Congress Members Push Back Against SEC; Promise To Introduce Utility Token/SAFT-friendly U.S. Legislation

A routine House Financial Services Committee hearing held on May 16th, 2018, turned eventful when a number of U.S. Congressional representatives sprung “initial coin offering” (ICO-related) questions on SEC officials — most of them from a more positive and supportive perspective than the SEC’s Chairman Jay Clayton has evinced in his comments directed at the ICO sector for most of the past year.

At the hearing, Ms. Avakian  and Mr. Peikin, co-directors of the SEC’s Division of Enforcement, testified for the SEC.

Notable statements and exchanges included (emphasis added):

  • Rep. Sherman (28:21): “I hope you shut it all down” (in reference specifically to ICOs; Sherman goes on to contrast the supposedly-lax SEC treatment of ICOs with a perceived harshness faced by conventional filers merely “misstating a footnote”.)
  • Rep. Maloney (42:30): ” … there [has] been a strong debate about whether a token that is offered as an ICO can be a security when it is first issued to investors and then later evolved into something that is not a security; some people think that once it’s a security it’s always a security and the others think that the token status as a security can change over time. As far as I know this is not a decision that’s been decided by the SEC or the court, so I’d like to ask both of you do you believe it’s possible for a token to start as a security but then evolve to something that is not a security?”
    Ms. Avakian: “I think it’s always going to be a facts and circumstances test as to whether something meets the definition of a security, and if the substance of something changes over time that analysis is going to have to continue to happen — but we really do look at the substance of the transaction, not the name of it, not what it’s called, and look at, you know, does it fit the test for a security…”
    Rep. Maloney: “… have you seen any situations where [a coin going from a security to ‘utility’ status] has actually happened?”
    Mr. Peikin: “I mean we have dozens of investigations that are ongoing and one of the subjects of many of these investigations is evaluating whether or not a particular instrument is or isn’t a security. I don’t think I can speak to… the outcome of those because some of that work is ongoing. A lot of what we’ve seen though in these ICOs obviously looks and… meets the definition of securities.”
  • Rep. Maloney (44:14): “… chairman [Clayton] has stated, and I quote, ‘I believe every ICO I’ve seen is a security’ — do you agree with that statement?
    Mr. Peikin: “I can’t speak to whether he’s seen the broad… gamut of instruments that our division is is investigating, so I certainly don’t dispute that what he’s seen he he believes is a security; the question… is whether some of the things that we’re looking at now, do they actually meet that definition, and I think… some more needs to be written on that.”
  • Rep. Emmer (01:10:10): “… as I’ve listened today, clearly I must have a different point of view when it comes to some of my colleagues on cryptocurrencies, and I will say that you just testified that these initial coin offerings present real risks to investors — but let’s not forget they also present real opportunities and we’re talking about a technology blockchain technology that has an amazing potential … “
  • Rep. Emmer (01:10:51): “… secretary Clayton has said ‘every initial coin offering is a security’ — that’s not what I heard you say; you’re reviewing these and you’re developing what your view is of the different types of cryptocurrency… problem is, a lot of people up here with white hair without hair or people that have been around for a while don’t even understand what they’re talking about and we worry that too much government could actually kill this thing before it can grow into something that’s very good for our economy…”
  • Rep. Emmer (01:12:46): ” … how does the SEC distinguish between an ICO and the sale of a token for use on a blockchain platform?
    Ms. Avakian: “That’s always going to be a real facts and circumstances question, and again, we’re gonna take a step back and look at exactly what the substance of that particular transaction or token is not the name of it…”
    Rep. Emmer: “Is that [determination] evolving , because it could be a security, it could be a commodity, it could be a currency — there have to be some delineated lines so that people understand where they’re at and… who has jurisdiction over them, because we want to make sure that they’re continuing to explore the opportunity, and not just going out of business.”
    Ms. Avakian: “Yeah, I think that’s right — and we’ve spoken a lot publicly about it, certainly the Chairman’s spoken a lot publicly about it, you know to the extent something is a pure currency, pure medium of exchange, that’s not a security. I think we’re relying on the experts in the marketplace — the gatekeepers, the lawyers, others like that — to really take a step back and take a true look at what is the underlying substance of a transaction, and that’s really going to be I think what guides someone.  But we are… open in terms of having folks come to us and help work through that analysis.”
  • Rep. Davidson (01:19:00): “What do you make of these folks that are clearly cryptocurrency today, yet if they had raised capital, might be seen as security at the time —  how do you resolve that?”
    Mr. Peikin: “… we’re obviously… encountering [a] kind of new area with new products and changing technology, and some of these issues are being worked out in in the courts… as we speak… We’ve been focused on the tokens and crypto assets that fit the definition of a security, and the CFTC has been focused… on currencies and mediums of exchange, but you know I’m not sure I’m an expert to say… where that exact line is drawn, and I think some of this is going to be worked out… over time.”

And, the coup de grâce:

  • Rep. Davidson (01:20:02): “… Our office is working on an initial coin offering bill that would provide certainty about how a security is…  fundamentally, is the Howey test still relevant, what’s the role of SAFTs, is a white paper paper gonna cut it, or do you to use SEC forms that already exist — how do you advise proceeding forward with your office? …”

There is more discussion on ICOs, throughout — check out the full hearing record to get a complete picture.

We will not attempt to handicap the likelihood of this legislation coming to pass, but the comments do speak revealing to the presence of genuine advocates of ICOs and the new blockchain token asset economy in Congress.  As such, we find the exchange that transpired distinctly encouraging.

(No official transcript of the hearing has been released; however, video of the full session can be accessed here, and KrowneLaw has provided an approximate, marked-up automatic transcript of the entire hearing, below.)


  • The transcript was produced by a text-to-speech process performed automatically by a third party service outside of our control.
  • KrowneLaw does not vouch for its accuracy; indeed, we guarantee it is inaccurate.
  • As such, each snippet of translated text is linked directly to the point in the video at which it occurs (popup in separate window/tab).   Please use this functionality to confirm exactly what was said in each case.
  • The hearing covers a wide variety of topics; thus, ICO-related terms have been highlighted to assist in quick location of the relevant passages (this highlighting is by no means exhaustive, however).
  • The breaks in the text coincide roughly with changes in topic/changes in Congressperson leading the questioning.  They do not correspond to changes in speaker; thus, each block usually represents multiple speakers, including those on “opposing sides.”  You must listen to each particular segment in the video to determine who is speaking and to get the full context (and therefore, meaning).

Scroll box with transcript follows:

