Transcripts For CSPAN2 Oversight Hearing On Securities And Exchange Commission Operations 20160425

[inaudible conversations] good morning, everyone. Good morning. Our team is here. The subcommittee on Capital Markets and gics will be hereby called to order. Todays hearing is entitled continued oversight of the secs offices and divisions. Without objection the chair authorizes a recess of the subcommittee at any time and also without objection, members of the Financial Service committee who are not members of the subcommittee may still set and participate in todays hearing. At this point i will now recognize myself for three minutes for an opening statement. So today the Sub Committee will continue efforts to conduct vigorous oversight of the ics sec and the individual offices that make up the sec. The last years are subcommittee has heard testimony from directors of trading and market, corporations by its enforcement and Investment Management division of the sec. These hearings have allowed us to take a thorough look at the agencys operations, rulemaking agenda, enforcement practices so we can better understand whether the sec is appropriately carrying out his threefold mission to protect investors, maintaining fair and orderly efficiency on market and last but certainly not least, facilitate Capital Formation. I welcome our Witnesses Today i look forward to hearing the testimony and i hope between the four of you here on the panel we will be able to cover a lot of ground with the time we have. To go back in the year 2000, the sec operating budget was about 369 million. Today, the sec fiscal year 2016 is a little over 1. 6 billion. The sec has recently submitted a request for fiscal year 27 budget coming up to 1. 8 early in dollars. During much of the time in congress have been accused of starving the sec of funds to fulfill the mission, its budget has actually quadrupled an offense though in a little over a dozen years. The increase in spending coincided with an agency that has become four times more effect is. Instead we are likely to vote back at a period of time in the sec missed some of the greatest frauds in history and when it was illprepared for the financial crisis of 2008 when it failed to incorporate Economic Analysis into its role making and more recently as often times been complicit in advancing priorities of special interest. Unfortunately instead of addressing the fundamental structural issues, the doddfrank act has created even more offices within the agencies, to a butcher with us today. Doddfrank granted agency vast new Rulemaking Authority that the sec has often struggled with to implement appropriately. For example, when the sec has made strides towards improving Economic Analysis that underlies rulemaking, there is still much more work that can be done in this area. Its not acceptable to simply say congress made me do it and assume that rulemaking is beneficial in all cases. The sec. Of racial row last june. Its also incumbent to clearly articulate a problem for a market failure rules intended to address which would be obvious, but its still unfortunately lacking in many of the rules that have been implemented. And eager to come here today to hear about the steps taken to further improve the Economic Analysis. I also continued concerns over recent rulemaking to Credit Rating agencies. Broad agreement and provisions in doddfrank such as removal of reference to regulations are much needed an address is one of the causes of the financial crisis and worry many other micromanaging rules included in doddfrank have had the effect of further siphoning competition and Credit Rating agent industry. I want to thank all the witnesses for the testimony and i yield to the Ranking Member for five minutes. Good morning. Thank you so much, mr. Chairman for holding this important meeting and all of our participants today. This hearing will continue or subcommittee series of oversight hearing on the sec. Today we are focusing on divisions and offices in the sec, the office of compliance, inspections and examinations, office of Credit Ratings. Also the division of economic risk and analysis. All four offices play a Critical Role in policing our nation securities markets. The office of Credit Ratings oversees the registered Credit Rating agencies such as moodys, s p and fitch. The financial crisis revealed the importance of Credit Rating agencies, specifically the catastrophic consequences that result in the rating agencies all get their ratings wrong. In response, doddfrank created the office of Credit Ratings in order to increase the level of oversight of Credit Rating agencies. One of the principal missions that the office is to ensure inappropriate conflicts of interest at the rating agencies do not influence their ratings affirms assigned to different securities. The office of the whistleblower has also created by doddfrank and is intended to encourage whistleblwhistlebl owers to come forward with specific and timely information about wrongdoing and in return for tips that lead to significant punishments of over 1 million, whistleblowers are entitled to a monetary report which incentivizes industry employees to blow the whistle before fraud gets too large and too devastating. Already this office has received thousands of tips from potential whistleblowers, which is striking. In 2015 the office received over 4000 tips for whistleblowers. The division of economic risk and analysis is the data im of the sec. It supports all the divisions bike that can cost benefit of potential rulemaking, developing models that help focus the commissions resources on the riskiest part says and even calculating an appropriate punishment, rather the appropriate punishment for bad actors. Finally, the office of compliance inspection and examination is one of the largest and most underfunded. Offices in the sec has over 1000 employees who examine registered Investment Advisors, brokerdealers, exchanges, mutual funds and mutual advisors. This sounds like a lot of examiners, but it pales in comparison to the number of Market Participants that the office has to examine. The office oversees more than 26,000 market participate in including over 12,000 Investment Advisors, 11 dozen mutual funds, 4000 brokerdealers commit 800 Municipal Advisors and 18 securities exchanges. As a result, the commission is able to examine 10 of all Investment Advisors each year, which is a terrifying thought. This means roughly 40 of Investment Advisors have never been examined. What makes this even scarier than 2015 a whopping 77 of the commissions examination identified deficiencies and Investment Advisors and 11 resulting in referrals for enforcement action. If those numbers are constant, that means of the 5000 Investment Advisors that have never been examined, a little under 4000 have deficiencies that have not been uncovered. This is a scary thought for investors who rely on david reisers to manage savings. I look forward to hearing from all of our Witnesses Today and i look forward to your testimony. Thank you for your work and i yield back the balance of my time. Thank you very much. The gentleman from virginia, vice chairman of the committee. Thank you, mr. Chairman. Welcome to our panel. I represent virginias Fifth District from the northern piedmont to virginia to the North Carolina border. The travel across my district are regularly hear from constituents concerned about jobs and the economy and the seemingly new normal in mr. To state here in washington that makes it more difficult for a main street Small Businesses to Access Capital to be successful. While the committee has been laser focused on legislation that would help our Small Businesses thrive and easy access to capital and told upon bipartisan success of the jobs act to make what important function is so telling Congress Duty to conduct vigorous oversight of executive branch agencies. To assess constituents are concerned, i too am concerned the sec often deviate from his threepart mission to protect investors to maintain fair orderly and efficient markets and facilitate Capital Formation. Viewing such as this allows congress to exercise its responsibility of proper oversight about how the fcc allocates resources and filling its mission. I look forward to the testimony of witnesses and i thank the chairman for holding this hearing any of that balance of my time. Pajama manuals back and now i welcome the members of the panel before us. Your false statement will be made part of the record. You are recognized for five minutes. You know the drill lasted. In front of you you will be recognized for five minutes. In front of you are the light which are green, yellow and red. The elevation of come on when you have one minute remaining so we ask you at that time to begin to wrap up in the red light is when youre time you have expired. With that, mr. Butler, you are recognized for five minutes. Good morning, chairman kerry, Ranking Member maloney and members of the subcommittee. Thank you for inviting me to testify in the securities and Exchange Commission regarding activities at the office of Credit Ratings. Jaffa supports threepart mission to protect investors and 10 fair, orderly market to facilitate Capital Formation. It does this by overseeing Credit Rating agencies as Nationally Recognized Statistical Rating Organizations are and are asked are zero. The credit reform act established a framework and give congress authority to implement a myriad of rules in the oversight. The doddfrank act expanded authority and demanded creation of an office of Credit Ratings dedicated to the oversight of nrsro. , nrsro monitoring and the third policy and rulemaking. Examinations of nrsro for compliance with laws and Commission Rules accounts for the majority of the opposite to these. The doddfrank act requires the office to conduct an examination of each nrsro annually and the scope of the inner examination covers eight review areas. Are there the office and is a risk based approach to exam planning identifying different risks for different nrsro. This improves the efficiency and effectiveness of the examinations as resources are prioritized resources are prioritize and focus on areas of higher risk. In addition to the examination, the office conducts sweeps and examinations to address issues and concerns and follow up on tips, complaints and selfreported. The marc wyatt have been responsive to recommendations. Many have implemented fundamental changes such as increasing surveillance act committees, policies and procedures for conflict of interest, adding staff to compliance and oversight functions in investing multiyear Technology Initiatives in enhancing disclosure, transparency and governance. The