestically.

Fiduciary Duty:

Representative Luetkemeyer (R-MO) asked about the problems the SEC discovered which compelled them to move forward with a fiduciary duty rulemaking. White said she has been very concerned about this issue since taking office. She said the SEC staff issued a study with recommendations in 2011. Luetkemeyer urged the SEC not to cede this issue to the DOL, to which White responded that they are separate agencies.

Representative Moore (D-WI) said the SEC has been criticized for not taking the lead on a fiduciary duty rule. She noted that White has said the SEC and DOL have different missions. Moore asked if these missions are antagonistic to reaching a harmonized rule. White said the SEC is at the beginning of the rulemaking process. She noted that the SEC and the DOL have separate jurisdictions and will proceed separately. She said the agencies will coordinate to prevent discrepancies. Moore asked if a harmonized rule will be

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implemented. White said the SEC will act on this issue through a separate process from the DOL.

Representative Ellison (D-MN) urged the SEC to move forward on a rule on CEO pay. He said conflicting investment advice imposes heavy costs on investors. He expressed support for the DOL's decision to move forward on a fiduciary duty rule. He asked why the SEC recently chose to announce its decision to implement a fiduciary rule. White said she has been focused on this issue since taking office. She stressed that the SEC and the DOL are separate, but that she supports moving forward with a rule at the SEC. Ellison asked if the SEC and DOL are coordinating, to which White responded that SEC staff has provided expertise to the DOL. Ellison asked if it matters whether the SEC or the DOL acts first. White said the DOL and SEC are separate agencies and will decide separately when to move forward.

Representative Wagner (R-MO) said White has stated that it is her personal view that the SEC should implement a uniform fiduciary duty. Wagner suggested that the SEC has not conducted a formal analysis of this issue. She asked what triggered White's decision to support imposing a uniform fiduciary duty. White said she has been focused on this issue since before her confirmation. Wagner asked if White's announcement was a result of the DOL announcing they would be moving forward with a rule, to which White responded in the negative. Wagner questioned what data informed White's decision. White said there are a number of studies in this area. Wagner asked if an economic analysis has been conducted of a fiduciary duty rule. White said studies have been done, but that the SEC economists would continue to examine this issue. Wagner asked if any SEC study has taken into account the potential for increased costs for retail investors from a fiduciary duty rule. White said this is part of the SEC's analysis. Wagner suggested that additional disclosures could resolve this issue. She asked if the SEC has considered such alternatives. White said the SEC has examined these alternatives.

Representative Himes (D-CT) said a uniform fiduciary standard should prevent conflicts of interest. He stated that the average retail investor does not know the difference between an investment adviser and a broker.

Representative Royce (R-CA) asked what changes were made to the DOL fiduciary duty rule based on the SEC study. White said she could not comment on a rule that has not been made public. She said DOL staff was responsive and receptive to the expertise provided by the SEC staff.

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Representative Carney (D-DE) stressed the need to achieve an appropriate balance in a fiduciary duty rule. White said that advisers should be required to act in the best interest of their client.

Representative Beatty (D-OH) said she has heard concerns with the impact of a fiduciary duty rule on broker-dealers. She asked how the SEC is working with the DOL to ensure low- and middle- income Americans retain access to retirement advice. White said the SEC has provided technical assistance to the DOL. She suggested that the SEC should proceed with a separate fiduciary duty rule.

Representative Guinta (R-NH) said on February 20, White said the SEC would need to determine whether a fiduciary duty rule was necessary, but that on March 17, she expressed support for a rulemaking. Guinta asked what caused White to change her position. White said she further studied the issue during that time period. She noted that the Commission is still examining how it will proceed. She stated that inputs from all sources will go into any rulemaking. Guinta suggested that a fiduciary duty would increase broker fees.

Representative Hill (R-AR) expressed concern with the impact of the fiduciary duty rule, capital gains taxes and other provisions on savings. He expressed opposition to the fiduciary duty rule and suggested that the current requirements are sufficient.