[00:18:41] it's just a minute ready to roll let's go committee will come to order and without objection the chair is authorized to declare a recess at of the committee at any time this hearing is entitled oversight of the FCC's division of enforcement now recognize myself for four minutes to give an opening statement as we all know the Securities and Exchange Commission has a three-part mission to protect investors maintain fair orderly and efficient markets and to facilitate capital formation today's hearing will focus on the policies and procedures of the SCC's division of enforcement the Enforcement Division investigates potential violations of the federal securities laws and prosecutes these cases in the federal courts or in administrative proceedings before the SEC zone administrative law judges the SEC is a civil enforcement agency it cannot bring criminal charges itself although it can refer cases for criminal prosecution to the Justice Department that pursues civil money penalties disgorgement of illicit profits and injunctions to prohibit future violations however the division has broad authority to subpoena documents and testimony from individuals and entities of violating the federal securities laws or who may have information relevant to a fraud investigation in November of 2017 the SEC enforcement division released their annual report highlighting their enforcement priorities which are guarded guided by five core principles first focus on the Main Street investor to focus on individual accountability three keep pace with technological change four impose sanctions that most effectively and further enforcement goals and five consistently as assess the allocation of SEC resources in the fiscal year of 2017 the SEC brought 754 enforcement actions and obtained almost 3.7 billion in in disgorgement and civil penalties resulting from those actions additionally 1.07 billion was distributed to harmed investors which was a dramatic increase from the previous year's 140 million dollars while this increase is significant the SEC noted that much of the effort that resulted in the FY 17 numbers occurred in years however focusing on the number of enforcement actions and total amount of penalties uses used to measure quote-unquote success can be misleading in my opinion I believe in this instance that these statistics only provide a very limited picture of the quality nature and effectiveness of a successful enforcement program for example violations that are prevented or deterred cannot accurately be measured by that particular statistic I'm pleased to see the enforcement division under chairman Clayton's leadership has redirected its focus away from the broken windows enforcement philosophy ie targeting a high number of minor infractions in order to discourage larger securities violations which was championed by former chair Mary Jo white in a 2013 speech then chair white characterized this approach as quote the theory is that when a window is broken and someone fixes it it's a signal that disorder will not be tolerated but when a broken-winged window is not fixed it is signaled that no one cares and so breaking more windows costs nothing the same theory can be applied to our securities markets minor violations that are overlooked or ignored can feed bigger ones and perhaps more importantly can foster a culture where laws are increasingly treated as toothless guidelines of close quote in a speech last week the SEC Commissioner Hester Pearce purse stated that by quote following the broken windows approach perhaps the SEC should have changed its name to the sanctions and Exchange Commission because it acted like a branch of the US Attorney's Office for the Southern District of New York close quote I couldn't agree more with a commissioner purse in my mind I believe that this is this misguided approach to enforcement appears to have only been successful at boosting statistics versus meaningfully improving investor protections I'm pleased to see that the division is shifting away from minor violations of securities laws instead taking a more selective approach to enforcement after all we should not evaluate the true effectiveness of a regulatory agency or its enforcement program solely based on how many headlines it can generate I look forward to hearing from our code directors of enforcement and how on how well the rules are working and if there are regulatory gaps that need to be filled to allow you do your jobs more closely and more carefully with that the chair now recognizes the ranking member of the subcommittee the gentlelady from New York mrs. Maloney for three minutes for an opening statement I thank the chairman for yielding and

[00:23:48] two of my minutes are going to mr. Sherman III thank you for holding this hearing the division of enforcement's job is to investigate and punish people who violate the securities law and it is the largest division in the SEC because its job is so very important the Enforcement Division makes all of the other divisions at the SEC matter after all if you don't enforce your regulations and rules then you might as well not have them but if it's a job that the Enforcement Division can't do alone the divisions budget actually decreased slightly in fiscal year 2018 and it is still badly outspent by the financial industry and the white color defense bar the SEC is responsible for overseeing over 8,000 public companies and more than 26 thousand registered market participants such as investment advisers and brokers and there are tens of thousands of retail investors who rely on vigorous enforcement of the securities laws to get a fair shake to cover all of this the Enforcement Division has a staff of around 1,200 less than 4% of the number of companies the SEC oversees and easily less than 1/10 of 1% of the employees of those companies given this huge disparity there's simply no way that the Enforcement Division can catch and punish every single violation of the securities laws that's why Congress gave investors the right to sue companies if they invest in for violations this private right of action allows investors who have been harmed to recover their losses without relying on the SEC enforcement division to do all the work this is one of the reasons why investors have so much confidence in US markets they know they can hold companies they invest in accountable when they violate the law even if the SEC enforcement digit division doesn't have the time or the resources so if you care about enforcing this Security's law and punishing bad actors who take advantage of retail investors which I know are our panelists do then you should support private enforcement of the securities law through investor lawsuits I also want to mention that the SEC has been very active recently in cracking down on fraud and virtual currencies and so called initial coin offerings or icos this is important because retail investors are getting killed in virtual currencies which are being treated like speculative investments rather than currencies this is a problem that we need to address and the SEC enforcement division has been at the forefront of this effort so I want to thank both of our panelists I look forward to hearing from you and I yield

[00:26:38] back my time o gentleman yields back well I've got

[00:26:47] one more minute remaining on my side where we will I will recognize the vice

[00:26:50] chairman of the committee for one-minutes an opening statement and then we'll be going to mr. shermin for his two minutes thank you for convening this hearing chairman huizinga thank you to our witnesses enforcement of our securities laws is a critical part of achieving orderly and efficient markets and the SEC s division of enforcement is critical to providing investors the confidence to participate in our markets this is especially true for retail investors who may not have a strong understanding of sophisticated financial products and services additionally the market participants should be reasonably informed about the expectations of the commission for following our securities laws transparency in this respect is of the utmost importance enforcement practices should be about ensuring the law is followed enforcement proceedings should not result from miscommunication or misunderstanding of the law finally I'm pleased to see that the Commission's enforcement approach has prioritized protecting retail investors I want to ensure they maintain the confidence to invest especially given the historic opportunities for investment and ongoing growth of our economy with that mr. Chairman I yield back gentleman yields

[00:27:53] back the chair recognizes gentleman

[00:27:55] California mr. Sherman for two minutes for an opening standing the purpose of the SEC often the focuses on the fairness to the market participants but the real focus has got to be funding American business it is we you deal with the people who participate in the markets but it is those entrepreneurs and companies that get funded that really affect the economy as the ranking member pointed out you're beginning to do something on initial coin offerings I hope I would have hoped you've done more I hope you shut it all down and we'll be interesting to find out what barriers you face in doing that because if someone's trying to fund an operating business that might employ thousands of people and they tried to comply with the securities laws and they screw up footnote 27 you might be on them like a ton of bricks but if somebody just builds on the image of the securities laws has an unregistered offering of quote coins calls it an initial coin offering to be similar to an initial public offering and is selling an investment with no investor protection something like in every Ponzi scheme is valuable only because another sucker might be found and furthermore isn't funding operating businesses now it's true somebody selling an initial coin offering might give a small donation to the Red Cross every scoundrel does something good in their life but when somebody's trying to fund creation of jobs they've got to do it very carefully or you're on them for a misstatement in footnote 27 when somebody is selling crypto currencies to investors it's taking you a while to shut them down you're still under a there's still there's still delay and I hope that you will be as tough on them or tougher on them than those who comply try to comply with the securities laws gentleman's time has expired today we welcome the testimony of Miss Stephanie Avakian and mr. Steven pekin who are the co-directors of the SCC's division of enforcement I'm going to recognize you

[00:30:20] collectively for a generous five minutes that will save us a few minutes actually rather than each of you being recognized and without objection your written statements will be made part of the record so with that about Ms Avakian you are recognized thank you thank you good

