SBC Nominations Hearing

• Consolidated Audit Trail: Sen. Tom Cotton (R-Ark.) noted the recent breaches of both the SEC and Office of Personnel Management (OPM) computer systems, and asked if it was “smart” for the SEC to begin the data collection required by the Consolidated Audit Trail (CAT). Peirce said she was concerned about the CAT, but conceded that she does not have background data available at the Commission with the rationale for the CATs structure. Jackson said that the CAT is critical to prevent another “flash crash,” but said that the SEC should be careful with personally identifiable information (PII).
• Fiduciary Rule: Sen. Mike Rounds (R-S.D.) asked what role the SEC should have when it comes to the Department of Labor’s (DOL’s) fiduciary rule. Jackson replied that the SEC has an “important role” in creating the standard, and that it is “natural” for the SEC to create a rule. However, he added his concern that investors could have one standard for retirement assets and another for brokerage assets. Peirce stated her concern with the DOL’s rule as written, adding that it is important to work with the states on the rule.
• Regulatory Oversight: Sen. Mike Rounds (R-S.D.) asked about FINRA oversight, to which Peirce replied that the agency “needs to be reviewed,” and Jackson added that it is “important the SEC takes a prominent oversight role.” Both SEC nominees noted their concern over FINRA transparency, but that they are comforted so far with Robert Cook’s leadership.

• David J. Ryder, to be Director of the United States Mint
• Hester M. Peirce, to be a Member of the Securities and Exchange Commission
• Robert J. Jackson Jr., to be a Member of the Securities and Exchange Commission

Chairman Michael Crapo (R-Idaho)
In his opening statement, Crapo introduced the nominees and discussed their backgrounds, stating that each of them will serve important roles in the commerce and capital markets. He noted that the Securities and Exchange Commission (SEC) nominees will join Chair Jay Clayton and Commissioners Michael Piwowar and Kara Stein, bringing the SEC to its 5-person Commission.

Ranking Member Sherrod Brown (D-Ohio)
In his opening statement, Brown also gave a brief background of the nominees and echoed Crapo’s remarks about the SEC nominees “finally bring[ing] the Commission to full strength.”

David J. Ryder, to be Director of the United States Mint
In his testimony, Ryder gave a summary of his background and experience, which included working with government agencies around the world. He noted that he has developed a “strong operational and technical understanding of the tight-knit industry,” and looks forward to helping the Mint fulfill its mission.

Hester M. Peirce, to be a Member of the Securities and Exchange Commission
In her testimony, Peirce gave a summary of her background and experience, including working at the SEC and the Senate Banking Committee, and that her experience showed her it is important to set and establish “clear rules” and “modernize them when necessary.” She continued that “innovation is important,” as it improves quality and lowers prices, expanding access to the capital markets to those who have not previously had such access, and that it is necessary to ensure rules are “flexible enough” to acclimate innovation.

Robert J. Jackson Jr., to be a Member of the Securities and Exchange Commission
In his testimony, Jackson gave a summary of his background and experience, telling stories about his family and how the capital markets impacted them. He stated that through his personal and professional experience, he learned that the daily “meat and potatoes” of the SEC and its staff is “crucial” to a functioning market.

Priorities for the Nominees
Crapo asked the SEC nominees to discuss areas the SEC should focus on in the next year in addition to their current agenda. Peirce listed oversight of self-regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA), both fixed income and equity market structure, and cybersecurity. Jackson also listed cybersecurity, as well as completing outstanding rules called for in Dodd-Frank (like executive compensation), and enforcement actions.

Sen. Elizabeth Warren (D-Mass.) began her question period by noting that the SEC has not completed 20 rules it was required to promulgate by Dodd-Frank, saying the Commission has “the worst track record of all the financial regulators.” She noted that the SEC’s previously released regulatory agenda for the upcoming year did not include finishing any of these unfinished rules. Jackson described this as “absolutely not acceptable” and argued that the rules, when finished, will protect investors. Warren then asked both witnesses if they would make it a “top priority” to finish those rules. Jackson quickly agreed, while Peirce said she would work with Chairman Clayton on finishing the rules. Warren expressed concerns about Peirce’s answer but Peirce defended it, saying that the SEC has many priorities at any given time. Warren said that “these rules aren’t optional” and that the SEC is ignoring Congress by failing to write them. Warren defended the substance of the required (but not promulgated) rules, which relate to executive compensation. Warren closed by asking Peirce directly for her commitment to finalizing the rules, but Peirce reiterated her view that the SEC must prioritize its activities.

Sen. Thom Tillis (R-N.C.) asked Peirce and Jackson for their views on the SEC’s tripartite mission. Peirce argued that the three components of the mission are interrelated, and said it was unfortunate that the SEC has taken a “paternalistic” view of investor protection. Peirce said the SEC should focus on maximizing opportunities for investors. Jackson said that he believed the SEC needed to efficiently allocate its resources to accomplish its mission.

Consolidated Audit Trail
Sen. Tom Cotton (R-Ark.) noted the recent breaches of both the SEC and Office of Personnel Management (OPM) computer systems, and asked if it was “smart” for the SEC to begin the data collection required by the Consolidated Audit Trail (CAT). Peirce said she was concerned about the CAT, but conceded that she does not have background data available at the Commission with the rationale for the CATs structure. Jackson said that the CAT is critical to prevent another “flash crash,” but said that the SEC should be careful with personally identifiable information (PII).

Enforcement
Crapo asked for the SEC nominees’ views on the Commission’s enforcement program, to which Peirce and Jackson agreed that it is a key function of the SEC.