inner examination currently underway include a comprehensive review of compliance with the significant new rules and amendments adopted by the commission in august 2014 all of which became affect by june june 2015. As required by the act, the office prepares and examination reports summarizing the essential fighting for the examinations. December 2015 the Office Published the fifth annual examination report. The monitoring and constituent groups within the office gather, analyze and assess data and identify trends across the industry. Monitoring conducts periodic meetings with nrsro inmates on an ad hoc proactive basis as necessary to respond to development and importantly, monitoring meets a certain board for direct earth including a separate discussion with the independent directors. Constituent monitoring holds meetings with investors, issuers, rangers and trade organizations. The group conducts Ad Hoc Research by industry or credit market conditions. Information obtained by the Group Provides useful input for examinations and guiding direction of any rulemaking. The policy within the opposite is possible for developing recommendations, conducting studies, drafting reports and including those required by the subtwo act doddfrank act. Addressing among other things reporting on internal controls, conflicts of interest including an absolute prohibition requiring separation of sales and Marketing Activities from analytics, procedures to protect the integrity and transparency of methodologies and requirement for the board of directors to approve a methodology before its used in standards of training, experience and competence to credit analyst are the rules provide an annual certification by the ceo as to the effectiveness of internal controls and additional certifications to accompany Credit Ratings as for me no part of the rating was influenced by any other business that dignity. While the commission has Broad Authority to examine all books and records as a nrsro and impose sanctions for violating statutory provisions in the commissions world, the commission is not permitted to regulate the substance of Credit Ratings are procedures and methodologies used to determine Credit Ratings. Thank you again for having me here today and i would be pleased to answer any questions. Thank you, mr. Butler. Mr. Flannery, welcome to the panel. You are recognized for five minutes. I didnt date on the outset, but make sure you always put your button on. Tanks. Thank you good good morning, chairman gary, Ranking Member maloney members of the subcommittee. Thats ushered to be here to talk about responsibilities and recent activities of the division of risk analysis which we call era. Admission to datadriven highquality Economic Analysis. For the past several years weve grown from approximately 96 employees in 2013th through project at work for some 175 by the end of the fiscal year. By that time we anticipate employing 88 phd is mostly in economics or finance, but also some accountants and we have to phd physicist. Phd is boldly supported by 22 associates by the end of the year. Staff also includes the bursting of other technical experts and professional staff. The divisions rapid growth and expertise has allowed us to expand support across an everincreasing range of activities. Our mrsa wellknown function is to provide economic analyses in support of Commission Rulemaking another priority initiatives. Economists examine the need for regulatory action, analyze effects of the rules and evaluate Public Comments on those rules. We provide theoretical datadriven analyses of potential new policies and changes to existing policies. Work closely with staff elsewhere in the commission with the early stages of policy development through the finalization of the rule. In the course of assisting other divisions and offices, staff prepares white papers or staff studies and other documents that present novel economic analyses of specific policy issues a rulemaking. For example, last year staff produce white papers relating to liquidity requirements for openended mutual funds operations. The funds usage voluntary clearing activity of the same country and single name in another paper in the market for registered security offerings. In addition to research performed with rules, staff regularly publish research in journals and are posted on the webpage to provide the public with access to her Current Research on Financial Markets. The Analytical Capabilities extend that to rulemaking but also Risk Assessment. We provide modeling expertise to other divisions and offices in support of their surveillance and investigative programs. Our Data Analysis helps sec staff with prioritization and scoping including what to look for during the examination. One example is her broker dealer Risk Assessment tool which was developed in close collaboration with oc staff. This tool analyzes how a behavior compares to its peers to identify behavior that might indicate risks in brokerdealer operations, finance thing, workforce or structure. We also have a new corporate issue of Risk Assessment developed in conjunction with the division of enforcement that allows enforcement attorneys to examine 200 custom metrics to help them assess corporate issue of risk by identifying initial recording irregularities that may indicate fraud. We also work with the division of imports meant. During fiscal year 2015, deara staff provided assistance and 120 enforcement matters. Does that help identify security law violations, bona fide on to investors, calculate the gotten game and evaluate economicbased claims of the defendant. For cases that go to trial, deara prepares the experts and critique or challenge the work of opposing experts. Certain instances, deara staff have testified on behalf of the convention. The work of the farm without highquality data. Deara acts as a data hub for the intake processing and use of data throughout the commission. Deara oversight falls into two distinct but related categories. First we were closely with other divisions and offices to design data structuring approaches for disclosures. Deara supports the collection, usage by designing taxonomy, validation will come a data Quality Assessment and data dissemination tools to facilitate highquality Data Analysis. Second, responsible for the management of Many Commission databases. We routinely generate summary information and statistics which are provided to Commission Staff and elsewhere within the commission. We also develop and refine data sets purchased from outside. Staff are delivering highquality datadriven analyses critical to the secs mission and we look forward to continuing this work in the future. Thank you again for inviting us and im looking forward to answering your questions. Thank you, mr. Flannery. Mr. Mckessy, good morning and welcome to the panel. Good morning chairman gary, Ranking Member maloney and members of the subcommittee. Thank you for inviting me to testify on the security Exchange Commission regarding responsibilities and activities of the office of the whistleblower. The opposite of the whistleblowers in the division of imports meant comprised of 13 attorneys, five Legal Assistance in an Administrative Assistant all of them are cast to administer the Whistleblower Program. Whistleblower program was designed to incentivize individuals to provide the commission with timely information. Enhancing the commissions ability to protect investors from harm, bring violators to justice. Under the Program Individuals who provide the commission with original information that leads to successful enforcement action is a monetary sanctions exceeding 1 million they receive an award equal to 10 to 30 of money collected. One of our primary activities is to evaluate claims and make recommendations as to whether it satisfied the requirements for receiving an award. We receive a significant number of award claims including 120 claims in fiscal year 2015 allow. As at the end of the fiscal year 2015, preliminary determinations are final orders have been issued with respect to 400 claims for awards. Since the program went into effect, the commission has awarded 57 million to 27 whistleblowers including more than 37 million in fiscal year 2015 alone. The efforts have resulted in orders against individual companies totaling 400 million in sanctions including 325 million order to be basic, the harm investors because whistleblower payments are made out of Investor Protection fund, the amount ordered have not been affected in any way. Thanks in part to the attention the Program Attracted in connection with the words tips we receive have increased each year. The commission received nearly four dozen whistleblower tips and 30 increase over the number received in fiscal year 2012. The programs inception, weve received 16,000 tips from whistleblowers in every state in the country as well as the District Of Columbia and individuals in 95 countries outside the United States. Our office is involved with enforcement staff in helping insured employees feel secure in reporting wrongdoing internally or to the commission without fear of retaliation. In june 2014 the commission brought its first enforcement action under the antiretaliation provision of the program said in a strong to employers that retaliation against whistleblowers in any form is unacceptable. Interpretive guidance embraced the commission has expressed its views under the Whistleblower Program extend to those to report security law violations internally regardless of whether they separately report information to the commission. Additionally our office continues to assist enforcement staff to prevent companies from coercing employees not to report possible wrongdoing to the commission. April 2015 the commission brought its enforcement action against a company that require employees to sign. Com potentiality agreement in rule 21 to 17a. It will prevent any person from taking any action including enforcing our threat and to enforce the confidentiality agreement to impede an individual from reporting information about a lot to the commission. Protecting whistleblowers, safeguarding rights to report possible Securities Violations to the commission continue to be among our top priority. Plus the diverse and implementation of the program with demonstrated we can and will protect confidentiality of whistleblowers, take action or interfere to report wrongdoing were tens of millions of dollars to whistleblowers whose information might to successful enforcement actions. Given a strong track record, we expect the commission will continue to receive highquality tips whether she detect earlier and more efficiently. We expect the program will continue