[00:30:37] morning chairman Huizenga ranking member Maloney and members of the subcommittee my name is Stephanie Avakian and along with my colleague Stephen Pekin who will address you next I serve as co-director of the United States Securities and Exchange Commission's division of enforcement thank you for inviting us here to testify today on behalf of the Commission about the Enforcement Division the Enforcement Division plays an essential role in carrying out the SCC's mission to protect investors maintain fair orderly and efficient markets and facilitate capital formation our vigorous enforcement of the federal securities laws in order to detect deter and punish wrongdoing and compensate harmed investors enables the Commission to promote confidence in our markets which is critical to encouraging capital formation our efforts are aided by our regular coordination with the Commission's other divisions and offices and our partners at the Department of Justice and other federal state and foreign regulators since our appointment almost a year ago in June 2017 the Enforcement Division has remained focused on its core mission of strong and effective enforcement of the federal securities laws the cases we have investigated and recommended to the Commission over the past year are a product of the hard work professionalism and expertise of our career staff in Washington and our 11 regional offices in November of last year we issued a report in which we outlined five key principles that guide our decision-making these are focus on the interests of Main Street investors focus on individual accountability keep pace with technological change impose sanctions that most effectively further enforcement and constantly assess the allocation of our resources today we would like to briefly explain how we are applying several of these principles protecting retail investors has always been at the heart of the enforcement divisions mission we've enhanced these efforts by forming a retail strategy task force which is focused on identifying punishing and deterring misconduct that affects everyday investors this increased retail focus does not mean that we are allocating fewer resources to financial fraud investigations or to policing Wall Street since we were appointed co-directors the Commission has continued to pursue cases against large corporations financial institutions Wall Street firms and other market participants who violate the federal securities laws focusing on individual accountability has also long been a priority and the enforcement divisions recent efforts show that our commitment to holding individuals accountable for misconduct in the securities markets has not diminished since we assumed our roles more than 80 percent of enforcement actions have included charges against one or more individuals at all levels of the corporate hierarchy including CEOs CFOs and other high-ranking executives and going forward we will continue to hold individuals accountable where warranted thank you very much for the opportunity to testify today before the subcommittee I would be happy to answer any questions you may have and my co-director Stephen Pekin will address you next good morning mr. chairman ranking member Maloney and members of the subcommittee my name is Stephen pekin along with my colleague Stephanie and I serve as co-director of the division of enforcement and I want to touch on two additional points our efforts to address technological change and the issue of remedies and relief in an effort to keep pace with technological change were focusing the enforcement divisions efforts and resources on emerging cyber related threats and issues including issues relating to hacking data breaches virtual currencies and initial coin offerings we think these are among the greatest risks facing investors in the financial markets today and we recently formed a cyber unit to focus on these sorts of issues cyber related matters are an area where we've sought to utilize the full range of tools and remedies that are available in an effort to balance protecting investors and allow for real innovation in some cases we recommend enforcement actions against wrongdoers in others we've acted on an emergency basis to recommend the Commission suspend trading in stocks the Commission and the Enforcement Division have also issued a number of public statements and alerts to focus investors and others on the risks relating to IC OS including for example the risks associated with celebrity endorsements of these products the sanctions the enforcement division seeks in its actions are critical to influencing the behavior of market participants and we have a wide array of tools available to us disgorgement penalties industry suspensions and bars and other relief in every case we consider the facts and circumstances and we seek the package of available remedies that's most appropriate enforcement division is also focused on compensating harmed investors for losses stemming from violations of the federal securities laws we place great importance on putting money back into the pockets of harmed investors in the last fiscal year the Commission returned to record 1.07 billion dollars to harmed investors now despite our successes in recovering funds a recent development threatens our ability to do so for long-running frauds in a case called khopesh versus SEC the Supreme Court held that claims for disgorgement are subject to a five-year statute of limitations and as you would expect many fraudsters try to conceal their schemes some are successful and defraud investors for years before they're discovered we appreciate the need for clear statutes of limitations and we're redoubling our efforts to uncover investigate and bring cases as quickly as possible but no matter how quickly we work it's likely that the coke cash decision will impact our ability to obtain recovery for harmed investors and long-running frauds so thank you for inviting us here today to discuss the division of enforcement and Stephanie and I are happy to answer any questions you have thank you very much we appreciate that I'm going to recognize

[00:36:33] myself for five minutes at this time for questioning and as I mentioned in my opening statement I believe that lawmakers should never necessarily evaluate the efficacy of regulatory agency or rule or enforcement program solely based on number of headlines or press releases that it can generate but there have been some recent news articles criticizing the drop of enforcement actions by the SEC under the new administration from 868 and 2016 to 754 in 2017 and so the joint question to you both as a and Mis Avakian you had talked about a focus on protecting the retail investors which i think is it's great and it needs to be done but does the statistic this drop in in actual cases beg the question of whether the SEC division of enforcement is has gotten soft on Wall Street as some are accusing and are you really trying to protect that retail investor thank you for the question you know we really when we think about whether we're protecting and to what degree we're protecting the retail investor and when we think about our effectiveness we really think it's most important to look at the nature and the quality of our actions the actions were taking and what it is we're doing so while statistics like you know how many actions the Commission's filed over a given period of time or you know the total amount of financial remedies ordered over a given period of time can be some measure of activity we don't think that that's the way to really look at the effectiveness of our program and instead we take a step back and look more meaningfully at you know what are the actions we're bringing are we making a difference for investors are we focused is our program focused on the worst conduct on the fraudulent conduct are we stopping ongoing frauds are we stopping inappropriate print inappropriate practices or sales of inappropriate products at financial institutions are we focused on those cases that are most likely to get money back into the pockets of harmed investors are we getting bad actors out of the securities markets those kinds of things are we deterring wrongdoing and that's what we think can well so with an enforcement program can it be evaluated solely on those number of enforcement's and and penalties and those kinds of things I mean it's what we're really trying to get out of then is what should be the evaluation of of the effectiveness of your particular division I mean how should you be measured we should be measured on you know are we creating deterrence against wrongdoing are we getting bad actors out of the marketplace some of these things are measurable by statistics but many are not are we stopping fraud on retail investors are we covering a broader range of retail investors or a broader range of practices so not all of these things are amenable to using statistics to measure them but if you look at for example what we've done in the ico space in a very short period of time and I think the effect that what our program is done in that time period is sort of a good way to look at it in a very short period of time the Commission has issued a report of investigation we've brought a number of cases the commissioners issued has issued a number of trading suspensions we've made of a number of statements to the marketplace I think we've gotten response to that so it's it's a more qualitative analysis I've got about a minute and a half here and I want to move on to another issue but I may follow up with a written looking at number of complaints and those kinds of things just to get a better handle on that in June 2017 the Supreme Court held in khopesh versus the SEC that the five-year statute of limitations apply to disgorgement claims that the SEC seeks an enforcement actions by clarifying that the remedy of disgorgement is a quote penalty and your testimony you noted that the co-coach decision has already had significant impact across many parts of the division can you please explain the effects of it and what you've seen so far and do you believe that investors ultimately will have to shoulder additional losses while fraudulent actors are able to keep billed gotten gains due to this decision it's a it's a very significant decision that's having meaningful impact on our ability to recover funds and return them to investors particularly in cases of long-running frauds where they're not discovered until time has passed we can't reach back beyond five years and pull money out of the pockets of the wrongdoers who and turn them to investors we've been keeping track of in our litigated and settled cases of how much money we've had to forego seeking recovery of and the latest numbers are over 800 million dollars just in the last year or so alone in our litigated and that was out of a total and total enforcement it was three something four billion it was last year it's a very meaningful percentage and I think you know we don't know what the ultimate impact will be but this is going to have a significant you know impact on the recovery that we achieve for investors my times expired and expiring but at what I want to know and we'll follow up in writing is what we as Congress can do to ensure that bad actors aren't able to profit from from from their misbehavior and their and their fraudulent actions and and then get get that remedy back to those investors so I think this is going to be a very significant thing and look forward to continuing that conversation with that I recognize the ranking member

