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tv   SEC Commissioner Testifies Before Senate Banking  CSPAN  December 14, 2018 12:08pm-1:17pm EST

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lunch. they will resume at about 115 eastern and continue with live coverage here on c-span2
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>> this hearing will come to order. today we were received testimony from security and exchange commission chairman jay clayton regarding the work and agenda of the sbc. your appearance before the committee is appreciated and it's the essential to the oversight of the sec. i thank you for your willingness to testify today. the sec has a critical mission to protect investors, maintain their orderly and efficient markets and facilitate capital formation. the sec plays an important role in public confidence and trust in our nation's capital markets. it provides information to investors to ensure as americans prepare for their futures they have information necessary to make informed investment decisions. i commend the sec for its work
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to advance of these missions. last week this committee held a hearing to discuss the appropriate role of the proxy advisory firms prep the shareholder proposal process and the level of retail shareholder participation. many members expressed interest in continuing the discussion on the appropriate relationship between proxy advisory firms and market participants as relates to shareholder proposals and corporate governance. i'm concerned about the misuse of the proxy voting process and other aspects of the corporate governance system to prioritize environmental, social or political agendas over the economic interests of and investors. last week you stated your intent to address aspects of our proxy system including proxy only, ownership and resubmission thresholds for shareholder proposals and proxy advisory firms. many of the rules govern our proxy system have not been examined for decades and i encourage the sec to take an
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aggressive approach addressing the scope and appropriateness of previous regulatory actions. capital markets are also vital to facilitating job growth and expanding american investment opportunities. this committee worked hard in 115 congress to pass a number of bipartisan securities and capital formations bills. i will work to continue with members to identify additional legislative proposals that encourage capital formation and reduce burdens for small businesses and communities. the sec has taken a number of steps to make it easier for emerging companies to go public while not discouraging the availability of capital in the private market. additionally the issue the sec proposed regulation best interest and related interpretation to establish standards of conduct for broker-dealers and investment advisers. this is a significant step forward and i look forward to seeing a final rule in the near term. finally the sec has been proactive in addressing
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cryptocurrencies and coin offerings. for example, the enforcement division create a new cyber unit which led efforts to counter fraud against retail investors involved in initial coin offerings and brought changes, or charges, against the bitcoin denominated platform operating as an unregistered securities exchange. i look for the receiving updates on these and other sec initiatives including reviews and when we can expect final rules in these areas. senator brown. >> thank you, chairman crapo. welcome chair clayton are . nice as you can. thank you for your service. i assume this be the last banking committee hearing for this congress. i'd like to express my thanks and appreciation for the work of senators donnelly and heitkamp and corporate and help over the years, so thanks to all of them. we discussed the sec's enforcement program in previous hearings in a recent meeting,
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chairman clayton, as your pilot the sec has worked hard to return money to harm investors. i agree that's an important goal but enforcement can begin and end with protecting wealthy investors. ten years ago today bernie madoff was arrested this is china ponta scheme was disposed expos but there's no doubt ponzi schemes still exist. your report shows sec is focused on finding them and punishing the wrongdoers as you should. we also know a decade ago bernie madoff was far from the biggest threat to most families. it was wall street firms that are just wrecked our economy and just as sec will continue to pursue ponzi schemes must also continue to pursue in many ways the harder, the compex cases against the big banks when they break the rules and threaten families, homes and savings. i've said on this new number of times i sit code 44105 where we live in cleveland had more foreclosures in the first half
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of 2000 seventh-inning zip code in the united states so i still see the remnants of an action and wrong actions by regulators and by wall street. the big banks have not turned into angels over the past ten years. last month, german authorities conducted a two-day raid of deutsche bank's headquarters in a money laundering and tax evasion investigation. last year, both the federal reserve and new york state regulators imposed fines totaling more than five hundred million dollars on deutsche bank's u.s. entity, for anti-money laundering violations. and deutsche bank is not alone, similar problems persist at other banks. looking at your strategic plan, i frankly see a lot missing, there's nothing about stock buybacks, and nothing about excessive corporate debt. take a look at what has happen since the republican tax overhaul. since last year, corporations have announced more than one trillion dollars in stock buybacks. to take one example, gm has spent more than 10 billion
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dollars on stock buybacks since 2015, and last month it announced it's laying off 14,000 workers and closing five plants, including the chevy cruze plant in lordstown, ohio. close to 5000 lost jobs, 5000 more jobs in the supply chain at least and probably another 10,000 jobs in the valley. the same day they laid off shift number to several months ago they announced their expanding production in mexico. yet the stock buybacks continue and an executive compensation continues to go up. the priorities of these corporations are clear, buying back shares can boost a company's stock price, which can mean even bigger bonuses for corporate executives. investing in a company's workers supports the long-term health of the company, but that's not what wall street rewards. our economy function fine without massive stock buybacks.
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the sec rule facilitating buybacks was adopted 36 years ago, and since then, the use, size, and frequency of stock buybacks has increased dramatically. my colleagues and i have asked you to take a hard look at that rule. it is time to question whether it is too easy for companies to buy back their shares. the gm case shows us the risks to workers and communities when companies think only about short-term profits. we should also be looking at the record levels of risky corporate debt and leveraged loans, and how that debt is packaged into collateralized loan obligations, the complex securities that allow investors to trade pools of loans. the federal reserve and the occ are looking at banks' exposure to leveraged loans, but they say the risks are manageable and they are not worried. we've heard that one before. it was a little over ten years ago, before the economy came crashing down. leveraged lending and clo investors include hedge funds, mutual funds, and other market participants under sec oversight.