to be a game changer in enforcement to protect investors and ensure the fairness efficiency of the marketplace. Thank you for the invitation and im happy to respond to your questions. Thank you, syrupy bass but not least, mr. Wyatt, youre recognized for five minutes. Chairman garrett, Ranking Member maloney and members of the subcommittee, thank you for the opportunity to discuss the Office Compliance inspection and examination with you today. Our Program Advances through examinations that approve compliance, prevent fraud, monitor risk and inform policy. The staff of just over 1000 employees, oci has registered entities consisting of 12,000 Investment Advisors, 11 dozen mutual fund, over 4000 brokerdealers, 400 transfer agents, 650 registered municipal visors. We also oversight responsibility for 18 National Securities exchanges, six registered clearing agency, the msrp, quebec and the pc aop. Recent legislative changes such as the doddfrank act and job facts have expanded the responsibility to include examinations that can pierce the baseball participants including dealers repositories and execution facilities as well as corpse combating corporations. We oversee a continued growth in the Financial Markets in the complexity of Market Participants. In order to maximize the use of staff, oci is in the stages of increasing coverage of Investment Advisors. To meet the challenges posed by a population that far exceeds resources, weve adopted a riskbased remark for examinations. Weve increased utilization of advanced Data Analytics and we promote compliance to transparency. Who adopted our framework to identify Business Practices are activities which may harm investors. We aggregate and analyze internal and external data sources to find operational red flag finance population did the analysis enables examiners to identify highrisk firms and select candidates for examination and deterring areas reviewed in the course of examination. Over the past five years of recruiting Industry Experts to enhance Technological Capabilities and increase our use of Data Analytics to further refine our riskbased program. For example, developing a new version of the National Analytics tool or needs. Meet enables examiners to access and systematically analyzed years perpetrating data much faster than we ever could before. Her clients have developed techniques that help examiners detect suspicious act to be an area such as Money Laundering and High Frequency trading. Ongoing efforts will further enhance and expand capabilities to prevent rod monitor risks. Oci tries to compliance is greater transparency. We engage in communication outreach initiatives with the industry and other regulators. Through this process we provide registrants the opportunity to self assess and remediate noncompliant behavior on their own good for example, each year, oci publishes to inform registrants about areas that staff believes represents heightened risks unwarranted examination. As outlined in priorities, we pursue several initiatives critical to the protection of investors. For example in 2015, doddfrank launch the multiyear examination of her focusing on Investment Advisors and brokerdealers to the services they offer to investors with retirement accounts. We remain focused on savings because Retail Investors are faced with a complex involving factors in making critical Investment Decisions. Another priority weve announced his cybersecurity. Over the last two years is conducted examinations to identify cybersecurity risk and assess preparedness among brokerdealers and Investment Advisors. Is another example of our transparency prior to initiating exams we publish our focus after conducting exams publish a summary of observations. 2016 we continue to conduct cybersecurity examinations including testing and assessment of control rights, data loss prevention, management and incident response. Im a priority i mentioned this liquidity. In light of changes over the past several years, the mutual funds come at etf and private funds have exposures to potentially a liquid fixed Income Securities that examinations include a review of various controls including liquidity management, trading at 2 billion valuation policies. Thank you for inviting me to testify today and i would be happy to answer any questions. Thank you for your testimony. At this point i recognize myself for five minutes to begin questioning. I will begin with mr. Butler. One of the areas there was bipartisan support in doddfrank was with regard to the removal of references to Credit Rating agencies 939 and a common area that i worked with chairman frank had the time to get included in doddfrank and remove references. But despite the purpose of putting in to say that Investment Decisions should not be as they had been prior to that simply entirely reliant upon Credit Rating savings. So we have seen since then despite the removal specific and regulations that some Pension Funds are still including none. Some Pension Funds are still including the names of two of the large agencies in their investment guidelines. So in 30 seconds, can you say has 939 and a bit effective as cars with the is here . 930 9a spoke with regard to the removal of references with regard to federal statute and the sec has worked with the office of Credit Rating for the removal and completed the work they are, so all references have been removed from federal statute. Has not been there . I understand the Pension Funds are suing two of the larger Credit Rating agencies say that their opinions in the past were wildly inaccurate on one hand, but on the other hand they are still using as the investment guidelines, which seems counterintuitive or perhaps opposed to their fiduciary duty. Would you agree . Im aware the Pension Funds with specific rating. Often by reference to the big three. Is not a problem . I wouldnt characterize it as a problem. The statute and allow for us to do more and remove this up in federal statute. Thats a good segue. Is there more should be done in this regard are sec can be or should be directed to . It was not within what to Credit Ratings overseas, the division of Corporation Finance trading markets and investment. With regard to Credit Ratings, we have with regard to examinations. Ive got that. Is there anything we are comfortable with the authority. Mr. Flannery. When it comes to regulations, economic benefit analysis in one form or another is conduct it by the agency, correct . When he came to the issue of the pay ratio, that was done . Yes. In that analysis, is it true they find they cannot quantify a benefit . Yes, i think thats right. Ultimately a justification, the benefit for the pay ratio rule was tied to informing investors about possible advisability of their pay votes. At the end of the day, and see if you a benefit. Theres a difference between quantify and find. A lot of what we do is very difficult to quantify even though its very important. In the decisionmaking process, which regulations go forward to why this was done when other areas when you can quantify the benefit. To your response to the rules as they come up, as they are treated by the commission, which i do explain and clarify what the economic facets of the decision are and then they are free to weigh those benefit and cost against the other considerations. It was done because it was a mandate of congress as opposed to the sec recommending it be done. I believe it was in doddfrank to show doddfrank to shellfish and fish as doddfrank to show a situation that supposed to have a situation or is imminent the sec could be working on, other areas where you put one of a special is the use of xp rl. It sorely makes it easier for investors to locate good investments, diamond in the rough and easier for start a new businesses is if they have a good store to get it out and let investors know where they can make a good investment. And in your testimony you describe it as the hub of information within the commission. So can you talk a little bit about why structured data like xbrl is useful to the investor and useful to the sec and exactly what does the implementation of it stand now with the sec . Yes. We have an office of structured disclosure inside, the purpose of the office is to advise where and what and how data should be structured. When theres a new rule, a revised form, these folks evaluate what can be captured and whats the best tactical way for it to be captured, which xbrl is one good possibility. At the example of what that does for us, the xbrl come is when of published on our website Quarterly Financial reports for all registrants. We have about 8000, and the small ones dont get a lot of attention from the commercial data services, commercial data providers. We have a complete set of information, and thats useful to investors for the purpose as you said. Its useful for us we do a rule or a risk Analysis Shows we have a more complete and and much better grasp of the information that is most relevant to the firms that have the hardest time raising capital. Its a very valid the resource and we provided the data to the public. One of things that xbrl is that the data are to be filed by the end of the quarter and usually within the next week we have built up and available for people to use. Some people say they dont use it because theres no enforcement on the accuracy of the xbrl. Arent you dependent on what the industry into, the companies into their data . You to check to make sure that is correct, is that correct . The our various internal checks it can be done easily with the xbrl. This hole but you do rely on the industry giving information speak with yes, we do. Theres been a learning process since 2009 since we first required the largest registrants to report using xbrl. How could you enforce the accuracy more . That is the one complaint that i hear from investors, that they would like it to be accurate and theres no guarantee that its accurate. They say delhi dont use because theres no really check on the accuracy. How could we improve the accuracy and the enforcement of accuracy on the data you receive . Thats a primary objective of our office of structured disclosure. As ive mentioned within xbrl there are various mechanisms for at least a shred the internal consistency of the data. If someone else in incorrect number of whether thats in xbrl or its on paper, theres nothing we can do about that as long as it is not inconsistent with other parts of the report are of our always deep people, office of structured disclosure, are investigating at all times, when how they get reported and investing how we can most efficiently usher increase compliance. They say one of the best ways to get accurate data is when the