[00:42:20] for a generous five minutes thank you and I look forward to working with you on on the point that you made I'd like to ask both you about initial coin offerings and virtual currencies there have been a strong debate about whether a token that is offered as an ICO can be a security when it is first issued to investors and then later evolved into something that is not a security some people think that once it's a security it's always a security and the others think that the token status as a security can change over time as far as I know this is not a decision that's been decided by the SEC or or the court so I'd like to ask both of you do you believe it's possible for a token to start as a security but then involved is something that is not a security that's really a question that's primarily within the expertise of our division of corporation finance not us as much that said I think it's always going to be a facts and circumstances test as to whether something meets the definition of a security and if the substance of something changes over time that analysis is going to have to continue to happen but we really do look at the substance of the transaction not the name of it not what it's called and look at you know does it fit the test for a security is it an investment in an enterprise in order to generate a profit based upon the efforts of others and that's really the test that's going to be applied well have you seen any situations where this has actually happened yeah I think I mean we have dozens of investigations that are ongoing and one of the subjects of many of these investigations is evaluating whether or not a particular instrument is or is in a security I don't think I can speak to you know the outcome of those because some of that work is ongoing a lot of what we've seen though in these icos obviously looks and is you know meets the definition of securities well building on that statement chairman Clayman is stated and I quote I believe every IC o---- I've seen is a security do you agree with that statement I can't speak to whether he's seen the broad you know gamut of instruments that our division is is investigating so I certainly don't dispute that what he's seen he he believes is a security the question I guess is whether some of the things that we're looking at now do they actually meet that definition and I think the you know some more needs to be written on that well I I know that you brought a number of enforcement actions on icos and I'm pleased to see that you're taking this issue seriously a great number of retail investors are getting hurt with cryptocurrencies but there been so many ICS over the past few years and none of them none of them have been registered with the SEC securities offerings so when your division is looking at all these IPOs how do you decide which cases to bring enforcement actions on we have as you noted there are a number of ICS and we have a number of investigations in the pipeline I think just speaking very broadly in terms of how we prioritize things that require emergency action are going to come to the front of the priority list so there are some cases we've brought in the last months like the Sentra I see which was a large ICO that involved celebrity promotion the founders of that were arrested assets were seized think roughly 60 million dollars in digital assets were frozen there are other cases the arise Bank case and there have been others long thin where you know I think those ones that that really do require an asset freezer emergency actually are gonna come to the top but there are others and you know like many other things the investigations take time so some of this is going to be when the actions are ready we'll bring them well do you believe that private lawsuits by investors can help supplement the enforcement divisions work by deterring bad behavior that the SEC might not catch so our main intersection with Private Securities Litigation is that we often will use Private Securities Litigation as a source for you know to start an investigation of our own I think our assessment of whether or not to conduct an investigation on our own isn't impacted by whether or not there's a private civil litigation because if we think it's worth devoting our resources to the remedies that we can get at the end of the day often are much broader than what a private litigant can achieve so in addition to just getting money back for investors we can also bar wrongdoers from the industry but that's our principle intersection with the Private Securities Bar well I think that sounds helpful to me so I believe it's important that the SEC not take the unprecedented step of allowing public companies to use forced arbitration clauses to prohibit their investors from ever suing them under the securities laws in court even for securities fraud so no matter how good a job the SEC enforcement or Enforcement Division does it will never be enough to catch all of the bad actors that are out there in our markets so I just want to say that while the SEC enforcement division is necessary I don't think it will ever be sufficient by itself it's so underfunded and understaffed compared to the challenge before you and that's why it's important that investors keep their ability to sue public companies in putting those class actions for securities fraud in court so I just my time is long past and I yield back

[00:48:03] thank you the chair was being generous since I had been a little loose on my own time so with that the vice chair of our committee mr. Hultgren from Illinois is recognized Thanks chairman thank you

[00:48:15] again both for being here in your written testimony regarding the Supreme Court's recent ruling on Co Koosh versus the SEC I wonder if you could explain and I'll let you decide whose best to respond if you could explain this decision how this rescission could decision could restrict the Commission's ability to enforce our securities laws what does this mean for retail investors and then also want to ensure our securities laws are enforced we need to have enforceable rules in order to encourage effective markets for companies seeking access to capital investors and the brokers that facilitate these markets so what steps do you believe Congress should take if any in light of the Supreme Court's recent decision so as I said the co cash decision is significant and is gonna have far-reaching impact on our ability to recover funds that have been stolen from victimized investors I think that we don't come with a specific proposal for a legislative fix if one's appropriate for Co cash but we I think would be interested in working with this committee and and with the members and their staff in fashioning a proposal or responding to anything that might come forward because this will have a significant impact on investors you know please let us know your thoughts as we move forward on that we had floated an amendment actually took Japan in general would you support a process within your office I'm sorry if I'm jumping on my notes here let me go back we had floated an amendment to choice act that would expand the reforms proposed for the SEC enforcement ajiz division to the CFTC and wonder if you could respond to would you support a process within your office for closing investigations during this time say 180 days could you make a determination to institute an administrative or judicial action refer the matter to DOJ for potential criminal prosecution or inform the parties that investigations are closed I think we're not familiar with the details of the legislation but but broadly speaking the investigations typically take some amount of time what I'll say is one of the things Steve and I have really message to the staff and I think folks have taken quite seriously is the importance of first moving quickly in our investigations but also really once we make a determination that perhaps we shouldn't proceed there's not a securities law violation you know to close the matter if it's more appropriately referred to someone else to do that quickly but we do take quite seriously prompt prompt movement of our cases and decision making that's great I think that's you know the issue for us is obviously this is disruptive and to get answers or information as quickly as possible when these investigations are going on or when they can be closed that's what we want to see happen obviously not changing the process making sure the process can work but expediting where possible let me move on a little bit to cyber security expectations in general wonder if you could speak to your expectations for public companies to protect themselves from cyber security threats for example after a breach would you be able to reach conclusion that a company was negligent in protecting itself and therefore its investors from cyber security threats and would you look at something like NIST standards to inform this thinking so we look at the question of cyber security through the lens of disclosure and you know the Commission has issued guidance to public companies about what they should be thinking about in terms of disclosing cyber risks and how they should be thinking about the issue of disclosing a cyber or then I think we're cautious in this area that we don't want to second-guess the good faith disclosure decisions that companies have been victimized by sophisticated actors including even nation-states have to face and we've said before that while we don't want to second-guess those kinds of judgments there could be circumstances that are so egregious failures of disclosure that we would bring enforcement action and we recommend it and the Commission brought enforcement action against the company formerly known as Yahoo just a couple of weeks ago for what we considered to be a case that had crossed over that line from good faith to to an abdication of responsibility Thanks my last seconds just the beginning of your testimony mentioned in fiscal year 2017 the Commission brought 750 for enforcement actions and obtained 3.8 billion dollars in penalties and disgorgement I'll return a record of 1.07 billion to harmed investors in awarding nearly 50 million dollars in payments to whistleblowers critics of your office may point out that the Commission brought fewer cases since the change in leadership at the Commission however could you please explain how you were able to return a record amount to harmed investors in general what does this mean for how your office is approaching enforcement we've taken the issue of both collections and distributions quite seriously we have a very they're both within our trial unit in the division and the collections folks have been incredibly aggressive about going out and collecting money and our distributions area is an area where we've put additional resources and where we've put a serious focus on doing our best to quickly move to get money back into the pockets of harmed investors as quickly as possible great thank you again thanks both for being here yield back gentleman yields

[00:53:34] back with with that the chair recognizes

[00:53:35] the gentleman from Massachusetts mr. Lynch for five minutes thank you very