Representative Stivers (R-OH) said the SEC has a mission to ensure orderly markets and facilitate capital formation. He asked if the SEC's 2011 study on fiduciary duties looked at the impact on costs for retail investors, to which White responded that she could not recall, but that the SEC is closely examining this issue. Stivers expressed concern that the fiduciary duty rule could push investors out of saving for retirement by raising fees. White stressed the need to act on fiduciary duties for the benefit of small investors. She said any rule should avoid preventing investors from obtaining retirement advice.

Proxy Access:

Representative Green (D-TX) expressed concern with the status of proxy access. White said an SEC rulemaking was overturned by the D.C. Circuit Court. She stated that there has been a great deal of private ordering movement. Green asked if the SEC will be issuing a rule in this area, to which White responded that she does not intend to issue a rule at this time, but that the SEC is closely examining this issue.

Representative Capuano (D-MA) stated that shareholders own corporations. He asked why shareholders do not have rights to find out about a corporation's political spending. He

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raised concern with the SEC's proxy access rules. White said the SEC does “stand with shareholders.” She said shareholders have successfully used the SEC's proxy access rules. She said the shareholder proposal process is working well. She said there is no specific disclosure requirement for political spending, unless it is a material issue. She stated that the SEC is examining whether additional disclosures are needed. Capuano suggested that the SEC “does not stand with shareholders.”

Representative Royce (R-CA) raised concerns with the use of activist proxy access strategies. White stressed the need to step back from “gamesmanship.”

Mergers and Acquisitions:

Representative Huizenga (R-MI) said in the 113th Congress he introduced a bill on mergers and acquisitions (M&A). He noted that the SEC issued no-action relief to M&A brokers. He said he has reintroduced the bill as the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2015 (H.R. 686). He asked if the SEC staff no-action letter is legally binding. White responded in the negative. Huizenga stated that this shows the need for a statutory fix.

Conflict Minerals:

Representative Huizenga (R-MI) said White has indicated that the SEC is not set up to deal with issues like conflict minerals. Huizenga said 21,000 hours of staff time and more than $2.1 million of SEC resources were spent on conflict minerals. He questioned why the SEC is appealing the court decision to overturn the conflict minerals rule. White said the rule is statutorily mandated. She noted that the courts only overturned one provision of the conflict mineral rule.

Glass-Steagall Act:

Representative Cleaver (D-MO) said he pushed to include the reinstatement of the Glass-Steagall Act in the DFA, but was not successful. He contended that the 2008 financial crisis was partly due to the failure to separate commercial and investment banking. White said this is a judgment for Congress to make. She said the regulators are focused on implementing the DFA as enacted. Cleaver asked if it would be easier for the SEC to do its job if commercial and investment banking were separated, to which White responded that she could not comment.

Tick Size Pilot Program:

Representative Duffy (R-WI) asked about the status of the SEC's tick size pilot program. White said the comment period on the tick size pilot program has closed. She noted that the

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SEC has received a large number of comments. She noted that the SEC has a May 6, 2015 “date to act” and intends to comply with that. Duffy said his bill required a five year pilot. White said the SEC is examining the appropriate length of a pilot program.

Representative Carney (D-DE) asked about the timeline for the SEC tick size pilot program. White said the Commission is required to act on the pilot by May 6, 2015. She said two of the major areas of comment were the “trade-at” feature and the length of the pilot. She stated that the SEC's goal is to obtain “maximum information.”

Representative Dold (R-IL) asked about the SEC's capital formation initiatives. White said the SEC is working on the tick size pilot program and venture exchanges.

Venture Exchanges:

Representative Duffy (R-WI) asked if the SEC has a work stream on venture exchanges, to which White responded in the affirmative, but noted that a decision has not been made on whether a rulemaking is needed.

Representative Carney (D-DE) asked about the challenges associated with venture exchanges. White said the SEC has approved prior venture exchanges. She stressed the need to avoid a “race to the bottom.”