sale takes place on the exchange, just being able to capture that as opposed to depending on private industry to what is your response to that . That would be a stock sale. Yes. The data ive been thinking about how i thought you were talking about was the financials provided by registrants in xbrl. So that would not be in the same venue. But the stock sales. The stock sales can we have direct feeds and ou there are direct feeds to go to various private participants but we have direct feeds. And a cut, consolidated audit trail, which is to be considered by the Commission Next wednesday i believe will eventually make those audit trails extremely accurate, extremely detailed. How does your work different from the office of Financial Research, which is also capturing this information . Do you share information with them speak with yes, we absolutely do. The office of Financial Research is responsible to fsoc. We have collaborated with him on a couple of important data sets. One is form pf which is hedge fund data, very valuable. The other is Money Market Mutual Fund data. They get involved in helping us designed taxonomies and look for to continuing a fruitful relation with them. We will be coming up on votes. Im going to try to keep things within time. Thank you, mr. Chairman. Mr. Flannery, i ha i have some questions for you. As you know, the president signed executive order 13579 that required all agencies to perform an analysis of rules that may be outmoded, ineffective, insufficient or excessively burdensome and repeal them in accordance with that which has been learned. Seems like to me your division is uniquely qualified to perform research for the sec, and thats the purpose of your division, correct . It is certainly one of the purposes, yes. At your division participated in any of these retrospective reviews . We are committed under the regulatory flexibility act to examine existing roles as you know. They usually get examined after about 10 years after their instance and we do that in conjunction with the general counsels office. I think rather than taking credit for finding potential, things that can be improved in these rules i should show us some of the other divisions because a lot of information come simply other divisions from the industry, either in the form of inquiries or complaints. There are frequently things where the burden can be reduced by staff guidelines, by no action letters. And a lot of the kinks, if you will, that might be in an initial role can be worked out that way by staff interaction. Since the president signed this order can you think of any example in which a rule has been repealed, such as it is, because it was excessively burdensome, ineffective or outmoded . I can give you an example of a proposed rule in the mutual funds of space that is based on a need for better information and a reduction in the frequency of reporting. And i would have to do with what we call import, a Mutual Fund Asset composition reports that will be filed if the rule is approved. Were trying to take advantage of better information, tagging the data and were trying to reduce the burdensome this. That was done to staff guidelines . Yes. But again to be clear, modify, streamline, expand or repeal. The starting instance you can think of where rules have been repealed a so this analysis thats taken place in the agency . I cannot remember one. All right. Another question deals with the issue of regulations that are developed some pursuant to doddfrank with participation from joint participation from individual agencies. Obviously there is a requirement of review are your office in terms of costbenefit analysis, economic impact, economic effects of these rules. But there are some who suggest that when it is a joint rulemaking, that costbenefit analysis is not required. Whats your take on that . And have you had, you all had pushback from the other agencies you have had to develop rules with on that specific issue . How do you do without . Of course you are right. We have security law required that we consider among other things efficiency composition and Capital Formation which is unique to the sec. There are instances where we will do a joint rule most often with the banking regulators, and ours will be the only Economic Analysis. There is one we are involved with now where speech is the analysis that you do, is that used in the promulgation of calm in the process speak with yes. As it affects a registrants. The rule republic it affects also so the banking regulator dont do that . I believe thats correct. I dont know what to do inside but they are not required to put an Economic Analysis out with a rule text for public comment. Do you see a problem there where you have an extensive work done by your agency, evaluating the cost and benefits on your side as it relates to your registrants, but not as a relates to those regulated by the other agencies . Is not a problem . I dont know whether theres a problem in that regard. What i know is that we have different statutory and regulatory constraints that we operate under. We developed our guidance on Economic Analysis to the defense of our specific expertise into fit with the specific institutions and parts of the Capital Markets we work with. Whether that would transplant, should transport elsewhere is beyond my expertise. Thank you. My time has expired. Mr. Hinojosa recognized for five minutes of. Thank you, mr. Chairman. My first statement is to thank you and to thank our distinguished panel of witnesses for their appearance and testimony today. My first question is to mark flannery. Mr. Flannery, as you are aware, the department of labor issued a rule earlier this month regarding the fiduciary standard of care tha that is though to investors when providing them personalized Investment Advice about their retirement accounts. Is the standard of care and ensures that Financial Advisors providing advice act in the clients best interest. The chairman has publicly stated that she would like the sec to do what its own fiduciary duty rule. My question to you is, as the sec studied with the comforts of interest in the provision of Investment Advice hurts investors . As you say, this is a major objective of the chair, and she has people trading and markets who oversee brokers and dealers. She has people in Investment Management who oversee registered Investment Advisors and staff from dera collaborate on a folding table. Turns out the reasons that surprised me very much because i was new to the sec, it turned out to be that is a very difficult problem. Its taken a long time to get it right and we want to make sure that we get it right when we get something out. This committee has considered bills that would impose a costbenefit analysis on the sec. I believe these bills would favor industry over investors and opened the sec up to increase litigation risks. Can you please discard all of the Economic Analysis obligations that the sec undertakes what looks to propose a new rule or an amendment to an existing rule . Yes. As i said with a 15 or 20 page document that we refer to as the guidance which is about four years old and lays out the content of what should go into an Economic Analysis at the sec. The first thing we do as we discuss whats called a baseline. We tried to document what is the state of the market and what is the state of the affected players, if we dont introduce the rule. So we start with a baseline, spend a lot of time try to document that with statistics and that gets everybody involved in the discussion and opportunity or perhaps an obligation to work off of the same baseline. Then we are interested in identifying who will be affected by the rule, who is likely to be affected by the rule and what would be the benefits and costs to the various people who are effected, the various firms and individuals . One of the things we fight is that there are many cases where we cannot quantify the benefit. So i would love someone to explain to me how, for example, i could quantify the benefit of a more informed investor. I know positive but i dont know how big i cant answer your question but i am very much in favor of that rule, that the secretary of labor has recommended and has had hearings for a long time, and that i think would certainly help investors. My next question is to marc wyatt. Mr. Wyatt, the office of compliance inspections and examinations template approximately 2000 examinations like 11 regional offices. Is the current sec budget sufficient to keep pace with the number of examinations that need to be conducted . We are trying to use our limited resources as effectively as possible. We are trying to endeavor to increase our examinations for last year fiscal year 20 year fiscal year 2015 for your half of examinations. We are striving to conduct additional examinations and increase our coverage in Investment Advisor space which currently is around 10 . On the brokerdealer side, together with fender we get to roughly 50 of those registrants. So we certainly welcome Additional Resources and information that can help us develop our exam program under the Space Program to conduct further exams. How do the sec resources to examine registrants compared the resources of some of the large brokerdealers come up banks are of the outcome is that the sec is supposed to hold accountable . And very quickly. The sec has, theres 1011 examines the there are some who have over 3000 public of the complex or grandma for Global Compliance program i will highlight. Thank you. Mr. Royce. Thank you, mr. Chairman. Think you to the witnesses for doing this today. Experts have deemed the United Kingdom for Retail Destination review as being effectively identical to the Labor Department rule. In the eyes of not just industry but the British Government itself, implementation of that rvr review create what they called an advice gap that lockout middle and lower income savers from Investment Advice. I studied the johnson report about the Department Latest indications with the sec during the lead up to the rules release. I showed the senators frustration with the departments lack of cooperation in releasing all of its communication with the Commission Regarding its rule. So im just going to ask mr. Flannery, did the dol and the sec communicate about the impact of great britains rdr on British Consumers . And if so to what extent . And if not, why did the sec not think it relevant to reference the fact that a developed economy has already implemented a rule similar to this rule and it was no longer a hypothetical situation . The retail distribution review which i think took effective beginning of 2013, we viewed in the sec can we do that as an extraordinarily interesting