[00:53:41] much mr. chairman and thank you for having this hearing I want to go back to the Yahoo hack now it's called Altha book I guess that's the new company and you're right he just settled for 35 million with with Al Tabo formerly Yahoo that hack affected several hundred million users alpha boy I'll go back yahoo sold their digital and email services for about four point four eight billion to Verizon I did the math on this so the thirty-five million represents about 8 cents per user that was hacked and you're very very correct when you say that that case was as you described it an abdication of responsibility I think it was worse than that they hid that disclosure of that hack for two years the only reason they disclosed it was because they were for sale so you know I think that that was the worst possible behavior to deceive investors they eventually had to discount the sale because they had neglected to disclose that information to the buyer but eight cents eight cents per user a hacked do you think that's that's fair I thought 35 million for a company that solve a four point four eight billion I thought 35 million was really you know selling short the the damage that was done to users and I I think it was a slap on the wrist to be honest with you because it really didn't didn't affect anybody other than the users having their their information compromised yeah I I think it's a great question and fashioning you know the the appropriate recommended penalty in a case like this where there'd never been a case brought before against a company for failing to make a disclosure like this obviously is a difficult situation you're trying to weigh the costs and benefits and burdens of any corporate penalty the penalty itself was never going to go back to compensate the people who were whose information was was hacked all fairness was going to the how about fairness you know III know they weren't gonna be compensated but you know you're also telling me now that that we're not going to do dozens of cyber hacking cases in the future we're gonna want to shift gears so I just see a lot of this we serve on another subcommittee that deals with you know cyber issues and I just think it was the case of first impression I agree with that but I think you fell far short or the SEC fell far short of holding anybody account here I think if there had been a meaningful penalty here other companies would look at that and say hey we got to get our act together here not only should we not allow this hacking to go forward and and you know redouble our efforts to protect data but you know there's also the backend the reputational damage that to the company when that happens and also the example to others in the future because this any company out there doing a sizable business in in you know digital conduct is is really gonna blow this off because thirty five million is laughable to be honest with you for a company that you know is about five billion dollars in value and and and and these people as I said before intentionally concealed this information from investors and and its customers so you know it was especially egregious behavior and I just think that that example coupled with your your new policy where you're not going to go after cyber hackers as you have in the past so we're going from week to week or I don't know how much weaker you can get them thirty five million dollars for a company of that value now you're going to do less I just think you're going in the wrong direction to be honest with you and and I think that some of this was a Russian hack some of these entities are getting even more sophisticated so your your example or your the lesson that you are teaching is that the fines aren't that bad compared to the cost of stiffening your system strengthening your system so why spend money on it I mean that's that's the message I'm getting from you well you know I hope that the industry reads this case in a different way and that I don't know why they would honestly you know I'm trying to be failed with you yeah and I would say that you know there there certainly is no intent or plan on our pot on our part to abandon bring cases against the perpetrators of these intrusions which continues to be of significant priority for us we see intrusions for the purpose of stealing information for insider trading and we have cases and investigations that have been there were gone going and then have been brought against the perpetrators of that kind of misconduct and I expect that will continue to be a high priority for the Enforcement Division thank you I yield


[00:59:11] back mr. chairman thank you gentleman yields back the gentleman from Missouri

[00:59:14] the chairman Wegener is recognized for

[00:59:14] five minutes I thank the Chairman I think our witnesses for being here I want to talk about a trend that occurred at the SEC in the last administration that is very concerning to me and that I hope is being addressed with our new leadership under the leadership of former chairman Mary Jo white the SEC increasingly turned to its own administrative law judges LJ's rather than the federal courts to adjudicate enforcement actions and in fact a 2014 Wall Street Journal article found that for 12 months straight every case the SEC steered towards the agencies appointed ALJ ALJ's was quote successful for the SEC in contrast according to the same article the SEC fared far worse when they brought cases before the federal court trials winning approximately I think half of the time at the time former enforcement director Andrew surest me I think was his name stated quote were using administrative proceedings more extensively because they offer a streamlined process with sophisticated fact finders let me start off by asking this our SEC administrative law judges the same as judges with lifetime tenure appointed under article 3 of the Constitution the judges are appointed in a different fashion I'm not sure of the exact mechanism but they're different so they are they are not appointed under article 3 of the Constitution should suc administrative law judges be interpreting and developing federal securities laws for at for example insider trading laws even though they aren't article 3 judges there are I think some sorts of cases that make sense for administrative law judges to consider given their securities background and the fact that the appellate rights are to the Commission of the end of the circuit courts but I should step back and make it clear that since we've been in this job which has now been just about a year the circumstances in which we've filed litigated actions as administrative proceedings have been fairly limited and I would say broadly they've been limited to circumstances where either the charges that we're pursuing are only available in the administrative forum so think failure to supervise of a broker dealer or something like that or where the principal relief we're seeking is only available in the administrative forum so barring someone from being in the securities business or where the person involves is a registered person like a registered broker-dealer investment advisor so I think we have filed a far fewer number of litigated actions as administrative proceedings Senate many of them our settlement maybe things have changed and I want to reclaim my time because I have several other questions it's very clear the SEC has lately been using these administrative judges for complicated cases including several involving insider trading how's their performance evaluated quickly the administrative law judge yes I'm not sure how their performance is evaluated doesn't this create a potential for conflicts of interest or undue bias in favor of the Commission in administrative proceedings probably worth noting that in the last year we fared much better in litigation in district court than we did in our administrative forum I think our success rate was fewer than less than 60 percent I am very concerned about the bias so what steps are being taken to prevent bias or at least the appearance of bias in all ALJ proceedings can the administrative law judges or are pointed in a unrelated to anything we do in an independent fashion but I will say that the appellate rights are initially to the Commission but after that to the US Circuit Court of Appeals which is the same appellate path that a case takes if it goes through the district court so I think you know if there's concern ultimately there is a path for peel that's very similar to the defendant have a choice about which path he can take know as the plaintiff says you know that's of concern to me does the SEC bring similar cases for example insider trading cases in both federal district court and administrative proceedings we have not filed it I understand the question yes have not filed an insider trading case as an administrative proceeding does this create the potential for different legal interpretations of the same or similar laws and potentially inconsistent enforcement actions I don't think any differently than you get by being in front of any number of district court judges who decide the same set of facts in a different fashion I understand the question yeah and these are complicated these are complicated issues and I have great concerns of this overreach of authority especially given the fact that these are not article 3 judges and I look forward to working with you and the agency as we go forward to get the most proper outcome concerning these issues so I think I've run out of time I yield