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as the shadow banking market plays a larger role in leveraged lending, watchdogs can't just focus on the big banks. it's your job to worry when it seems like there is nothing to worry about. i will say that again. it's your job to worry when it seems like there is nothing to worry about. that's what consumers and investors expect, so that risks don't build up across the financial system. a decade ago the regulators in the bush administration failed the country and the price was enormous. the sec needs to be closely watching this market, not just to make sure disclosures and credit ratings are adequate, but to complement the work of the banking regulators. we know the financial system has become more interconnected and that systemic risks are more likely. main street cannot afford for you to stand by watching wall street greed grow out of control. and any strategic plan for any agency guiding our economy needs to focus on the american workers who drive growth, not just wealthy investors.
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thank you. >> thank you, senator brown. again, chairman clayton we appreciate you being with us. you may proceed. >> chairman crapo, ranking member brown, members of the committee, thank you for the opportunity to testify before you today about the work of the screws and exchange commission. on behalf of my fellow commissioners and the 4500 women and men of the sec i'd like to thank this committee for its support. congress is funding of the agency enables to improve our tools and expertise relating to our markets, capital formation of protecting main street investors. further, your interest in an engagement on our rulemaking and other initiatives have helped us refine and improve these initiatives often to the benefit of our long-term main street investors. thank you for your input. from the day-to-day management perspective i see our job is having four principal areas of focus. protecting investors through
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forward-looking policies and will makings, and through inspections and strong enforcement of our securities laws. number two, monitoring our disclosure-based capital markets and the numerous market participants including through oversight and issuers, gatekeepers and intermediaries. three, ensuring our trading markets function effectively and fairly including during times of volatility and price discovery. and fourth, identifying, evaluating and addressing emerging market risks. with regard to the fourth category of what to note several key risks that are in front of my mind. first, cybersecurity continues to be a pressing threat to our capital markets and many market participants. the sec deals with cybersecurity risk for a number of perspectives both within and outside the agency. combating these challenges will continue to require significant resources and attention as well as an understanding that this is both an entity specific and a
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systemic risk. second, the potential effects of brexit on u.s. investors and securities markets, and on global financial markets more broadly is a a matter of incred focus for me and my colleagues at the sec. in short i believe the potential adverse effects of a poorly executed brexit are not well understood and in some areas where they are understood, are underestimated. the sec's responsibility is primarily related to the effects of brexit on our capital markets and i directed the staff to focus on the disclosures companies make about brexit and the functioning of our market utilities and infrastructures. third, managing the transition from lifework to a new rate such as -- a significant issue for many market participants including main street investors as borrowers, for example, have consumer credit tied to libor. we and our colleagues at the
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federal reserve treasury department under the financial regulators are monitoring this issue and working to facilitate a reasonable transition period however, an effective transition requires participants to take actions well ahead of year-end 2021 when the banks commitment to submitting the information used to set libor ends. finally, the process for developing implement in the consolidated audit trail remains slow and cumbersome and significantly behind deadlines. according to the sros, substantial delivery of the first phase of cut is now not expected until 60 months after the initial deadline. while i believe the cut should be completed with deliberate speed, protection of cut data particularly any form of pii remains a threshold issue for me. as the sros continues to make progress in the development and debilitation and operation of the c.a.t. at least the
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commission, the sros and the planned processor must continuously evaluate their approach to the collection, retention or protection of pii and other sensitive data. more generally, i stated before, the sec will not retrieve sensitive information from the c.a.t. unless we need it and believe appropriate protections are in place to safeguard it. in closing i would like to again thank the committee for its continued support of the sec, its nation and its people. also like to note that my colleague commissioner stein will be leaving us at the end of this year, and i thank her for her contributions to the commission and to investors. i look forward to answering your questions. thank you. >> thank you, chairman clayton. i'll start out on the proxy voting process. that's been a focus of both the sec and this committee recently. in your chest when you note this consensus on the need for major overhaul of certain aspects of the proxy voting process including proxy plumbing and proxy advisory firms.