policies that put we could call it an expensive because it did not involve us. I undertook a couple of Conference Calls with people over in the regular agencies there. With me on those Conference Calls was one of my staff who was involved in keeping with the department of labor economist. So be conveyed certainly that information to them. I dont kno know in what for bum not for me with the details but certainly the information was conveyed to that individual. The information coming back the other way about the advice gap that they were experiencing in britain with middle income and lower income savers from Investment Advice, that information was being it was certainly conveyed to the department of labor. When we are asked to provide Technical Advice to any organization can we provide technical advise based on our expertise with our institutions and our space. So if we send over comments or suggestions, those people are operating in a different regulatory in private under different legislation. It is therefore their decision which of our comments is most appropriate to their situation. I was going to ask mr. Mckessy a question. And this goes to the issue of the offices creation under an amendment offered in this committee. It came as a result actually of Harry Markopolos is struggle which he explained to us is decadelong prevail to bring Bernie Madoff ponzi scheme to the attention of the sec. It in particular his frustrati frustration, year after year after year, a failure of the sec to take any action against Bernie Madoff. So the idea, in a nutshell, was that by establishing a separate office within the commission, the sec would be better situated to protect whistleblowers and ensure that their concerns are, in fact, acted on and not handled as that previous situation was. Do you think the new structure is working, and what could be done to improve it . And im also concerned that not unlike the gaps in coordination we have between regional offices and divisions in the sec before your office was created, there may be gaps in coordination with other parts of the government. How does your office coordinate with other federal agencies that allege conduct that is beyond the fccs jurisdiction, that that is the thrust of what im concerned about. I think the creation of the office, ive very grateful for because it created my job. I think it has been effective in encouraging whistleblowers to come forward. I have had a number of meetings with mr. Markopolos and gathered his thoughts on how we can be as effective in advocating for whistleblowers. I think beyond the office of the whistleblowers or other structural changes in the agency that i think has been effective in dealing with issues like information gaps, decoration of the office of Market Intelligence which is a centralized office that centralizes all the intelligence that comes into the agency to make sure when we get a tip from italy to something someone is only looking at that it finds the right home and that we dont have competing office is working on the same matter. At the end of the i think the fact that the Whistleblower Office provides free benefits to whistleblowers confidence young and retaliation protection of the building to be paid. Has created real incest allow people to come forward if they otherwise were unwilling to are reluctant to. I think were seeing the results in the fact weve solicited over 16,000 tips since the program went into effect. Thanks again. The gentleman from massachusetts, five minutes. Good morning. Thank you, mr. Chairman. I want to thank the witnesses for their help on this issue. Mr. Butler, i was a member of this committee and the financial crisis going back to 2008, and i think it is beyond any reasonable doubt that the Rating Agency played an Important Role as a facilitator of that crisis, and that they not only amplified the intensity of the crisis but also i think facilitated the wider scope of that crisis as well. Independent researchers and investigators as well as Justice Department have basically said that this sort of pay to play role that our system that has been in place where customers pay for ratings and that the conflict of interest on the part of the rating agencies contributed greatly to the problems we had back then come and that that model has to change. Now, since the crisis your agency hasnt instituted any fundamental changes in the Credit Agency Business Model that created those conference of interest. And Credit Rating agencies have returned to record profits. Your own most recent examination found severe failures by major credit agencies to comply with their own stated policies and procedures, yet you of not letting any fines or penalties on rating agencies. Do not use or Statutory Authority under section 15 of the Security Exchange act to suspend agencie agencies or inds for ratings. And the office of Credit Ratings public examination did not even identified, they dont even identified specific rating agencies that violate procedure rules. You dont even call them out. No name and shame. It seems to me the system is designed really to shield the rating agencies from any accountability. We dont even identified the people, we use terms like one of the larger rating agencies would assume is one of the big three. You know, your testimony states that the ocr attempt to stir the Public Interest and protect users of Credit Ratings, but ive got to ask you, do you really believe that when you get to that place without eliminating the conflict of interest, that currently exists where Companies Pay the rating agencies for favorable Credit Ratings, and that companies are in competition with each other. Theres a great segment in the big short, that movie where talking to one of the folks from Standard Poors, ed and lois asks why are you not tougher on come our demand on these guidelines . And the one from Standard Poors as well, if we do they would just go to moodys. That sort of encapsulates the problem here. So whats the answer here . As long as we have a competent interest, are we ever going to get to a place where we are actually, you know, your mission states are begun to be able to protect the users of Credit Ratings . In my estimation, compliance is not a destination but it is a journey. We are well along on the journey with regard to the rating agencies. Infusing in them the importance of compliance enhance governan governance, transparency, training and other methods to build rigor within the rating process to establish integrity. To address specific your questions with regard to issuer pays conflict, in august of 2014 the Commission Adopted a new set of rules, and the rules were effective fold in june of 2015. Importantly within that set of rules theres a requirement for a complete separation of the sales and marketing function from the analytical function. And thats accomplished by by prohibiting rating an alleged more developers of methodology from participating in sales or Marketing Activities, or from being influenced by other business considerations. And apart from let me to stop either because i only have 30 seconds left. You are important to your report says that they are departing from their own policies and theyre not following their own programs, and those companies are not being held accountable under your system, the one youve got right now. And thats after this last iteration of changes has come for. They are still paying for ratings. Theyre still paying for ratings. They know the rating agencies know where their deal flow comes from him and they are acting accordingly. I just dont see any changes here compared what we were doing before. At i thank the gentleman for his question and i would ask not to end with a question because were trying to get in before the vote is called. Who is up . Mr. Hill. Recognized for five minutes. Thanks, mr. Chairman. Thank you for the panel. Thanks for your service after the commission. Doctor flannery, i took a question to edit a few minutes ago about the dol wrote and your work and the chairs commitment to fiduciary role at the commission. The sec has eight years of experience in overseeing brokerdealers and Investment Managers and doing Economic Analysis on that. You made the statement is really, really hard to get it right. Obviously, dissident something that the commission was asked to study back in 2010 as the port of our frank. And yet the department of labor has rushed into this world. Not rushed. Thats not fair to the dol because they worked on for two or three years. But my biggest complaint about the petition will is that it wasnt done in conjunction with commission, the commission didnt take th the lead on it to get it right our behalf of all Market Participants. Since it is hard what do you think are the hardest things about it when you look at, look at it from an economic analytic point of view of trying to quote get a ride . Obviously finra has led the way. If we manage money on a discretionary basis its subject to a fiduciary standard in the industry. What do you rank on the most difficult challenges . Course you can answer that because youre not comment on the department of labor. In the context of the sec, in the context of combining the standards to which the judiciary standards to which brokerdealers and Investment Advisers have been held historically, they are different standards. In the old days record dealers sold things to people and got, said the commission. Investment advisers gave advice, didnt get, then did commissions. That got compensated via fees. Now the brokerdealers have moved into the advice of giving space. They bring with them, however, a compensation arrangement that was designed and that survived in a somewhat different if id been. What is the first questions that comes up is what does it mean to give Financial Advice . If im a broker ive got to make sure that the security is suitable for my customer, but after the customer has bought the security, i am then, i dont have any further responsibility to monitor to customers portfolio. Thats not true, is it . They have an obligation to make sure the Financial Disclosure and their situation is reviewed at least annually in those firms policy manuals for net worth, earnings, suitability, changing circumstances, marriage, having children, having an estate plan. I mean, they do have a continuing obligation to their client, dont they are at all policies of finra and the sec. I believe the brokerdealers obligation that is transactions oriented as opposed to life change. If theres a life change and the customer comes back, there could be a different definition of suitability. But it is a life change and the customer does not come back, theres no responsibility as i understand