[01:04:32] back Jim gentleman yields back gentleman

[01:04:34] from Georgia congressman Scott is recognized for five minutes

[01:04:39] thank you very much mr. chairman mr. bacon and mr. Abba Khan let me ask you this you listed in your testimony the recent Supreme Court decision of I think was kokeshi versus the SEC and you said that that along with the president Trump's administration's hiring freeze put had ones before you and could very well severe affect the effectiveness of your enforcement duties would you share with us why you've come to that conclusion and how serious would these impediments be so mr. Scott um I appreciate the question I think really a couple points in response the first is the Co cache decision is is going if not change is going to limit our ability to recover funds that have still been stolen from investors as part of long-running frauds in some cases like Ponzi schemes for example are sort of self covering and so they often go on for many years before they're discovered and then we can't reach back and get money that's that's been stolen from investors the the question of hiring is one that we you know think about a lot and and we've been operating under a hiring freeze we think we're adequately resourced to do our jobs and you know we've asked in the current budget request for an additional 17 slots for enforcement which we'll use for our cyber efforts and our trial unit and and other key areas but we're working we're trying to use the resources we have to make decisions about how to allocate scarce resources like every other law enforcement agency we have a broad area to cover and we're doing things like using data analytics and trying to leverage our investigations to work smarter to try to to make the biggest impact with the resources that we have yeah and there was a case I believe in Dallas with this company who's running a scam operation you may remember that and my information is that they were trying to develop a false federally insured bank could you tell us about that so we could see the ingenuity of folks doing that it was AVS Bank Epperly I know it starts with and I think I think um that you're talking about a case called a rise Bank where yeah I rise a an initial coin offering that was supposed to fund a some kind of banking operation and this is one of the cases that Avakian referred to where we acted to obtain emergency relief it turned out that it was a total scam as we allege the individuals were ultimately arrested and we seized digital assets so I think it's a great illustration of how these initial coin offerings can present real risks to investors and how we've been trying to work quickly to stop this kind of fraud from from going on all right now in my in my last minute and a half here we are now in the grips of dealing with Russia and China and their use of their very sophisticated technology of really breaking into our security systems what I'd like to get from you is how serious is this nation-states threats and who would be the leaders that we have to worry about the most and how so so I'm not sure that I'm in a position to really answer that question fully but I will tell you that you know our cyber unit which is focused you know in large part on addressing securities law violations that are perpetrated by cyber criminals including nation-states you know sees you know actors in the Russian Federation and other places that you've mentioned trying to steal non-public information to trade forcing trading by breaking into people's brokerage accounts and the like and the Yahoo case which I mentioned before is one in which actors which I think we allege were associated with the Russian Federation were involved in in stealing the information from Yahoo so you you have actually saved Russian operatives who are acting physically correct well I believed in the Yahoo case the allegation is that the people who were identified as having broken into Yahoo and stolen user information were associated with the Russian Federation so yes and in your enforcement capacities what has been the disposition of these Russian operatives well as you can imagine for you know for a civil investigative agency that police's the securities markets where we're often looking at people who trade on that kind of information or benefit from the theft of that information so you know whether we can actually bring action against the perpetrators you know depends on the case thank you very much gentleman time has expired with that gentleman from Minnesota mr. Emmer is recognized for five minutes

[01:10:06] I want to thank the chair again for convening this hearing and the co-directors for joining us today and for the job that you're doing as I've listened today clearly I must have a different point of view when it comes to some of my colleagues on crypto currencies and I will say that you just testified that these initial coin offerings present real risks to investors but let's not forget they also present real opportunities and we're talking about a technology blockchain technology that has a an amazing potential I'd like to go back to some of the questions earlier and ask them a little bit differently and I want to thank you before I start because I think it was represent Maloney that started the hearing this morning by suggesting that secretary Clayton has said every initial coin offering is a security that's not what I heard you say you're you're reviewing these and you're developing what your view is of the different types of cryptocurrency problem is a lot of people up here with white hair without hair or people that have been around for a while don't even understand what they're talking about and we worried that too much government could actually kill this thing before it can grow into something that's very good for our economy so I'd like to know since you've been getting involved in some of these enforcement actions in investigations what has been your level of engagement with cryptocurrency exchanges with the actual exchanges about their decision process around listings are you actually communicating with them in having it back and forth we as an agency broadly speaking are engaging with the marketplace I think to some degree the exchanges although we're not necessarily in the best position to answer that particular question the reason is as an agency we've really worked together across divisions and across offices so we've got a distributed ledger technology working group that's an interagency group we've got a FinTech working group that's an interagency group those groups particularly the FinTech group have been working closely with the marketplace with folks who are coming to us with folks we're doing outreach to I would say the division of corporation finance is probably on the frontline of a lot of it the division of trading and markets is going to be on the frontline of the exchange issue but we are working with industry and we encourage market participants to come to us whether it's through the FinTech email box which we've set up FinTech at sec gov or whether it's to reach out directly to a particular division or office I would go the next step then how does the SEC distinguish between an IC o---- in the sale of a token for use on a blockchain platform that's always going to be a real facts and circumstances question and again we're gonna take a step back and look at exactly what the substance of that particular transaction or token is not the name of it and so is it something that someone's you know investing something of value in is it an enterprise someone's investing something of value in in order to generate a profit at the expense of others that's the basic definition of what's a security it is that evolving ru because it could be a security it could be a commodity it could be a currency there have to be some delineated lines so that people understand where they're at and who is who has jurisdiction over them because we want to make sure that they're continuing to explore the opportunity and not just going out of business yeah I think that's right and we've spoken a lot publicly about it certainly the Chairman's spoken a lot publicly about it you know to the extent something is a pure currency sure medium of exchange that's not a security I think we're relying on the experts in the marketplace the gatekeepers the lawyers others like that to really take a step back and take a true look at what is the underlying substance of a transaction and that's really going to be I think what guides someone but we are as I said before we are open in terms of having folks come to us and help work through that analysis what let me ask you this last one when looking at potential enforcement actions what specific factors are used by the division to determine which token pre-sales will be targeted when we think about enforcement action and what we're going to look at we are working together with our division of corporation finance to a large degree to analyze what it is we know about the substance of an underlying product is it as security is it potentially as security and and that will guide sort of how we think about it okay well I look forward to working with you as this evolves and I want to thank you again for the work that you're doing and your light touch policies is so far thank you my yield back gentleman yields

[01:15:13] back at this time all right at this time we're going to stay on the Republican side and the chair will recognize mr.

[01:15:27] Davidson from Ohio for five minutes Thank You chairman I thank you both for

[01:15:32] your for your testimony and for the work you're doing to protect our markets and to make sure that America remains the world's best place to raise capital and and see it grow I will spend a fair bit of time on icos and crypto currencies but I want to pick up where miss Wagner left off on due process with administrative law judges I couldn't have used five minutes better and for that reason I introduced HR 2128 the Due Process Restoration Act which seeks to give defendants the option of federal court versus a no option path to an administrative law judge proceeding I have some of the concerns about a near 100% batting average for the ALJ's and I think over time about a 67 670 batting average for the courts which says that the SEC is good about picking their cases but it does raise some concerns about the path of ALJ's director pinkie bacon you can yes speaking my apologies I guess are you concerned that SEC administrative proceedings have fewer due process rights than in the courts so let me just make a couple of reactions to that so one I think as Stephanie said earlier you know we've been much more restrained in the use of administrative proceedings in the last year um and really using them in only the limited categories for litigated cases that she outlined when you look broadly at you know the the success rate of our litigated cases in over a broad period of time in the administrative form versus federal court they actually are pretty close now don't get me wrong when we bring a case we're we're looking to win them all we don't we win about seventy five percent of our cases in federal court and about eighty five percent in an administrative form so you know the roughly equivalent success rates there are protections there obviously different processes in administrative proceedings from in federal court but the rules around administrative proceedings have been modernized in recent years to for example allow for depositions you know each side and there are some protections in the administrative form that aren't even available in federal court so we have to turn over our entire file immediately in an administrative form we don't have to do that in federal court we have to turn over information Brady or jiggly Oh information which is exculpatory or helpful to write your side and we don't have to do that in federal court so you know there is a balance there obviously different rights and procedures in both forums well as you know there's a case pending before the Supreme Court so we look forward to that out come and and we look forward to vote on the on the due process Restoration Act here but we also look forward to regulatory certainty around initial coin offerings in particular and you know is is is you're all aware the CFTC also has claimed some jurisdiction you've got a working group as you know you referenced earlier is it clear where the CFTC's jurisdiction is because we do have you know court proceedings and we have CFTC who staked out claims on crypto currencies since 2015 what do you make of these folks that are clearly cryptocurrency today yet if they had raised capital might be seen as security at the time how do you resolve that yeah I mean I think some of this you know we're obviously um you know encountering kind of new area with new products and changing technology and some of these issues are being worked out in in the courts you know as we speak you know we've obviously operated our financial system has operated for a long time with you know regulators with differing jurisdictions the CFTC regulating derivatives and commodities and SEC focused on securities I think the way you know things have fallen out recently where we've been focused on the tokens and crypto assets that fit the definition of a security and the CFTC has been focused its jurisdiction on you know currencies and mediums of exchange but you know I'm not sure I'm an expert to say you know where that exact line is drawn and I think some of this is going to be worked out you know over time yeah okay so our office is working on an initial point offering bill that would provide certainty about how a security is it's fundamentally is the Howey test still relevant what's the role of staffs is a white paydirt paper gonna cut it order you to use SEC forms that already exist how do you advise proceeding forward with your office so I mean that obviously would be interested in providing technical assistance and working with you and your staff on any proposal and our division of corporation finance is probably a critical participant in in that because some of this is beyond the expertise of the Enforcement Division all right thank you my time is expired challenge time how you look inspired seeing no for their Witnesses on the Democrat or sorry questioners on the Democrat side we will move to mr. Poliquin from Maine for five minutes thank you very much mr. Chairman