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as staff recommends comprehensive overhaul proposals, what reforms can you not in the short term, if any? >> with respect to proxy, i put this into three categories, chairman crapo. first is proxy plumbing. our proxy plumbing, the voting from a in investor back to the company is very complex and the verification of the process does not work as well as it should. we are looking for fix it. looking to the industry to propose them so in that area i'm looking for short-term fixes. we do need a long-term overhaul. in the area of shareholder voting, i believe there are things we can do to that process that will not in any way diminish engagement but will,, what i would say, eliminate unnecessary processes. and in the area of proxy advisors, i think there's broad
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agreement that there are elements of the proxy advisory, what i will call ecosystem, that can be improved fairly quickly. i'd be happy to discuss more detail used. >> i appreciate that. one last question for me that the sec has donated significant time issues around digital assets encryptor curtis. do you feel the framework is officially placed to provide certainty and predictability for market participants? >> i want to thank this committee for holding a hearing, it may been nine months ago on this very issue, as the emergence of ice ceos and cryptocurrencies became i would say a broad interest to our investment community. at the time chairman and i noted without the securities laws function well for securities, the commodities laws function
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well for commodities and that the extent the work crypto assets developed site either of those, for example, we talked about bitcoin at that hearing,, we should continue to monitor whether of the laws such as anti-money laundering and lost need to be supplement. we are continuing to monitor that but i very much appreciate this committee is attention to it and vigilant. >> all right. thank you very much. i will yield back my tiger win the vote coming up sometime after 11, maybe 1130 thymic some good yield back two minutes to help us meet that deadline. senator brown. >> i don't know if that will spread. >> on setting and you stand, three minutes. >> thank you. the banking regulators recently banking regulation of the risk and the leverage lending market but only will aftermarket has reached record highs. recent lending move outside the banking system and fueled significant increase in collateralized loan obligations.
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what's the sec doing to monitor the growth of risky loans outside the traditional banking system? >> what i can say is many months ago, i don't want to say too many, but four owe five, we started looking at this issue in detail. you touched on a number of things that we should be looking at in your opening remarks. so kind from beginning to end, you've got issuers on the one hand, which do we have too much leverage at the issuer end of the spectrum, companies borrowing too much money? all the way through to the end investors whether its mutual funds, , pension funds and the like. and there entities in between including rating agencies, banks which originate loans, then what i'll call the clo packagers who by the loans from the banks, form the seal those consenting to the end investors. we're looking at each component
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of that and looking at it with two ideas in mind. one is systemic risk. are there other elements of this market that are going to cause the kind of systemic issues that you discussed? knock on effects. one thing we looking at in particular is what are the change in ratings for these types of securities trigger substantial selling that would not be picked up by ordinarily expected demand. if you go from investment grade two below investment grade, and psych investment restrictions caused selling, where the credit really hasn't changed that much but there's nobody there to pick it up. that's one of the main issues we're looking at. i can go on for a long time. i do want to take more of your time. >> let me shift to fsoc, doesn't seem as engaged as many of us would like it to be. they have moved the wrong direction by de-designating the insurance companies that were deemed systemically important,
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as you know. as a member of fsoc what again to push a greater focus on leverage lending and interconnectedness of banks and shadow banks? >> the discussion i was going through i would say the components of the clo, i will call it the clo ecosystem, the leverage lending that is outside of the traditional high-yield debt market, bringing our knowledge, what i was a continued analysis of that market to the other members of the fsoc is one of the things we are doing. >> and i'm hopeful, i guess i will ask you on the record, will you commit to pursue these interests with the rest of fsoc? is it something you will absolutely plan to do? >> i generally try not to commit but it's easy to commit for that because i'm already doing it. >> i can't emphasize, under emphasize importance of that.
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yesterday former federal reserve chairman janet yellen said corporate debt is at high levels and would prolong the damage of an economic downturn. if you were to come or whenever it comes. lead to more corporate bankruptcies. i'm inclined to believe her. i hope you and other regulators take the appropriate action as corporate debt seems to continue to mount and continues to play the role it has in this economy. thank you. thank you, mr. chairman. >> thank you. senator toomey. >> thank you, mr. chairman. mr. chairman, thanks for coming back. good to see you again. we discussed in the past including at public hearings that we've had this amazing the client and the of public companies in america, the number of ipos that we launch in the united states. i for one think it's a terrible thing if people are choosing to finance their business through private capital because of the
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cost and regulatory implications of going public. obviously a public company creates an investment opportunity for a main street investor. it creates another vehicle for capital raising, the competition between the public markets and the private markets have the effect of lowering the cost of capital. so in any way i can think about it a very robust public equity markets is a very good thing for our economy. i think in the past you've acknowledged that the regulatory costs of being a public company are probably a a contributing factor to the relative decline and absolute decline. is that still your view that that is a contributing factor? >> yes, it is. >> one of my concerns is that as we all know there is a subset of activists shareholders who engage in forcing votes, shareholder votes, sometimes repeated on issues have no
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chance of succeeding on. other times it's an effort to impose an agenda on a company. does this activity contribute do you think in any way of a companies reluctance to go public? >> look, i think the answer to the question is, do the decision-makers who decide whether the company should go public or not, when you look at that kind of activity is it a check mark in the negative box? yes. >> okay. vanguard is headquartered in pennsylvania. it's a great, great american success story, great innovative institution that is made investing affordable for millions of main street investor. but the founder recently made an interesting observation to keyboard and i quote, if historical trends continue, a handful of giant institutional
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investors will one day hold voting control of virtually every large u.s. corporation. now, if the trend continues which is his caveat, wouldn't that be a bad thing if a handful of institutional investors had voting control virtually every large company in america? >> the short answer to question is yes. the broader answer is, a continued reduction in the number of public companies has i would say negative effects i believe has negative effects that go beyond just opportunities for main street investors to invest. a vibrant public capital market has a number of other benefits to our society. >> i mentioned some of them. totally agree. but i do have this concern that
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we have this regime that is discouraging companies from going public. and when they do go public, we've got processes that may result in votes been cast that are not really well aligned with the interests of the investors. one thing just my point of clarification, former sec commissioner dan gallagher was here last week and he reminded us that it is perfectly permissible under existing law and regulation for a fund manager to come to the conclusion that it is not in the best interest of their investor clients to be voting on every proxy matter will that's factually correct, right? >> i saw his testimony at a think he described the staff position properly, yes. >> so one idea that's been floated as a way to increase the likelihood that when votes are cast actually reflect the wishes of the investor who is the
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ultimate shareholder, is client directed voting. do you have an opinion on the merits of that, and is it your view, on any regular changes the sec would need to make in order to facilitate client directed voting? >> so i do not have a specific opinion today on client directed voting. on the core question of are the intermediaries, fund managers or others, voting shares in interest of their clients? that something that was the subject of our roundtables. it goes to the question of regulation of proxy advisors and it's something i intend for the commission to continue to look at. and i think we can improve it. >> so you don't have an opinion on client directed voting? >> i don't have here today. >> at something i'd i like to e with you.