SEC Budget:

Representative Pittenger (R-NC) said the SEC budget has increased about 35 percent since 2010 and noted that the SEC has $75 million in its reserve fund. He expressed concern with the misuse of funds for purchasing office space and computers for “non-existent employees.” White said the SEC has improved its practices related to office space leasing.

Maker-Taker Model:

Representative Lynch (D-MA) said he recently introduced the Maker-Taker Conflict of Interest Reform Act (H.R. 1216). He expressed concern that brokers are chasing order flow and rebates, rather than acting in the best interest of investors. He expressed support for implementing a pilot program which would prohibit rebates on fifty highly traded stocks. White said the SEC is closely examining the maker-taker model as part of its market structure review. She stated that SEC economists have said there are a number of complexities associated with conducting a pilot program, but that it is “a possibility.” She said the maker-taker model will be an early subject for the Equity Market Structure Advisory Committee, which will hold its first meeting in May. Lynch said the Market Structure

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Advisory Committee should include members who are “suspicious” of high frequency trading and maker-taker. White said MSAC will be able to receive input from non-members.

Insider Trading:

Representative Himes (D-CT) said the SEC and the Department of Justice are acting in an environment without a statutory ban on insider trading. He noted that he intends to introduce legislation in this area. He asked if a clear ban on insider trading and a streamlined prosecution process are needed. White said there is a strong body of law. She said a ban on insider trading would be challenging to codify. She stated that there is a need for strong insider trading laws.

Accounting:

Representative Sherman (D-CA) said the Financial Accounting Standards Board (FASB) has put out a proposal which would add $2 trillion to the balance sheets for American businesses. He said FASB is “empowered” by the SEC. He asked what the SEC has done in this area. White said SEC staff in 2005 suggested that FASB should engage in standard setting to capitalize leases. She said she has discussed this issue with the SEC Chief Accountant. Sherman expressed opposition to requiring leases to be capitalized.

Representative Barr (R-KY) said the SEC is considering requiring U.S. companies to transition from Generally Accepted Accounting Principles (GAAP) to the International Financial Reporting Standards (IFRS). He expressed concern that firms would no longer be allowed to make use of last in-first out (LIFO) accounting. He opposed the SEC changing tax policy without congressional approval. White said she has considered the legal issues in this area. She stated that the SEC should assert its positions on domestic issuers and global standards. She emphasized that this does not mean they should transition to IFRS. She said she supports the convergence efforts of the International Accounting Standards Board (IASB).

High Frequency Trading:

Representative Williams (R-TX) noted that White has said the markets are not rigged. He noted that the Federal Reserve Bank of Chicago put out a paper on high frequency trading. Williams asked if the Federal Reserve Bank of Chicago has responsibility for the equity markets, to which White responded in the negative. Williams asked if White has concerns with the recommendations in the study, to which White responded in the affirmative. Williams asked if the SEC has a responsibility to demonstrate it is a good steward of its

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funding, before asking for a budget increase. White said the SEC is required to meet its congressional mandates.

Comprehensive Automated Risk Data System:

Representative Hill (R-AR) said that being subject to the appropriations process does not make the SEC less independent. He asked about White's views on FINRA's Comprehensive Automated Risk Data System (CARDS) proposal. White said she could not comment on CARDS, as it will come to the SEC for approval. She said FINRA is carefully considering the comments on CARDS.

Accredited Investor Definition:

Representative Dold (R-IL) stressed the need to look at ways to encourage savings. He said the definition of an accredited investor based on income or wealth is antiquated. He noted that the UK recently implemented an education provision and asked if the SEC is considering a similar provision. White said SEC staff is closely examining the accredited investor definition.