for a broker to call up and said now that you are remarried you want to do something different. We dont have to debate that here. I would very much disagree with that basel looking at first policies and procedures, manuals for a couple of decades. But one has to think is challenging about getting it right from the commissions point of view . Speak with one of the things that surprising to me is how difficult it is to disclose information effectively. The brokerdealers and Investment Advisor rules and standards are based on disclosure, and theres sometimes a difference between disclosure and the transmission of information. Even dera start a small behavioral unit to try to help people process information that is may be Second Nature to those in the finance industry but new and confusing to those outside. Couldnt the department of labors approach of creating one set of approaches for our retirement account versus under the set of approaches executed by the sec and finra on behalf of the other account categories lead to investor confusion . I suppose it could. Certainly there is some inevitable confusion i suppose because the department of labor rules are promulgated under a different set of statutes can different set of considerations under and acidity laws under which offered. In an ideal circumstance only become the administration would have insisted that the commission take a leadership role in organizing this approach. Thank you, mr. Chairman. I yield back. The gentleman yield back. The gentleman from connecticut is reckless for five minutes. Thank you, mr. Chairman. Thank you for being with us and for your good work. I have two questions which are recognize our little tangential to your office and efficient but both protected topics ive been concerned about them what they perceive as files on the part of the sec some hope i can get only some provisional feedback. The first pertains to Insider Trading but as you all know the second circuit, then human decision apart from overturning to very high profile trading conviction put a great deal of uncertainty newman into future prosecutions of Insider Trading. I think we could all agree on two things. Number one, we now dont have a good definition of Insider Trading and i Insider Trading and ive want them to believe that a program to send people to jail we should a pretty good statutory definitions for why we are sending to chill. Secondly, without getting into the guts of newman come as you know the decision about whether they can be held liable unless they know of the personal benefit received in exchange for the disclosure. If im a corporate insider and i tell you a, i shouldnt be telling you this, its probably illegal but you can make a lot of money and you trade on it, so long as you dont know that ive received some tangible personal benefit them you are not prosecutable. You are not liable under the newman decision. Summative i guess ill get bit more clarity from the sec about whether there should, in fact, be a statutory definition of Insider Trading. I plan to my colleague mr. Lynch, ive also before to legislation, menendez in greater put together legislation im looking for more guidance about whether the uncertainty introduced is, in fact, a problem that we should address. I believe as a member of enforcement decision im probably the best qualified to talk about this. But that also to thank the newman decision raises issues that are extraordinary nuanced and i want to be as hopeful as they can, but i think to get a real appreciation for the considerations that go into how newman affects our enforcement decision at our ability to bring Insider Trading cases is best addressed by someone who has more background if that. Of course, i be happy to take any questions back and have the right person get back to you. Obviously, we are well aware of the newman decision and the nuances of it but i think he probably would be better served by having from people who were a christian the nuances of how it impacts our enforcement efforts spirit i appreciate senator i recognize this isnt exactly the panel thats right on point for that. Im sensing a certain amount, and understand this. Weve got to that vast body of case laws come insider training, and beauty ambiguity. I would appreciate it if the commission would, in fact, focus on nuanced thinking is a more clear message and maybe try to get away a little bit from what is bureaucratic, or what is case law tradition and maybe a little bit of bureaucratic inertia. Because yo he demanded example i gave on the question of tipper versus tippee. Its kind of commonsensical. Second question, we been doing a lot of work on the jobs act which i support and now look at a bunch of additional changes come expansion to the job back. The whole idea of a job that is Young Companies should not bear the full burden of sarbanesoxley compliance. I that as with anywhere between one and 2 million a year for the cause of sarbanesoxley compliance and were spending a ton of time on the issue. I think its good i cant seem to get enough attention drawn to the odd fact that one of the biggest sources of cost for a Young Company going public is a remarkably consistent growth spread of 7 . Lets just say the average ipo is a neighborhood of 200 million, that means 14 million out the door. Were spending a ton of time on that one or 2 million a year associate with sarbanesoxley compliant on having trouble really understand why we are not focused more on the odd fact that 95 of all ipos that have occurred a lease in the tenyear period after 98, 95 had a 7 growth spread exactly. In europe there is no such clustering. In fact, ipos growth spread average about 4 and you almost never see gross spread as i is one person. Does that clustering at 7 over such a consistent project on strike you as odd and perhaps worthy of investigation . Let me try that. Another industry which is not nearly so germane to the issues you expressed but another industry that has the same phenomenon is Real Estate Brokers were i believe the number is more likely to be 6 . That has always puzzled me. Thats an Economic Analysis for both of these cases about why this might be a good contract, but you can also find arguments that are equivalent to whats implicit in your comment that maybe theres something nefarious going on. You can find economic arguments on both sides. Thank you. Thank you for the questions mr. Hultgren. I want to thank you. I want to thank you all so much for bringing. I appreciate your work and your testimony today. Mr. Wyatt, Harry Markopolos who initially won the sec about Bernie Madoff ponzi scheme revealed is working to uncover three multibilliondollar schemes including one that would be bigger than Bernie Madoff. Many of the failures that allowed Bernie Madoff to continue his ponzi scheme for as long as it can be traced to the failures of oc examinations to connect their apparent dots, offices couldnt oc were unaware of parallel investigations into Bernie Madoff entities. Do you believe the institutional changes implemented by oc since 2000 that are sufficient to stop future fraud . If not what else needs to be done . I do believe the changes weve made after Bernie Madoff have enhanced our ability to detect those types of activiti activities. To streamline of rtc a program to ensure there are no titles in the region as well as the connected we have amongst the regions to ensure if we see a theme or risk out we can act on awkward and bring the resources to bear where continue to run the risk base program. Part of evaluating our risk are continuing to look for any emerging risks and connecting the dots as your site with the tcr program and other areas including information gathered from other divisions such as dera. The sec did not and still did not have a code that consistently identifies all the entities it regulates and makes connections between them. I believe that translated was in part a data standards that you. Last year congressman issa, myself and other members introduced legislation called the financial transfers act to direct all financial regulators including the sec to adopt take a stand for information they collect with the hope of transforming the current landscape of disconnected documents into open, searchable data. The original name of the bill was a madoff transparency back. For instance, of the sec would adapt the legal entity identifier to consistently i get all the entities it regulates and affiliations between them. So in the future parallel investigation into related entities like madoff will be electronically visible. For information about what is lost to be made public, the bill directs the agency to publish such information as open data, machine readable and freely downloadable. Will an openended initiative help prevent future failures like we saw with the Bernie Madoff scheme . We have adopted strategies to enhance our use of Data Analytics and to catch all the Data Available to us as i mentioned the internal and external sources. We have centralized all the information we have with regard examinations. So if you want throughout oc can go into book at a given registrant and see what activities have been involved in examination or even a nonexam review. We are applying the Data Analytics and we would welcome anything that could give us additional insight into the activities of the registrars that we are examining. Examining. I believe we have to do better. We can do better, and theres Incredible Technologies and connectivity, we ought to be able to recognize. Let me switch to mr. Flannery if i could the department of labors proposed producer wrote which was finalized mentions 172 times annuities. But the Impact Analysis did not examine the impact of the rule on annuities, advisors or the Retirement Savers using them. Last october david grimm from secs division of Investment Management testified, a lot of what weve been talking about with the department of labor has been on impacts. Impacts of choices that they are making on investors. What impacts is he describing what did your office conduct any costbenefit analysis . We did not directly do a costbenefit analysis. We are involved in advising and providing comments, technical, einfahrt im not familiar with the gentlemans time has expired. We are getting ready to vote. The chair now recognizes mr. Foster for five minutes. Thank you, mr. Chairman. My questions i guess will be directed to mr. Flannery. First and foremost, congratulations on your high rings up to physics ph. Ds. As the only physicist in congress, effect the only ph. D scientist of any kind, i recognize the complexities of things like structured financial products, a technology that is involved in highfrequency trading