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>> before i moved to senator reed i'd like to notify the committee the vote has now been moved up to 11. i would like to finish by then. i want to congratulate senator brown for giving back one minute and a half and encourage everybody to really stay tight on your questions. senator reed. >> you want me to be short? >> yes. see if you can beat my record. i keep two minutes back. >> i'll try. thank you, mr. chairman. thank you, chairman clayton. following up on some of the comments senator brown made about share buybacks, not only is it difficult to look at gm buybacks, significant stock and then my off thousands of workers, but your whole approach is been for the long-term main street investor. one of the options that gm had was investing in innovation, investing in more sophisticated products and effectively they chose not to do that.
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they gave the money back. so this issue of stock buybacks have several dimensions, one of which is not investing in the long-term future of the company. that's something that concerns you and is it something that the sec can take steps to try to correct? >> senator reed, , i want to be clear about the fcc's authority. we do not have authority over capital allocation, whether a company chooses to allocate its capital by distributing it to its shareholders or investing. but i agree with the number of observers that in terms of how companies should communicate what they intend to do with their capital. we can do a better job around disclosure. so you have, what are your capital allocation decisions. our disclosure rules are based on i think historic facts,
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plant, proper equipment. how am i going to spend my money on plant property and equipment? in today's economy i think we should be driving disclosure more towards human capital. intellectual property and the type of the damages we have from things like supply chain management, distribution management at our relationships with other vendors. those are the things the drug companies values today and i like to see our disclosures evolve towards that. >> but in terms of the sec's role as understand, please correct me, 36 years ago you could not have these stock buybacks sec rules. is that -- >> i don't believe that's correct. what happened 36 physical is the sec said if you're going to buy back stock in the market, here's a way you can do it where if you intend is not to manipulate. there's no safe harbor even
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trying to manipulate. but if your intent is not to manipulate you do it this way, you can feel comfortable that the buyback is being done without subjecting you to a claim of manipulation. >> essentially what you did is provide a pathway to buy back, which previously was considered somewhat risky because of the implications of inside information, of timing of the self -- you to have the authority to look at the rule against. >> i want to be clear what authority we have, which is the authority over whether to provide a pathway where you won't be come you presume not to be manipulating the stock. >> again. >> not prohibiting or allowing -- >> i think given what we've seen is you have to go back and sort of reroute that pathway not only for modernization and innovation but also because the choice for
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many individuals i presume, fsm position i was really thinking of this is if i do of stock buyback stock buyback my stock option suddenly are hugely beneficial to me. oh, by the way, my pay based features on the value of the stock. this could be nothing to do with the shareholders, nothing to do with the worker's comp. nothing to do with the future of the company but it's a very good payday for me. that i think those against the notion 36 use go of manipulation. >> let me say i agree that if the purpose of the buyback is to drive the price up for the benefit of an individual, that's a problematic situation. i does want to say i would encourage compensation committees who set compensation to look at that issue. >> i had to give leads 20 seconds back, so i would encourage the sec not deferring to the committee, the
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compensation committee which are not that rigorous in many cases to take a strong and appropriate action. thank you. >> good assertion. senator rounds. >> thank you, and in interest of following the chairman salute i will ask just one question and i'll submit several for the record. in your written testimony, , you discussed the impact of brexit on the american markets. from a security standpoint i have been following how brexit could call to get the build of american clearing houses to compete in the eu and the uk markets. for u.s. clearing houses cooperate in the eu, eu authorities must determine that u.s. regulatory regimes are equivalent to the eu's hear here otherwise, market participant would base higher capital charges for accessing american markets. although the u.s. and eu agree that regime with a colon in 2016, there is yet to be any
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determination for the sec's regime. progress in these areas have been under threat thanks to brexit a legislative pain in the european parliament. if the legislation passes, large american clearing firms would only be allowed to continue operating in the you -- in the eu if the eu regulators could jointly supervise them. such legislation would violate the 2016 agreement, hurt american companies and taxpayers by making the market u.s. treasury bonds less liquid and increase the cost of trading derivatives for farmers and ranchers. my question is can you share your thoughts on the u.s., eu clearinghouse issue? do you foresee any other regular chumps associate with brexit and clearing securities? if so, how would we work to resolve them? >> i think you describe the issue very well. it's complicated.