Business Development Companies:

Representative Dold (R-IL) said business development companies (BDCs) have seen a rapid increase in growth in the past few years and provide loans to small and middle market businesses. He asked what the SEC is doing to support the growth of BDCs and modernize BDC regulations. White said the SEC staff is examining this area in connection with legislation introduced last year. She suggested that there is “nothing imminent.” Dold said White has previously indicated that legislation on BDCs posed no investor protection concerns. Dold suggested that the SEC has the authority to modernize BDC rules. White said the staff is examining this issue.

Summary of Witness Testimony:

The Honorable Mary Jo White, Chair, U.S. Securities and Exchange Commission

Issuer Disclosure and Capital Formation

Corporation Finance initiatives:

Dodd-Frank Act Rulemakings

Corporation Finance, along with other Commission staff, continues to work to implement provisions of the Dodd-Frank Act relating to executive compensation matters and payments by resource extraction issuers. In addition, the staff is currently conducting the review of the

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accredited investor definition as it relates to natural persons as mandated by Section 413 of the Dodd-Frank Act.

JOBS Act Rulemakings:

In October 2013, as mandated by Title III of the JOBS Act, the Commission proposed rules to implement the new exemption for the offer and sale of securities through crowdfunding, an evolving method to raise capital using the Internet. The Commission received over 500 comment letters on this complex rulemaking and Corporation Finance is preparing recommendations for the Commission on final rules.

In December 2013, as mandated by Title IV of the JOBS Act, the Commission proposed rules that would build upon Regulation A, which is an existing exemption from registration for small offerings of securities, to enable companies to offer and sell up to $50 million of securities within a 12-month period. The Commission received over 100 comment letters, and the Commission is scheduled to consider adopting a final rule on March 25.

In December 2014, as mandated by Titles V and VI of the JOBS Act, the Commission proposed amendments to revise the rules related to the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act. The Commission received comments, and Corporation Finance will develop recommendations for the Commission on final rules.

Trading and Markets:

OTC Derivatives

Trading and Markets has continued to engage in rulemaking to establish a new oversight regime for the OTC derivatives marketplace. Most recently, the SEC adopted two new sets of rules that will require security-based swap data repositories (SDRs) to register with the SEC and prescribe reporting and public dissemination requirements for security-based swap transaction data. The SEC also proposed certain additional rules, rule amendments, and guidance related to the reporting and public dissemination of security-based swap transaction data. The new rules are designed to increase transparency in the security-based swap market and to ensure that SDRs maintain complete records of security-based swap transactions that can be accessed by regulators. In addition to the adoption of these rules, in 2014 the SEC proposed the last of the remaining rules required by Title VII of the Dodd-Frank Act and adopted a number of significant final rules and interpretations, including rules governing the application of the “security-based swap dealer” and “major security-based swap participant” regimes to cross-border security-based swap activities.

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The staff continues to work to develop recommendations for the remaining final rules required by Title VII that have been proposed but not yet adopted, including those addressing, the registration of – and requirements for – security-based swap dealers and major security-based swap participants, security-based swaps execution facilities, and the enhanced oversight of clearing agencies for security-based swaps. Currently, the Title VII rulemakings are a very high priority for the agency.

Review of Equity Market Structure:

The SEC's review of equity market structure has continued to progress with a data-driven approach that has helped identify areas where improvements in the regulatory structure may be warranted. Drawing on the Commission's equity market structure website, the Market Information Data Analytics System, and other data resources, Trading and Markets is working on a series of rulemaking initiatives to present to the Commission for consideration in the near future, including:

A rule proposal scheduled to be considered on March 25 that would eliminate an exemption from national securities association membership requirements for broker-dealers that trade in off-exchange venues;

Rules designed to improve firms' risk management of trading algorithms and to enhance regulatory oversight of their use;

Rules that would expand the information that alternative trading systems (ATSs) disclose to the SEC about their operations and, for the first time, to make ATS operational information publicly available;

An order-routing transparency rule that would require disclosure of customer specific information that a broker would be expected to provide to institutional customers on request;

An anti-disruptive trading rule to address the use of aggressive, destabilizing trading strategies in vulnerable market conditions when they could most exacerbate price volatility;

A rule regarding the status of active proprietary traders as dealers.