[01:21:00] I appreciate it thank you both for being here today I am represent the great state of Maine and I know you folks are new at your job you've been there for a year you'll probably have a very stressful situation at the SEC so I want to remind everybody that Maine is vacation land if you haven't booked your vacation remain you should do it we don't have any air conditioning with a lot of moose a lot of critters everywhere a lot of blueberry pie and lobster so with that let's get right into it I'm concerned about small investors because rural Maine is like the most beautiful part of the world the hardest-working people I don't worry as much about folks who have you know big fat you know accounts but I worry about small investors in in particular when you look at small investors who are starting out to build a nest egg maybe the first time through a mutual fund and you know they mark the market every day in its public and it's one portfolio for the asset manager and I don't worry as much about that but what happens if one of our small investors builds up that nest egg to a point where they might want a separate account from an investment advisor well maybe they participate in a 401k planner to find a benefit pension plan and that account is managed by an asset manager in a separate account now I used to be in the asset management business and you know what you're providing for your investors for your accounts if you're in that business is trust and security and the product you're selling in great extent is is your rate of return your performance record over time so what I worry about and when I want to ask you folks is how you deal with this when you go look at an asset manager it's time for their review and you're trying to make sure that the rate of return that they are showing their prospective clients how do you make sure there is accuracy in the performance data that they're submitting because that's what people are buying Pass perform it's no guarantee of future performance but that's what they're selling so for example if you walk into an asset managers firm and they have a hundred different accounts how do you know number one they're all fully discretionary how do you know there are no restrictions on on tobacco or alcohol or gambling how do you know about the size of the account are they diversified enough that you're getting a true reflection of what the performance is such that investors are able to make the decisions with confidence that the data is accurate tell us how you do that sure I think the the first line of defense on the kind of potential problems you're worried about really is our office of compliance inspections and examinations OSI they are the ones that go in and do the examinations they do risk-based examinations they do other sorts of examinations and this is one of the things they're looking at is what an investment advisor is representing to its clientele is it accurate is it true is their performance what they say it is so that is one of the things that we look at that OSI looks at I would note that we've done some risk-based proactive work within the division of enforcement asset management unit and one thing we've looked at is performance reporting our economic folks in our indira the division of economic resource and research and analysis have also spent time looking at this issue broadly and so this it's a it's a very potentially real concern that you raise and it's a very good question but it is one that I think our examination folks take seriously and mr. beacon have you found these wonderful examination folks that work over at the SEC that there this is a problem or is the oversight enforcement the audits that you perform on behalf of the investors and savers in Maine and beyond is enough to keep folks in line or have you seen there been problems here so the issue of valuation is it has been a problem in the number instances and we brought a number of enforcement actions against you know wrongdoers for you know giving investors false information about the true value of and performance returns we have a very close relationship with our with our office of compliance inspections and examinations and they refer to enforcement results from their examination so if they go in and they find something that's sufficiently serious that they don't just issue a corrective letter they'll refer it over to enforcement and we open investigations and some of our most significant cases have been brought based on these examinations and what type of penalties are common with an asset manager who might be cooking the books so it could be the whole gamut um there could be you know disgorgement and return of money to victims penalties barring them from participating in the investment advisory business altogether so you know anything up to and including you know being being kicked out of the business please keep working at what you're doing make sure your vacation in Maine but don't forget about the small investors or small savers we need to make sure they have confidence when they turn over their hard-earned savings to an investment manager thank you very much

[01:26:12] thank you mr. chairman the gentleman's time has expired and if it is fine with our co directors we're gonna do a quick second round of questioning which at this point we think will be rather limited we might not decide whether its Laurel or yani but let's at least continue the conversation I'm going to turn to my friend and gentleman from Georgia for five minutes sure let me get to what I think is really the gist of the matter here I have recently read a Wall Street Journal report and it says this it says that US regulators have repeatedly put cryptocurrency companies and their advisers on notice in recent months about what officials say are widespread violations of security rules designed to protect investors could you share with us what these widespread violations are so I think when we look at these crypto asset related issues they really fall into two buckets so on the one hand we have the out-and-out frauds like the one that you were talking about with the Dallas bank company and these are people who are trying to just trade on whatever newsworthy event there is and make money you know in the past it's been in the marijuana industry or hurricane relief and this just happens to be a newsworthy thing this technology so they're trying to take advantage of investors by trading on that so we see those kinds of out and out frauds and then we also see in another bucket the failure to register offerings broad offerings of what we think meets the definition of a security and if you're gonna sell make a general solicitation of a security offering broadly to investors if you're not subject to an exemption from registration that's got to be registered with the Securities Exchange you have to comply with the various rules and requirements and if you don't meet an exception then investors are presented with an investment opportunity without the information that the Commission has decided they're entitled to have so those are the two sort of real buckets that we see these issues falling into yeah this whole enders is is so moving our technology the crypto currencies all of this seems to be moving at warp speed and with some variation that what we're doing isn't enough just just to carry this point further in the same article your chairman Jake Clayton said this he said many promoters of ICL's and crypto currencies are not complying with our current security laws and then he also said that he has urged his staff meaning you the enforcers to be on high alert for protests to icos that may be contrary to the spirit of these laws however with all these warnings from you and from your chairman it goes on this article very good I hope more people will read this Wall Street Journal article it says such warnings have failed to chill the booming market for digital tokens coin offerings have already raised about one point six six billion dollars this year in our own pace to even top last year's six point five billion dollar tally according to research and data from token report and then he went on say we're just dealing with the tip of the iceberg and as we all know when you just deal with the tip of the iceberg you have problems with the ship below all we have to do is look at the great sinkings of the Titanic there's if we just reached the tip the real serious part of this iceberg is down below as it was with the Titanic and if that happens our nation's gonna be in serious trouble is this article accurate are they sounding the necessary norm you agree with it so you raise you raise a great point and I think if you look at the work that the staff has done there have been a couple of you know there have been cases that we've brought already enforcement actions that we brought there are many investigations that are ongoing and those will take time but they will many of them will likely lead to enforcement actions I don't know how many but many of them will we've also seen people we've we've communicated with people they've stopped a token offering because they hadn't told that you know they were about to violate the federal securities laws so no violation occurred lemansky I got 10 seconds yeah is there anything that we in this committee we in Congress can do to help you with your farm progress in this great challenge well I mean I think we have adequate statutory tools but obviously we'd be willing and interested in working with your staff and the staff of any members here on any proposed legislation all right thank you gentleman's time has expired and we are going to go back for the PSA for pure Maine with mr. Poliquin remain for five minutes thank you very much mr. chairman appreciate it folks if one of you could take a stab this miss miss Avakian my prancing out right in February you folks made an announcement about your shear class selection disclosure initiative and I believe it deals with investment advisers and reporting and self reporting and so forth so on could you explain that program to us and how it might help investors absolutely I'm happy to explain it and we we do expect it to directly impact and help retail investors in particular so one of the problems we've seen over the years both our office of examinations and an enforcement are problems where investment advisors are recommending higher higher fee mutual fund share classes for which they're being compensated when there are lower or no fee share classes of the exact same products available is this only apply to if I may to to fund companies in other words it doesn't deal with managers who me in a separate account you're just talking about mutual fund companies that correct the share classes or share classes and mutual fund companies the self reporting initiative is targeted to investment advisor got it and so we've brought OSI has identified this problem in a number of exams over the years we have brought in the Enforcement Division a number of cases for failure of investment advisors to identify this this conflict of interest for their clients the fact that there's a higher fee share class for which they're being compensated is this apply to no loads as well as load funds or you just talking eh two bees that are nutty should be the you know the fees that are charged and so the self-reported and we've brought a number of cases in each of which against financial institutions in each of which the Commission assessed penalties in connection with the resolution of those cases the self reporting initiative provides a defined period of time for months for investment advisors who have this problem have identified this problem to come forward and self-report and in exchange for that we will recommend to the Commission standard settlement terms those standard settlement terms require these investment advisors to disgorge the monies and to repay them back to investors and in exchange for that we'll have standard settlement terms that will not include a financial penalty ultimately what we're trying to do here is take a problem we identified on a broad scale investigations that take a substantial amount of time to complete and instead say all of you who have this problem come forward identify it to us and hopefully attract and get a much larger universe with way fewer staff resources invested in it and money back into the pocket of investors you find in doing your work do you find there's a common thread among the asset manager community that participates in these practices that they're not no there's no common we've seen it from the smallest advisors to the biggest financial services firms on Wall Street okay good Thank You mr. chairman I yield back my