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it requires international cooperation and recognition. and if we fail to identify what i will call a smooth path forward, there will be costs. i have made that clear. joint european counterparts. i know they recognize it. this is part of a broader issue. it's one of the reasons i am worried about brexit is that there are a number of issues just like the issue that you described that seem to get kicked down the road as the broad issue unfold. >> do you see a format for resolving the issues? >> pursuing several. pursuing several. >> can you share any thoughts? >> i think i should leave it at that out of respect for the negotiations but this is very much front of mind.
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>> very good, thank you. i would yield back two minutes and eight seconds. >> senator menendez. >> thank you. can i take the two minutes and eight seconds? no. [laughing] mr. chairman, thank you for being here. in your testimony you state that you make protecting main street investors a key guiding principle of virginia at the sec. let me ask you, do you agree main street investors were harmed by excessive risk taking on wall street in the years leading up to the financial crisis? >> i do. i think that excessive risk-taking in our markets, let me just say this. excessive risk-taking intermarket my perspective is more likely to have an adverse effect on main street investors than just about any other class of people. >> i agree with you. do you agree that pay practices that big banks and financial institutions have at times ignored long-term consequences
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in favor of rewarding risky behavior to make short-term gains? >> i do want to make a general statement about this but what i will agree with you on this, i think your concept is when you take someone's activity and you bring forward the benefits, so let's say i'm working somewhere and it is something that's going to last for five years and then i say to you, hey, over the five years this is going to make 100, so payment based on 100 today. that type of incentive drives short-term behavior. >> do you think main street investors might object to the fact that wells fargo ceo tim sloan was paid 17.4 million last year, the same year other regulators investigated and actions on scandals relating to the banks auto lending, mortgage lending and investment management practices? >> i'm not going to comment
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about a specific institution here in this forum. >> well, okay. do you think main street investors might object to the fact that any ceo would be paid, you know, tens of millions of dollars after they faced all of those investigations at all those consequences for fraudulent behavior at the institution? >> i do think that investors in companies should have clear disclosure of what the senior executives of the companies are making and they should have been put through various engagement processes including some of the processes that we discussed here today. >> so with that in mind -- >> there should be accountability. >> good. why has been the commission is not made it a priority to finish congressionally mandated rules to rate in a practices that put main street investors at risk? >> you are speaking about the
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dodd-frank mandates around pay practices i believe. >> yes. >> i am aware of those. i keep track of the dodd-frank mandates. i am pursuing them, which with my fellow commissioners. we propose rules are bound some of those. we are reviewing the comments if we received a number of comments. some of them raised very significant issues. >> can you give me a time frame when you would expect the commission actually be able to promulgate the rules in this regard? >> i have the hedging row on or near term agenda. i expect that in the near term. the others i can be as precise. >> well let me just say that if we agree in principle that run with executive pay, which rewards risk-taking can be harmful to investors and you have a mandate from congress to do something about it, it just seems to me that they should be a priority. falls right in line with your main street investor priorities.
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so i hope you will make it such at the end of the day and hope the next time you come before the committee we will have rules promulgated. let me ask you one of the question. i would your statement issued on friday regarding the sec difficulty assessing information about chinese companies that are listed on u.s. exchanges. there are 224 companies listed on u.s. exchanges with a combined market capitalization of 1.8 trillion that are located in countries primarily china that make it difficult for u.s. regulators to review the financial reporting. this presents a major risk to use investors who may assume the financial reporting of these companies is in line with u.s. requirements. moreover, it's fundamentally unfair for chinese companies to take advantage of the strength and liquidity of u.s. capital markets but don't have to play by the rules. the u.s.-china economic and security review commission recommended congress consider legislation providing authority
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to ban and delist compass that have refused to sign reciprocity agreements with a public company accounting oversight board. despite the sec and the ports this efforts to reach an agreement it appears unlikely that beijing will cooperate. with such authority strengthen your hand in negotiations with your chinese counterpart? >> let me say this. i think your characterization of where we are, which are information barriers to us receiving what i i would say is the same information and the pclob receiving the same information we would expect to receive, yes, are we working through those? yes. i'm not prepared to support a specific remedial action in this forum, but we need to make progress. >> outages close on this. we can't continue this process.
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$1.8 trillion, , investors on te own previous statement about our other line of questions about transparency, should have transparency to know that these companies are living up to the standards for which investors rely upon to make investment decisions. >> that transference is why we put the state without. people should know where we sit today and know we need to improve. >> all it will say is that we don't know exactly what they're accountability is the we just know that there is an accountability. so at the end of the day you should i will help the commission would embrace us giving you the tools to get the chinese and other companies similarly situated to disclose. thank you, mr. . thank you, mr. chairman. >> senator kennedy. >> mr. chairman, thanks for being here. i think you're doing a great job. would you buy a bond issued by the state if he didn't know whether they were broke or not? >> no, i would not. >> i read you gave a speech recently, i was reading the other night, very good.