To improve transparency regarding the latencies between the consolidated data feeds of SIPs and the proprietary feeds of the exchanges, I requested that the exchanges consider including a time stamp in the consolidated data feeds to indicate when a trading venue, for example, processed the display of an order or execution of a trade. In response, the exchanges have announced plans to add new data elements to make data feed latencies more transparent; the exchanges expect to implement the time stamps by this summer. In addition, at my request, the exchanges have submitted rule changes to disclose how they

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use SIP and proprietary market data feeds in their operations, thus increasing transparency. The exchanges also have undertaken a comprehensive review of their equity order types and how they operate in practice. Our review of the exchange submissions is ongoing, but substantially all the exchanges have filed proposed rule changes to describe fully order-type functionality.

For example, each exchange's rulebook will fully describe the characteristics of its order types (e.g., price, display, routable, provide liquidity only); the functionality of the order type (e.g., how and when it interacts or does not interact with other order types with respect to the full range of potential order book and execution scenarios); the relative priority of the order type; and the way in which an execution of the order type will be priced taking into account the full range of potential execution scenarios.

Strengthening Critical Market Infrastructure:

Recent market events demonstrate the need to bolster resilience throughout critical market systems. After the August 2013 interruption in the trading of Nasdaq-listed securities, the equities and options exchanges, FINRA, and the clearing agencies have been working with other market participants to implement concrete measures designed to improve the robustness and resilience of market systems. Many of these measures are now complete, including enhancements to the SIPs and enhanced rules for the trade break processes at equity exchanges.

In November 2014, the Commission adopted Regulation SCI, an important set of mandatory rules aimed at strengthening the technology infrastructure of the U.S. securities markets. Regulation SCI imposes requirements on key market participants – including national securities exchanges, registered clearing agencies, FINRA, the MSRB, and certain ATSs – designed to reduce the occurrence of systems issues, improve resiliency when technology issues arise, and enhance the Commission's oversight of the automated systems of these entities. The staff is considering whether it would be appropriate to develop an SCI-like framework for other types of market participants

Tick Size Pilot for Smaller Companies:

In 2015, I expect the Commission to continue its evaluation of the appropriate tick size for the quoting and trading of equity securities of smaller companies. Current rules, which have been in effect since decimalization was introduced in 2001, permit market participants to quote securities priced $1.00 or more in increments as low as a penny.

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After conducting a study and issuing a report required by the JOBS Act, as well as holding a roundtable to gather views on the impact of decimalization, in June 2014 the Commission issued an order directing national securities exchanges and FINRA to act jointly in developing and filing a national market system plan to implement a pilot that would, among other things, widen the quoting and trading increments for certain small capitalization stocks. The national securities exchanges and FINRA filed their proposed plan with the Commission, which the Commission published for public comment in November 2014. The Commission has received over 70 comment letters from various interested constituencies and has extended the time period for consideration of the proposed national market system plan until May 6, 2015.

The Volcker Rule:

Banking entities generally have until July 21, 2015 to bring their activities and investments into conformance with the final rule, with additional time provided for certain legacy covered funds activities. The largest banking entities, however, became subject to a metrics recordkeeping and reporting requirement in July 2014. Commission staff continues to coordinate with staffs of the other agencies on implementation of the final rule, including on compliance, enforcement, and responses to interpretive questions.

Fiduciary Duty:

Section 913 of the Dodd-Frank Act granted the Commission authority to impose a uniform standard of conduct for broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers, while at the same time specifying certain features of current business models that would not themselves be a violation of such standards. The question of whether and, if so, how to use this authority is a very important one.

After significant study and consideration, I believe that broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors. As set forth in Section 913, the financial professional giving advice to a retail client should be required to provide advice that is in the client's best interests, without regard to the financial or other interests of the financial professional.