all of these others were things we need that kind of expertise and im glad to see that you are recognizing that. Im also the author of the contention Capital Requirements in the doddfrank bill. As someone who is widely credited with having invented the concept come in fact, back in 2000 weve seen it adopted worldwide with what i see is a lot of success. You see the Swiss Banking regulators which are faced with a problem that the economy is not big enough to backstop the size banks that they have. They had his contention capital to make those viewed as very solid counterparties, even in times of financial stress. We have seen the whole Deutsche Bank ongoing secular dutch boyd is aggressive restructuring, deleveraging, guided bonuses and so on. Driven in large part by the worries that the contingent convertible coupons will not be paid more than a year way. It is to my mind working very successfully at providing the Early Warning signal. Finally, i guess was recently candidate, the new government, announcing they would his contention capital instruments to make sure that canadian taxpayers are not about if the big banks get in trouble. I view this as a successful thing and i have continued to try to get them adopted, which they have full Regulatory Authority but we are not saying aggressive adoption. I was wondering if you could give or take on what you see as the Lessons Learned in their worldwide the way forward for potentially getting those lessons used in the United States . First of all its a pleasure to meet you. Contention capital is something that personally and in the academic environment, my academic career i spent a fair amount of time talking about. I think you put your finger on what i view to be the biggest advantage of contention capital instruments, and that is that rather than wait until the last minute win a from as close to insolvency, contention capital instruments address that possibility, keep us away from the possibility, and get the managers and shareholders of the firm an incentive to stay away from certain trigger points. Which i first started talking about this, the crisis was fresh in our minds of people had this vision that capital would be almost zero, then a conversion. But by the time capital is almost zero all sorts of bad things have started to happen to these firms. I believe, im sure you are correct when you say that they could be permitted as part of the capital back on the United States. They havent been added think there are who feel that higher capital formal equity requirements are safer, more protective than contention Capital Requirements or. And then how one comes out on that is based on how, what one believes is the effect of higher Capital Requirements on the operation of the firm and the pricing of its products. Do you think at this point that are good examples of trigger mechanisms that have proven workable in times of stress, or is that still an ongoing experiment . I believe thats the problem. The securities in europe and asia that have been so successful have book value trigger mechanisms. One of the characteristics of firms that get into trouble is that their market value deteriorates much more quickly than the book value disparate in other words, the martha loses confidence in the firm despite the fact that it may be showing strong book capital relations are in so the triggering of these contentions Capital Insurance off of ratios i view as problematic and likely to interfere with their value. Are there issues just related to the sec, how do be registered under the 1933 act . If you go to the european websites with the thought of investing in contention capitals, theres a big warning, if youre a u. S. Citizen can forgiv forget it. I was just wondering if there is a clear regulatory path or whether you would see sec issues involved in making this widely used . Are not aware of any considerations actively going on inside the sec but it would focus on disclosure. Disclosure of the risks so investors could understand what was likely to happen and accept the risks. The gentlemans time has expired. Thank you, mr. Chairman. Welcome panel. Great to have you. Im just the warmup act for ms. Wagner who will go in the second ida b. Wells fiduciary. Obviously, many of us as youre well aware of concerns about the rule. Its my understanding the sec also shared some concerns about the proposed rule and now the actual rule. Mr. Flannery, is it fair to say the department of labor for the most part disregarded much of the guys at the sec gave to get in the guard to this rule . The advice that was given, i think of it more as technical comments. Some of the was incorporate into the final rule in some of the. Dont know about the preponderance. One of our concerns would be that one of the economists suggested the department of labor should measure improper activity of advisors through measuring conflict of interest. The proposed for the purpose of the rulemaking process not projected investment return. It seems like the dol did not take that advice. Is that fair to say . Im not familiar with the final dol rupert its 395 pages, and i look forward to reading it but havent yet. You taken any analysis of the impact of this rule on investors . We have not yet gotten to the point because our internal deliberations again into different security space have not gone to the point of generating a rules weve not yet done that should of Economic Analysis. Let me share my concern. I come from centered in western and northern wisconsin. Not a really wealthy part of the world. We dont have a lot of people who have a half million or 750,000 in a retirement account of a people who have 30, 50, 80,000 in their retirement accounts. Theres some concern that we are going to migrate those folks from getting advice from someone that theyve worked with and that they know that they trust, to a different computer model. Do you see that for happen do you foresee that happening as well speak with you can look at the rowboat advisor in the way that you have. You can also look at it as an opportunity for people who are just getting into retirement savings. People are generally more comfortable taking advice from computers that i may be or you might be. Lets play that out because it might not be just a person who just started to invest. Invest. Invest. The first time interest in washington, d. C. Might start after couple of years and have 80,000 into retirement account but in my community it after 25 years they have 80,000 in their account. Based on, maybe open to the panel, do you think maybe someone whos not an expert in investing, thereby focus has been posted but theyve been responsible come the but although the money away. Do you think, look back to last august, that that person when the markets start to move is going to be more compelled to look at the computer screen and make the right choice, as opposed to calling their Investment Advisor and trying to sell the investments its very vital as i hold onto second, thats not the right all right now. We should ride this storm. Thats not part of our plan. We know there are peaks and valleys. Dont sell. Are they going to get the same advice from the computer . I guess my question is are they going to make really bad choices for their future if you have a robo advisor as opposed to a Financial Advisor . I suspect that a lot of people in the world, in wisconsin, who didnt even know was happening that day. Didnt look at the financial statements. But in general i agree with you entirely a good Financial Advice is valuable. I think good Financial Advice also sometimes comes with complex, and i i dont dispute that but does that come from a computer . I dont know enough about those computers. If im able to get eight or 10 questions about some of my goals, some of the income, how many kids i have, what what what a . I put it in and it spits out some advice, do you think that just because i am a low income individual, i am a low dollar safer but i shouldnt be entitled to the advice that comes from someone who makes 800,000 a year . I guess we dont know. Certainly the point you make is widely discussed but we dont know for a fact whats going to happen. Do you have a study you have a study so you have a studies the weekend of speakers we will know when we take up a role of the sec, we will no. Is it too late . Might people will already be kicked out of personal advice and that we relegated to their computer. Do you share that concern . The already out once you do your study. And the rule isnt limited. Again, the rules under which the dol operative from those in the lets authorities are different from those that i cant wait to see how we navigate both and how that will the gentlemans time has expired. Im sorry, mr. Chairman. I yield back. The gentleman from california. Thank you. I would point out that i think it was congress intention that the sec at the department of labor have very similar identical rules. It is absurd to think that ira account would have one set of protections and nonira, nonpension accounts would have another. And its even more absurd to say that the ira accounts typically control by those in their 50s and 60s should have more protection than widows and widowers and elderly people who are typically middleclass families control the wall larger against precise share some of the last gentlemans concern. Mr. Chairman, the one part we dont have before us are those concerned with accounting standards. Id like to get into the record my letter of earlier this month, demonstrating the incredible harm that is being done to our economy by the misuse, well, the departure from accepted accounting theory that requires companies to write off their research and experiment station across. Without objection. Thank you. Mr. Butler, we just, we are still suffering from this 2008 downturn. I think it was mostly caused by the Credit Rating agencies. We still have a system where the umpire pays, is paid by one of the teams, and selected by that team. And the sec has decided to come instead of being an agency that favors transparency for investors, has decided to conceal this by such relatively meaningless, socalled protections. It says that salesforce cant talk to those who do the ratings. The people who do the ratings are compensated by the company. Their promotions depend upon the company. They want the company to be successful. Is there any rule that those engaged in rating debt obligations cannot receive Stock Options, bonuses, or any benefit from the success of the company they work for . Each of the companies has a different compensation is there any sec prohibition speak with with regards visible star rating analyst and compensation . Yes. I would have to take