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one of your statistics says the issuers of statesmen dispels, et cetera who file either annual financial information are audited financial statements within 12 months of their fiscal year. do so on an average of 188, 200 days after after the end of the fiscal year. so the financial statements between 188-200 days left. why is msrp allowing that to happen? are they doing anything over there other than standing around and sucking on their teeth? >> i'll just -- what else he is this is the reason i gave that speech, is i think this is an area that needs to improve. the first step in improving it is to make sure that investors understand the financial statements are looking at in some cases our 18 month old. that's pretty old.
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>> let's suppose that you're an individual investor, okay, you want to research the bought and ms rb which is to regulate themselves, you want some information about the bond issuer o.r. about the state. are you where msrp charges 60,000 bucks to download bulk data? >> action of not aware that. >> would you look into that. >> i be happy to. >> do you need disgorgement of ill-gotten gains to do your job? i think -- >> i think you're referring to the effects of the supreme court decision. i believe that the supreme court decision, we need some help. we need some help. because what he did was it said basically ponzi schemes and other types of frauds like that they go on beyond five years, we
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are not able to reach back and get the money back for people who are a victim of those schemes. because disgorgement was viewed in that case as as a penalty subject to the five-year statute of limitations. >> and you don't have that authority now? >> we do not have the authority in those speedy only congress can give you that authority. >> i'm not going to be a lawyer here, but yes. >> let me ask you one final question. are you familiar with the stanford case where allen stanford stole $7.2 billion in a ponzi scheme from about 21,000 people? >> yes. >> okay. well, we are doing great getting money back from bernie madoff and his people. we collected over 75 cents on the dollar. we are not doing as well with stanford. we've clawed back 431 million and the lawyers took
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226 million. sec took a position to oppose a motion to eliminate the restriction of filing a voluntary bankruptcy which will help people get their money back. why did the sec do that and would you reconsider? >> i know i'm catching a cold. just trust me, it would be a candidate. >> how about i say i trust you. >> i would yield back one minute and 17 seconds. >> thank you, senator kennedy. before i go on, for some of those are just arrived, we have a vote at 11 and i've encourage all members to shrink down the question of the three of them have given back a minute or two. counting me, four have given back a minute or two. you have to the please help us get there. senator warren. >> thank you, mr. chairman. it's good to see you again, chairman clayton. right now investment advisors subject to what's called pretty sure standards. that means there legally
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required for financial interest of the client ahead of the own interest. brokers who get a commission for every trait that they make follow different rules and, in fact, they can recommend a product that boost their own commission even if it isn't the best deal for the customer. we also know broke which firms artificially create all sorts of perverse incentives to encourage brokers to make certain recommendations that are very profitable for the firm or for the broker, even if they are not real good for the customers. so that's a problem. in april the sec proposed some new rules for brokers here as you told me before the idea behind these new rules is to have regular retail investors, you like to call them mr. and mrs. 401(k), to make informed choices, right? >> that's one component of the. there several components. >> but kind help investors make informed choices, right?
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>> absolutely. >> okay. one option would simply be to make rocher subject to the same fiduciary standard that investment advisors are subject to but you didn't do that. instead the sec's proposal says brokers have to act in the best interest of the client but then you never define what best interest actually means. here's where i'm stuck. with a proposal to customers make good decisions they need first to understand the difference between a broker and investment advisor, and second have fiduciary standard for investment advisors is different from the best interest standard for brokers. which is something you don't define. do i have that right so far? >> i don't think so. i think we're pretty clear on what the best interest standard, going to be clear -- >> you say you do define in the rules. >> was the best interest and as we propose means you as speedy
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answer, is it to fight in the rules? >> is a specific definition? no. but there's a specific definition the this is this ist -- >> i just want to be clear then. anybody is trying to figure this out first had to figure out do you have a broker or investment advisor and secondly had to figure out to bid on which one you have what the difference is between the fiduciary role in the best interest test, right? >> almost because you also understand the relationship. there are, you've got it right but the three components. the advisor relationship, the reason it's important to understand who you're dealing with, whether it's a broker or an advisor, the advisor relationship as a portfolio relationship. >> you were telling me to even more complex than that. >> that's where we sit today. >> i know and we could fix that by just getting everybody the same role but we didn't. so here's the question. you've got to start with the difference between an investment
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advisor and a broker. the sec has done a study on this and your own data show a lot investors have no idea what the difference between brokers and investment advisors is. and the legal standards that are different for each of them. your office of investor advocate commission did a study whether investors could figure out these differences based on the standard disclosures that you gave them and the bottom line was they can't. i don't have time to go to every example in the study but i picked one out. one participant told an interview after reading side-by-side descriptions of the best interest in the fiduciary standard, i don't know, it's basically the same language, but the same, they kind of word it differently so it is pretty much the same. but, of course, the standards are not the same which is the whole point here. when your own study shows that disclosures don't work to a regular investors make informed
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decisions, will you move away from a disclosure-based approach in your final rule and just adopt a uniform fiduciary standard for both advisers and brokers as congress instructed in section 913 of dodd-frank? >> that's a good summary of where we are. let me tell you what -- >> thank you. >> it's very good. let me tell you what we are doing. the advisor standard and have called the baseline advisor stand because advisors are led to contract around the standard. it's not well known. this is something we want people to understand. baseline advisor standard is the advisor cannot put their interests ahead of the clients interests. they are able to say, but i'm going to do these things and with informed consent they can cut back on that standard. that's that will understood. we want that to be understood. but on the brokers side the fundamental duty is going to be that the broker cannot put her or his interest ahead of the
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client. >> so it's the same that it's a different type of speedy let me suggest, if it's the same can just use the same words. because when you're not using the same force and effect time to give a description of people have to sort out which of the two kinds of people there needed with and have standards differ from each other, it needs the disclosure is not working. we've had study after study after study that shows the pages of disclosures don't work. and even if people read the disclosures and they can't make heads nor tails tales from it,w your own study which is exactly the same conclusion. the inference i draw from this is that we need a clear uniform fiduciary standard for advisors and brokers. it's the only way to make sure that people are trying to say for the kids college education or their retirement are getting the advice that is best for them instead of what's most profitable for the person giving the advice. >> i believe -- sorry.