In proposing a uniform fiduciary standard, there are many challenges. At this juncture, I will just mention three of them. The first is how to define the standard. My initial view is that the standard should be codified, principles-based, and rooted in the fiduciary duty applicable to investment advisers. A second challenge, which was expressly contemplated by Section

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913 of the Dodd-Frank Act, is to provide clear guidance on what the standard would require, and how current business practices can or cannot continue under the standard – importantly, for both broker-dealers and investment advisers. A third challenge is providing for the meaningful application, examination, and consistent enforcement of a uniform fiduciary standard. Without effective examination and enforcement, a uniform fiduciary standard could be mere words on a page. Central to this challenge is extending our examination coverage for registered investment advisers.

I will be discussing these concepts in depth with my fellow Commissioners in the very near term, and I have asked the staff to develop rulemaking recommendations for Commission consideration. As part of its analysis, the staff is giving serious consideration to, among other things, the recommendations of the SEC staff's Section 913 study of 2011, the views of investors and other interested market participants, potential economic and market impacts, and the information we received in response to a 2013 staff request for data. Included in the staff's work will be recommendations for the Commission's consideration of a program of third party compliance reviews for investment advisers to supplement, but not replace, examinations conducted by the Office of Compliance Inspections and Examinations (OCIE).

Separately, the Commission staff has provided technical assistance to Department of Labor staff as they consider potential changes to the definition of “fiduciary” under the Employee Retirement Income Security Act (ERISA). The staff and I are committed to continuing these conversations with the Department of Labor, both to provide technical assistance and information with respect to the Commission's regulatory approach and to discuss the practical effect on retail investors, and investor choice, of their potential amendments to the definition of “fiduciary” for purposes of ERISA.

Oversight of Investment Funds and Managers:

Money Market Funds

In July 2014, the Commission adopted significant reforms for governing money market mutual funds….The Commission provided for approximately a two-year transition period for these new provisions to enable both funds and investors time to fully adapt their systems, operations, and investing practices. The new rules also enhance money market fund disclosure requirements. Money market funds will be required to promptly disclose certain significant events, including the imposition or removal of fees or gates, portfolio security defaults, and instances of sponsor support. In addition, money market funds will be required

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to disclose additional key information on their website on a daily basis, including funds' liquidity levels, net shareholder flows, and market-based net asset values per share.

Risk Monitoring and Regulatory Safeguards:

At my direction, Investment Management also is developing recommendations for Commission rulemaking with the goal of enhancing risk monitoring and regulatory safeguards for the asset management industry. Specifically, the division is developing recommendations for the Commission to modernize and enhance data reporting for both funds and advisers. This initiative, among other things, would: (i) update the reporting of basic fund census information; (ii) enhance reporting of fund investments in derivatives, liquidity valuation of holdings, and securities lending practices; and (iii) collect more information on separately managed accounts.

In addition, Investment Management is considering whether enhanced risk management programs should be required for mutual funds and ETFs to address the risks related to their liquidity and use of derivatives, and measures to enhance the Commission's comprehensive oversight of those programs. In particular, the division is reviewing options for updated liquidity standards, disclosure of liquidity risks, and measures to appropriately limit the leverage created by a fund's use of derivatives. Investment Management also is developing a recommendation to require investment advisers to create transition plans to prepare for the winding down of their business or similar business disruptions, and is considering recommendations regarding implementation of the new requirements for annual stress testing by large investment advisers and funds, as required by the Dodd-Frank Act.

Target Date Funds:

On April 3, 2014, the Commission issued a release reopening the period for public comment on proposed rule amendments concerning target date fund names and marketing. The release requested comment on the SEC's Investor Advisory Committee recommendation that the Commission develop a glide path illustration for target date funds based on a standardized measure of fund risk as a replacement for, or supplement to, the asset allocation glide path illustration the Commission proposed in 2010. To date, approximately 30 comment letters have been submitted, which Investment Management staff are currently reviewing.

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