Corporate Accountability
Brown asked how corporate Boards of Directors should improve accountability for best practices. Jackson stressed that it is critical there is corporate accountability and that he is in favor of finishing the rules required by Section 954 of the Dodd-Frank Act.

Sen. Catherine Cortez Masto (D-Nev.) asked what individual executive accountability should look like. Peirce explained that it “comes down to specific cases” and asking questions, adding her concern about how often there are settlements using shareholder money to “take the focus off of executives.” Jackson agreed with Peirce, and stated that he looks forward to updating the law to “keep people accountable.”

Sen. Chris Van Hollen (D-Md.) asked how Congress could best address the “8K trading gap” which Robert Jackson has previously written about, whereby corporate executives trade in advance of the filing of an 8K. Jackson said he was “very concerned” that managers are trading on material information and that he would be happy to work with Congress on legislation to address the issue.

Van Hollen also asked about short-termism, and asked Jackson for his view on requiring executives at public companies to hold stock on a longer-term basis. Jackson said that corporate managers “should put their money where their mouth is” and commit to holding stock for long periods of time. Jackson also said it is important that management be held accountable for explaining any stock buybacks, especially when undertaken in the place of capital and employee investment.

Sen. Brian Schatz (D-Hawaii) also asked about stock buybacks, and Jackson reiterated that he views buybacks as a major problem, and said the SEC should look at rules that gave companies more flexibility to launch buybacks.

Corporate Disclosures
Brown noted his concern that companies are failing to disclose information to investors and asked what the SEC can do to make sure companies do not make the wrong decision when it comes to whether information is material. Peirce replied that it is “really important” for companies to “think carefully” about what materials facts are disclosed to the public, adding that the companies understand what information is material and what is not better than the SEC does. Jackson stated that guidance on what materiality is considered is not keeping pace with technology and changes in the markets.

Sen. John Kennedy (R-La.) stated his concern over disclosures and how lawyers have made prospectus “meaningless,” as people do not read them. Peirce replied that it is important that documents are revisited and tailored so investors can read them.

Schatz asked the SEC nominees if the Division of Corporate Finance should require companies to disclose risks posed by severe weather. Both nominees agreed, though Peirce hedged by saying that “speculation” had no place in disclosures, while Jackson argued that shareholders may be interested in this information.

Cybersecurity
Sen. Jack Reed (D-R.I.) asked about cyber disclosures, and Peirce replied that it is important to figure out the best way to disclose cyber risk to investors. Jackson agreed, adding that current cyber risks are different than they were years ago. Reed then asked if legislation related to cyber disclosure would help the SEC with their own rules, Jackson replied that while legislation is “always helpful,” “sometimes it should be done without [it].”

Reed then asked about cyber resources and the $50 million annual fund Dodd-Frank gave the SEC, to which Jackson replied that “companies are spending billions of dollars on the latest technology,” so the SEC needs additional resources to “keep up.” Peirce stressed that it is important resources are used well, and that it is difficult to understand from the outside how they are currently being used.

Cryptocurrency
Sen. Richard Shelby (R-Ala.) asked about alternative payment methods, to which Ryder replied that he “appreciates” advancements in technology and how it can “ease” payment. He continued that he is open to discussing it with technology companies interested in meeting with him. Ryder cautioned that crypto currency could be a challenge to central banks, as they are “pretty old and do things one way,” making such a change difficult for the central banks. However, he stated that “with proper technology, it is possible to entertain it,” and that it is possible the market will get ahead of regulators if crypto currency is not treated seriously.

Regulatory Burdens
Shelby asked about the benefits of cost-benefit analyses for regulations, to which Peirce replied that it is “extremely important.” She added that metrics must also be built in to regulations so that regulators can look back and see how rules are working, and that if confirmed, she will work on this. Jackson cautioned that sometimes regulators and lawmakers have to make policy judgements without knowing “exactly what the implication may be.”

Regulatory Oversight
Sen. Mike Rounds (R-S.D.) asked about FINRA oversight, to which Peirce replied that the agency “needs to be reviewed,” and Jackson added that it is “important the SEC takes a prominent oversight role.” Both SEC nominees noted their concern over FINRA transparency, but that they are comforted so far with Robert Cook’s leadership.

Fiduciary Rule
Rounds asked what role the SEC should have when it comes to the Department of Labor’s (DOL’s) fiduciary rule. Jackson replied that the SEC has an “important role” in creating the standard, and that it is “natural” for the SEC to create a rule. However, he added his concern that investors could have one standard for retirement assets and another for brokerage assets. Peirce stated her concern with the DOL’s rule as written, adding that it is important to work with the states on the rule.

Forced Arbitration
Cortez Masto discussed forced arbitration clauses, to which Peirce replied that arbitration can work but the circumstances “matter,” adding that she is “happy to work with the SEC staff to consider arbitration as it comes up.” Jackson noted his skepticism over forced arbitration clauses.

Resubmission Thresholds
Sen. Tim Scott (R-S.C.) asked Jackson if the SEC should take a look at having a resubmission threshold for shareholder proposals. Jackson said the SEC “could and should” take a look at whether or not repetitive proposals are helping or harming the relationship between management and investors.

Auditing Standards
Cotton also asked the SEC nominees about a Dodd-Frank requirement that broker-dealers be audited by a Public Company Accounting Oversight Board-registered auditor. Cotton said the policy hurts small broker-dealers who must pay for more expensive auditors, and takes business away from small, unregistered auditors. Jackson said the program is relatively new, and that the SEC should consider whether a differentiation should be made between custodial and non-custodial brokers.

For more information on this hearing, please click here.