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>> we need to shut it down. senator corker. >> i did want to thank the centers for the service on this committee, so thank you, joe very much. >> i join in that. thank you. >> a great privilege. it really has. i'm to be very brief because in of the chairmen member want to have this in at an appropriate time to live a lot of other things happening. .. relative to our financial system and with that thank you and i will defer to cotton. >> thank you, senator cotton.
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>> thank you. >> senator corker. >> chairman, i want to discuss with you the sec gag rule on settlements. it was addressed in the wall street journal opinion piece on november 14th, here is how judge from southern district referred to them in 2011. for result is confusion hypocrisy. the defendant is free to proclaim he has never remotely admitted terrible wrongs led by sec, by gosh, he better be careful not to deny them either. here agency of the united states is saying in effect although we claim the defendants have done terrible things, they refuse to admit and we do no propose to prove it but result to gagging their right to deny it. the disservice to the public such act is palpable. can you explain public interest on discussing settlements with the commission serves?
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>> it has been effective means to reach the settlement that is in the interest of the public. let me just say that if we can settle matters quickly, we can move onto look at other matters and the no admit no deny approach has enabled us to get to settlements, get people their money back, get bad actors out of the marketplace and draw a line under that matter. so it has -- it has been an effective means of pursuing remedies. >> one might also say it allows a company and an agency who have both failed in a particular matter to conceal from public as well. >> it's not the right approach in every matter. >> there's a wrinkle in the rule that says if a defendant who has reached settlement is under one of the orders testifies under law he's no longer bound by the
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gag order which em plies -- implies that the gag order would require him to say something untruthful. what's your thought on that sprinkle? >> i think that's a -- how would i say that, a result of the unique nature of testifying in those types of situation. >> it's okay to have defendants who have reached settlement in sec say something to the public that might be untruthful but not say them in court? we are talking about a prior restraint on speech that's also content based, the most disfavored kind of regulations under supreme court precedent. they require compelling government interest in a narrowly tailored means. >> we all know that the first amendment doesn't permit all speech without sanction. you can't commit fraud. using words. this was developed in part to
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restrict somebody who had done prior wrong or we think had done prior wrong from telling people pay no attention to that, doesn't -- you know, when you're dealing with somebody in the security's industry, their history is something that is of relevance. >> well, they can say that they didn't commit what was alleged against them, they just can't deny the allegations that were made. i know this is not clayton initiative, it's before i was born. it's come under criticism for a long time. do you think the gag order has first amendment problems? you personally. >> my personally, i think that we have a long history of -- of people agreeing to restrict certain things that they can say in the commercial arena. >> okay.
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my time is almost expired. thanks for the exchange. i think the sec probably -- >> i didn't know this was going to be a con law class. >> reconsider it. it was passed in 1972 when first amendment precedent was much different and frankly more favorable to the government than it probably should have been. i understand points you're making about public interest but i do think it's quite overbroad, not at all narrowly tailored anymore and can undermine other interests. >> i understand. thank you. >> senator. >> thank you, mr. chairman, welcome, mr. chairman. i want to pursue some of the questions senator reed had on stock buybacks because the claim that many made at the time that the big tax cut was passed was that companies were going to use all this extra money that they got from their tax cuts to invest in more plant equipment and wages increasing for their workers and the evidence is overwhelming that in fact, they used or are using that money for stock buybacks, we are up to
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$800 billion in stock buyback today since passage of the bill, we can debate merit of stock buyback, you agree that if executives are using stock buybacks to elevate price of stock and cash out own compensation that would be a problem from your perspective, am i understanding you correctly? >> senator reed and also others said, if the motivation is driven by compensation scheme i think -- >> let me ask you this. well, let me ask you this. so there's mounting evidence that executives are cashing out more frequently after a stock buyback than before. i mean, there's been evidence that in fact, twice as many companies have insiders selling in the 8 days after buyback announcement as sell on an ordinary day, would that trouble
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you if that was a problem? >> i is saw the announcements. i think a little more work needs to be done on that, so if the only time you can sell as an executive is right after earnings are announced which is most been, if you need today sell as part of your planning, it's going to be -- >> i just -- it's possible that the data is wrong. >> no, i think is -- >> but those in other words, if it's happening a lot more frequently in the 8 days after stock buybacks, i think that would be a problem. let me just ask you this, would you be willing to have host a round table to look into the issue? >> let me say this, i'm happy to continue to discuss the issue, i don't want to commit to a round table but the sec's role in this is clearly something that people
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are focused on. i want to be as clear as i can about what our role is, i'm happy to continue the conversation to bring -- >> but understood and a number of us read your letter on this, i understand your position with respect to decision that have to be made by corporations for the good benefit of shareholders, what we appear to be seeing is a pattern where more executives are cashing out when they've had stock buybacks which boost the price and that would be decisions made for their own benefit as opposed to stockholders. i would like to pursue this. >> absolutely. >> i just, you know, where you've chosen to focus efforts i think is a little bit troublesome, but let me just ask you this on shareholder voting, proxy shareholder voting, we had earlier hearing on this and i mentioned a statement elect from price, base company.