[01:35:23] time thank you gentleman yields back we'll give the ranking member of opportunity as well I apologize I have another hearing taking place there just many many hearings today with a lot of work to cover I want to go back to the kokeshi decision I want to understand how you got a 9-0 ruling that that's very rare in the Supreme Court yet there seem to be a concern on both the Republican and Democratic side and from you that this would limit very much the Securities Exchange Commission in your mission to protect investors can you give me some insights on the khopesh case and ruling and and then secondly what do we do about it you identified it as a problem as did many of my colleagues on both sides of the aisle would it take legislation to correct it but what were the circumstances of this case that's so overwhelmingly came out in a 9-0 ruling I don't know of any other 9-0 ruling this Court's easing so if you could give me some more understanding of the khopesh case and responding really to both of your testimony that this is a big challenge for the Securities SEC um yeah so the khopesh decision a couple things so first of all the case itself involved a pretty egregious fraud in which khopesh stole think like thirty five million dollars from investors and that took place over a 10-year period and by the time you know he was prosecuted enough time had elapsed that in the end as a result of Supreme Court's decision he was allowed to keep all but I think about five million dollars of that thirty five million dollars that was you know misappropriated from investors the Supreme Court's decision as you know was unanimous and we obviously accepted and it's the law of the land and so you know the issue is not with the decision but rather with the effect of it which is that going forward you know if it was a huge crime where they abused investors you would think that the court would be sympathetic to investors being reimbursed in other words they cut off their ability to be reimbursed there's got to be a reason why well I think they were addressing a you know technical legal question of how did the statute of limitations apply to the remedy of disgorgement so I think absent a a you know some kind of extension of the statute of limitations you know that's we're going to live with this and that's what we'll have to act faster but there will be cases where there's a mom going fraud for years we don't discover it until you know some of that money is out of our reach and I just would note that you know we respect the fact that satchel limitations are important you know they put limits on the government in appropriate cases but there are many statute of limitations that apply to financial fraud cases that are much longer than five years for example the Justice Department has the ability to use the financial institutions recovery and Reform Act which has a 10-year statute of limitations so it's not without precedent for there to be a longer statute of limitations available but the the way Congress could react is by legislating correct absolutely we constantly legislate after Supreme Court decisions that we disagree with most notably that when I was involved in was a little allowed better act that allowed people to sue when they've been discriminated against but in any event I just want to thank you for for your testimony today it's a very difficult job and we want to help you in any way we can I yield back

[01:39:18] generally to yields back and I'm gonna

[01:39:21] take a couple of moments here as well for a quick question on explore maybe a little bit of the differences between corporate and individual penalties and in what that might how that might affect things and former SEC chair Mary Jo white emphasized the need to seek more admissions of wrongdoing from defendants as a condition of really settling the enforcement cases and mr. mr. peak in the you have noted that for people they're resolved cases with the Commission without admitting wrongdoing I'm sorry I'm not sure where that hum is coming from helps without admitting wrongdoing but still agreeing to all points of relief that most people don't particularly view that as hey I got away with one here but can you explain how other tools such as obtaining disgorgement monetary penalties mandatory business reform compared with the admission of guilt in settling I mean is there something more significant that it comes with that admission and and does settling help obtain relief more promptly rather than going on and risking you know the trial and in that time and effort and costs of that Thank You mr. chairman um we continue to consider whether seeking admissions is an appropriate part of the resolution of any case obviously though we have to balance as you note that against the possibility that by demanding admissions rather than getting all the other remedies that we might seek like disgorgement and the ability to return money to investors today so the SEC still can go for these admissions of yield and we do you do but

[01:41:11] you know if there's a case where you know a respondent says I'm willing to give you everything except those admissions we have to make a cost-benefit analysis about whether it's worth you know going through what could be years of litigation in some cases that might well be worth it in others maybe not and so you know we evaluate the full package of potential remedies in relief as part of every resolution do you mind addressing briefly maybe individual versus corporate penalties and how that may affect people's actions I mean I think as some you know the chairman Clayton has said individual liability in his view and I agree with this drives behavior more even so than organizational liability so we put a high premium on bringing I think I think at one point he said we'll look at it is it is shareholders that then are paying part of that penalty correct yeah and I look I think that what we the way we look at it is in every case that we recommend to the Commission we're seeking where appropriate to recommend action against an individual in some cases that's not that's not possible but over the last year it's been possible in about 80 percent of all the cases that we bring there's charges against an individual as well as potentially against an institution so we're looking at both there is a place for corporate liability and you know corporate penalties and there are places for individual responsibility and individual penalties and including getting bad actors out of the out of the markets so some of the individuals that we come across in our investigations our recidivist sort of engaged in serious wrongdoing and they have no place being in our in our markets and so we'll recommend as part of our proposal that we seek to bar them or suspend them or bar them entirely from participating in the in the industry and previously we had had bill inmon here from corporate finance division and talked a lot about icos and and and those kinds of things and it's been pretty clear that most of these seem to be birthed as a security and then some migrated into a futures and and so is it oh I've been describing is it fish or is it fowl and it turns out this these are sort of platypuses you know somehow or another they're where they they they don't quite fit in into categories so I appreciate the you know the opportunity to explore that a bit more we certainly are working on on that issue and needing some clarification and again how that works for you all to then enforce what what what is being laid out so with that I just want to say thank you I appreciate the time think and I think both of you for your efforts on behalf of the SEC and and that retail investor as well and without objection I would like to submit the following statements for the record I think and then without objection all members will have five legislative days within which to submit additional written questions for the witnesses to the chair I will then pass those questions along to you we ask for as timely a response as possible please and without objection all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the or as well so again mr. Pekin MS Avakian thank you for your for your time today here and our hearing is adjourned thank you you