that back. Okay. If you give a grade inflation, the Company Makes money. Your Stock Options be better and sec has no rule of which you are aware that if youre not aware of the role it would be very hard to think of as being a force to ensure the one that would be enforcing the rule. Let me, i mean, the debt markets are obviously are more important to the economy, or at least involved far more capital than the stock markets. Those who invest basically are entirely dependent upon the ratings. Even if you know better, you are managing say that t. Robot a prize Fund Committee decide to forego eyeing a double a rated bond that pays 20 basis points more, and im going to invest in vanguard. All im going to go to do is decide which has the highest rating and heidi steele. I want to talk to you about one particular problem. That is the peruvian Agrarian Reform bonds. Obviously the way to make money is to try to get a room as a client. Its a significant for real hebrew. One way to do that is to avoid even offering to rate these agrarian bonds that seem to be part of a selective default. Is there any rule that says that a bond, Credit Rating agency cant refuse to rate bonds because they can make more money from, you know, they are paid off one way or another not to write them speak with i am generally familiar with the Media Coverage of the peruvian bonds that i cant discuss the specifics of speakers is there any rule that says that you enforce, that would prohibit peru from saying, please dont comment on our agrarian bonds and we will make sure to give you a contract worth millions of dollars in some other part of our financial dealings . Is there any rule you can point to that point to that speaks to our rules that provide for an absolute prohibition rating analyst to be involved this is what you take the engagement. The rule prohibits the analytical function from being involved in such marketing function. Thats achieved from prohibiting analysts from being influenced thats not what im asking. The salesforce decide whether to take engagement. So if peru pays them a few Million Dollars to say, just dont even get a Credit Rating analyst involved, dont let them look at it hes got the question. Do you have entered . There is a record certificate to the company each action says there was no influence this is a nongrading action. You are avoiding my question. The answer is obvious. Thank you. Ms. Wagner is recognized for five minutes spent thank you, mr. Chairman. Erector flannery come as part of flashes transportation bill, one of my bills was included that would allow Small Reporting Companies to incorporate by reference in the posteffective amendments on the form s1. The sec would implementing this provision in january estimated over 70,000 work hours at 85 million would be saved annually by Small Businesses. Of the benefits of this provision for Small Companies and provide a more detailed response . Im sorry, but i never saw your letter. I dont know what went into the response. One of the things that concerns me about reducing reporting from Small Companies is certainly that there is room for there to be ways. But theres also evidence that companies that go to the markets with less information are less likely to be traded. A secondary market trading for stock is ultimately what companies would like to have if they are going to have access to capital. Back to your immediate point. I have a number of current policy things we need to deal with. I would be more than happy to consider doing. I would really like to take a look at this spirit facilitating Capital Formation is part of the mission and this is a provision that appeared in the sec farm on Small Business Capital Formation annual report several times. I think we can find Common Ground here and i would ask dr. Dr. Flannery that you get a copy of my original letter. I will send it directly to you. Moving on i would like to discuss the extent that the sec and department of labor coordinated in crafting their recently finalized fiduciary role. According to be no records outlined in a recent Senate Report in mr. Chairman, i would like to have these entered into the record. It seems that the department of labor disregarded advice from the secs Pacific League regarding concerns raised by the division of economic and risk analysis. In fact, a specific quote and these are fascinating read, specific quote from an economist at the department of labor states we have now gone far beyond the point where your input is helpful to me. These exchanges between the sec and dll should make for very interesting reading. From your web over the past year, from the proposed rule to the recently issued final rule, how well has the department of labor coordinated that the fcc . Was certainly an opportunity to provide technical assistance. I am familiar with the email you describe because it involved one of my staff. Yes. A staffer from deal well have been a friend and professional acquaintance of the cello for a while. What you are seeing is the culmination of a long stream of emails. It can be pretty direct. If somebody says i understand what you are aiming at not applicable to my case, i do want to hear anymore about it, that is kind of the way i interpret the email. There are others here, too. I dont see the department of labor been open to any of your advice from i think a very fine office that you run and certainly i have great concerns. I want to deara as it stands right now. Its not forthcoming . When and if and i hope it is when the commission considers a role for fiduciary standards in our space, we will look carefully at the role because that would be part of the baseline. As your jurisdiction and honestly it is laid out perfectly in section 913. We want you to do your own uniform fiduciary rulemaking here. This is your purview, your space. You are the regulators, including finra. I would like to get a commitment that youre willing to do a cost benefit analysis when doing this. Yes, absolutely. Thats part of our economic analyses. Thank you very much. I look forward to working with u. S. In the forward. The general video fact that the gentlelady from texas. Thank you, mr. Chairman. Mr. Butler, could you describe the statutory requirements for the annual examination . Yes, sir. This required to cover areas we cannot and examine if each of the nrsro at the sec. The a few areas are informed by the Risk Assessment process we use internally. The Risk Assessment process takes a variety of input, information from the prior exams. It takes inputs from the media, and thats from the other office and division of the sec as well as tips, complaints and referral we received on the sec alignment. The Risk Assessment process is then used to effectively differentiate risks by registering, which are then informing the axiom scoping which allows for exam teams to be most effective as they go through their process. We also had the examination teams arranged in such a way if you have a larger examination team, examining the larger register on so that we have an effective allocation of resources. As a result of the examinations, theres a report event to each registered identifying deficiencies weve noted. Theres also a summer report required to be put together by the office which is assembled and reports publicly a summary of the essential finance we found in the examinations. You think there is room for improvement on the present requirements . We are doing a good job an effective job with what we have. I also believe we can always do better in wishes one of the reasons weve added an additional request for two fy 17 i specialized examiners. Having specialized examiners would allow for us to be able to go narrow on particular issues that arise during the course of an examination and other times during the course of the year. You think its necessary for exams to be annual and for folks to be president . Its important that we are with regard to oversight we have seen real change as a result of the examination did in real change implemented at the firms as a result of the recommendation that accompany our findings and up for the fact we are been there with the regularity we are, i would not be able to sit here today and say with such conviction that there was real change. I think the annual requirement is one that allows for us to bring a different approach each year to focus on different areas within the firm so we are not going in on a predictable basis, but rather on a more tailored basis for a particular firm with regards to risks identified to us or that weve seen. If you could scale or tailor the current requirements, what would you do . Repeat the question. If you could scale or tailored the current, would you do . Im comfortable as its currently crafted. The written statement result your whistleblower is 10 to 30 . Why is the threshold not hero . I think if the intention is to incentivize individuals to come forward if they are aware of wrongdoing, and the calculus that individuals go through to decide whether they can report something to the regulator is complicated and has a lot of factors. Amongst them is how much is enough for me or could be and if it is true that when a person should approach a regulator, one of the outcomes could be that they get zero. That could change and affect negatively their incentive than enthusiasm about coming forward. I think its appropriate to not have zero is the baseline so that individuals who may otherwise be reluctant to come forward know that there is a possibility of some monetary award. What is the current value of the whistleblower . Just over 400 million. What kind of internal controls do you have with respect to that fund . Thats a pretty sizable amount of money. We can only make payments when the Commission Approves that. There is a process by which we pay only against what we can confirm husband collect it. We have internal controls to make sure that the cases that have been deemed to be worthy of an award, the documentation requirements we receive from the court or the appropriate person inside the sec to verify weve collected the money and then we multiply that against what the percentage of the commission has approved. Is the sec inspector general, are the office auditing of sense . Yes. The geo odyssey Investor Protection fund. Thank you. The gentlemans time is expired. Weve been called to those paired with five minutes left on the those numbers not you should run over on passage of the bill. Theres only two votes if im not mistaken and i believe one or two other members who were here who will be returning after votes for final questioning. Your committee is adjourned until it be reconvened immediately after votes. [inaudible conversations]