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advisory firms but they are also an issuer of where others use proxies to decide whether to purchase -- how to cast their votes with respect to price. what they say clearly in the letter is that they think the requirement, the requirements that proxy firms run their advice or proposals or concerns through corporations first would actually significant diminish at vice. do you agree that we should not be dictating to the market that the proxy advisers have to somehow show the executives or the corporations their information before they give it to the clients who are paying for it? >> so i'm certainly not wedded to that improved -- that method
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of improving the process. there is an issue in the process, proxy advisory form comes out with analysis and the company wants to respond and you have to look all over the place. it would be nice if you could see the responses side by side or something else like that but i'm not wedded to running it through the company before it's published. >> okay, i find it curious we find people advocating a firm doesn't know what it's doing and it needs this extra step in order to make good decisions, okay, thank you. >> thank you, we have 10 minutes left in the boat. we can either -- i will be glad to reset and come back for those who want 5 minutes, i understand y'all will avoid that by going a couple of minutes. >> chairman, i will ask one question. >> go ahead, thank you. >> the consolidated audit trail been the second in the world and personal identifiable information and sensitive trade data, as such major target for
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cyber criminals and other bad actors, broker dealers require to report consumers, information to the cat and rely on security measures by cat operators, what is the sec doing requiring cat operators will provide notification and assure that broker dealsers are not held liable for customers not by the cat? >> all three significant issues in the question are things that we are focusing on including retail customers pi will go into the cat or whether we are going to do something hashing, technical term, that's as much as i know about hashing, ensure data that goes in the cat is pii for retail investors and in terms of issues around liability, i'm not going to speak about who -- who owes what to whom and what the law applies
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and we are sensitive with those issues. >> with time constraint i'm happy continue conversation in your office or my office. >> thank you, i want to follow up on a conversation we had a year ago, sec issued guidance in 2010 on climate risk. many investment community like blackrock and bloomberg called inadequate. currently less than half america's companies even make disclosure. in october a group of investors representing 5 trillion in assets, 15 leading securities law professors sent a petition to sec arguing that improved disclosure rules would improve efficiency and sec has the authority to issue such rules, yesterday a group of 15 investors that represent 32 trillion in assets wrote the government needs to act on climate change and specifically say it is vital financial
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reporting standards. i thought we had a good conversation about this, i thought you expressed a willingness to work on that. i have seen no evidence that you are working on this and what little evidence i've seen goes to the contrary in terms of the shareholder proposals which are punitively not about climate, it's every example given in raising thresholds for shareholder action is about climate. what are you going to do to make sure that publicly-traded companies disclose climate risks? >> so our division of corporation finance which reviews public company filings, this is one of the issues that they are reviewing filings for. they make companies specific comments, ask company specific questions, we are doing that. i've been in discussions with our head kirk about we should do
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more. >> they are sand-bagging, i will leave it there. i will follow up in the record. i would like a meeting in person, i understand they are working in good faith they view this as ideological question and 8 years later this is very clearly an issue of economics and there was a point at which you could say, well, we can't measure this, we can't know this, none of that is true, all of this is provable economic question and in the interest of time, i don't mean to cut you off. >> senator cortez maskill. >> i want to jump to best interest standard that you were talking with senator -- excuse me, elizabeth warren about. first of all, i supported the department of labor's fiduciary standard and if you don't know nevada is the first, i think, state in the country that passed a state fiduciary duty
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requirement for broker dealers. i'm curious with respect to proposed regulation introduced by the sec, under that proposed regulation can brokers create sales incentives for recommending certain products to the customers? >> short answer to your question, some sales incentives like growing assets under management or total assets, you would think you would compensate somebody for bringing in new customers and growing assets just like happens in the investment advisory space but there are some -- there are some activities like that that i believe and i'm speaking for myself, not for the commissions that are inconsistent with putting the clients -- not putting your interests ahead of the clients. high pressure products specific sales contexts. they don't work for me. get this out the door. >> and i agree with you. for
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the interest of time, isn't it true that any incentive works against the best interest of the client? >> well, i don't think so because if what you're doing is saying to a broker, hey, if you -- if you now have $100 million, for example, you grow it to $200 million, you should make more money. i think that's okay. that's the way investment advisory firm works, if you're managing pension plan for someone and you get another pension plan to manage, you may get paid more. i think that's okay. >> we are going to leave this and you can find it online, c-span online, cato conference on surveillance and privacy in washington, d.c. up next flash top, short presentation by single speaker, we will hear from a representative on rating the creep factor of network appliances. >> tracking what people do in a


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