[inaudible conversations] good morning, everyone. Good morning. Our team is here. The subcommittee on Capital Markets and gics will be hereby called to order. Todays hearing is entitled continued oversight of the secs offices and divisions. Without objection the chair authorizes a recess of the subcommittee at any time and also without objection, members of the Financial Service committee who are not members of the subcommittee may still set and participate in todays hearing. At this point i will now recognize myself for three minutes for an opening statement. So today the Sub Committee will continue efforts to conduct vigorous oversight of the ics sec and the individual offices that make up the sec. The last years are subcommittee has heard testimony from directors of trading and market, corporations by its enforcement and Investment Management division of the sec. These hearings have allowed us to take a thorough look at the agencys operations, rulemaking agenda, enforcement practices so we can better understand whether the sec is appropriately carrying out his threefold mission to protect investors, maintaining fair and orderly efficiency on market and last but certainly not least, facilitate Capital Formation. I welcome our Witnesses Today i look forward to hearing the testimony and i hope between the four of you here on the panel we will be able to cover a lot of ground with the time we have. To go back in the year 2000, the sec operating budget was about 369 million. Today, the sec fiscal year 2016 is a little over 1. 6 billion. The sec has recently submitted a request for fiscal year 27 budget coming up to 1. 8 early in dollars. During much of the time in congress have been accused of starving the sec of funds to fulfill the mission, its budget has actually quadrupled an offense though in a little over a dozen years. The increase in spending coincided with an agency that has become four times more effect is. Instead we are likely to vote back at a period of time in the sec missed some of the greatest frauds in history and when it was illprepared for the financial crisis of 2008 when it failed to incorporate Economic Analysis into its role making and more recently as often times been complicit in advancing priorities of special interest. Unfortunately instead of addressing the fundamental structural issues, the doddfrank act has created even more offices within the agencies, to a butcher with us today. Doddfrank granted agency vast new Rulemaking Authority that the sec has often struggled with to implement appropriately. For example, when the sec has made strides towards improving Economic Analysis that underlies rulemaking, there is still much more work that can be done in this area. Its not acceptable to simply say congress made me do it and assume that rulemaking is beneficial in all cases. The sec. Of racial row last june. Its also incumbent to clearly articulate a problem for a market failure rules intended to address which would be obvious, but its still unfortunately lacking in many of the rules that have been implemented. And eager to come here today to hear about the steps taken to further improve the Economic Analysis. I also continued concerns over recent rulemaking to Credit Rating agencies. Broad agreement and provisions in doddfrank such as removal of reference to regulations are much needed an address is one of the causes of the financial crisis and worry many other micromanaging rules included in doddfrank have had the effect of further siphoning competition and Credit Rating agent industry. I want to thank all the witnesses for the testimony and i yield to the Ranking Member for five minutes. Good morning. Thank you so much, mr. Chairman for holding this important meeting and all of our participants today. This hearing will continue or subcommittee series of oversight hearing on the sec. Today we are focusing on divisions and offices in the sec, the office of compliance, inspections and examinations, office of Credit Ratings. Also the division of economic risk and analysis. All four offices play a Critical Role in policing our nation securities markets. The office of Credit Ratings oversees the registered Credit Rating agencies such as moodys, s p and fitch. The financial crisis revealed the importance of Credit Rating agencies, specifically the catastrophic consequences that result in the rating agencies all get their ratings wrong. In response, doddfrank created the office of Credit Ratings in order to increase the level of oversight of Credit Rating agencies. One of the principal missions that the office is to ensure inappropriate conflicts of interest at the rating agencies do not influence their ratings affirms assigned to different securities. The office of the whistleblower has also created by doddfrank and is intended to encourage whistleblwhistlebl owers to come forward with specific and timely information about wrongdoing and in return for tips that lead to significant punishments of over 1 million, whistleblowers are entitled to a monetary report which incentivizes industry employees to blow the whistle before fraud gets too large and too devastating. Already this office has received thousands of tips from potential whistleblowers, which is striking. In 2015 the office received over 4000 tips for whistleblowers. The division of economic risk and analysis is the data im of the sec. It supports all the divisions bike that can cost benefit of potential rulemaking, developing models that help focus the commissions resources on the riskiest part says and even calculating an appropriate punishment, rather the appropriate punishment for bad actors. Finally, the office of compliance inspection and examination is one of the largest and most underfunded. Offices in the sec has over 1000 employees who examine registered Investment Advisors, brokerdealers, exchanges, mutual funds and mutual advisors. This sounds like a lot of examiners, but it pales in comparison to the number of Market Participants that the office has to examine. The office oversees more than 26,000 market participate in including over 12,000 Investment Advisors, 11 dozen mutual funds, 4000 brokerdealers commit 800 Municipal Advisors and 18 securities exchanges. As a result, the commission is able to examine 10 of all Investment Advisors each year, which is a terrifying thought. This means roughly 40 of Investment Advisors have never been examined. What makes this even scarier than 2015 a whopping 77 of the commissions examination identified deficiencies and Investment Advisors and 11 resulting in referrals for enforcement action. If those numbers are constant, that means of the 5000 Investment Advisors that have never been examined, a little under 4000 have deficiencies that have not been uncovered. This is a scary thought for investors who rely on david reisers to manage savings. I look forward to hearing from all of our Witnesses Today and i look forward to your testimony. Thank you for your work and i yield back the balance of my time. Thank you very much. The gentleman from virginia, vice chairman of the committee. Thank you, mr. Chairman. Welcome to our panel. I represent virginias Fifth District from the northern piedmont to virginia to the North Carolina border. The travel across my district are regularly hear from constituents concerned about jobs and the economy and the seemingly new normal in mr. To state here in washington that makes it more difficult for a main street Small Businesses to Access Capital to be successful. While the committee has been laser focused on legislation that would help our Small Businesses thrive and easy access to capital and told upon bipartisan success of the jobs act to make what important function is so telling Congress Duty to conduct vigorous oversight of executive branch agencies. To assess constituents are concerned, i too am concerned the sec often deviate from his threepart mission to protect investors to maintain fair orderly and efficient markets and facilitate Capital Formation. Viewing such as this allows congress to exercise its responsibility of proper oversight about how the fcc allocates resources and filling its mission. I look forward to the testimony of witnesses and i thank the chairman for holding this hearing any of that balance of my time. Pajama manuals back and now i welcome the members of the panel before us. Your false statement will be made part of the record. You are recognized for five minutes. You know the drill lasted. In front of you you will be recognized for five minutes. In front of you are the light which are green, yellow and red. The elevation of come on when you have one minute remaining so we ask you at that time to begin to wrap up in the red light is when youre time you have expired. With that, mr. Butler, you are recognized for five minutes. Good morning, chairman kerry, Ranking Member maloney and members of the subcommittee. Thank you for inviting me to testify in the securities and Exchange Commission regarding activities at the office of Credit Ratings. Jaffa supports threepart mission to protect investors and 10 fair, orderly market to facilitate Capital Formation. It does this by overseeing Credit Rating agencies as Nationally Recognized Statistical Rating Organizations are and are asked are zero. The credit reform act established a framework and give congress authority to implement a myriad of rules in the oversight. The doddfrank act expanded authority and demanded creation of an office of Credit Ratings dedicated to the oversight of nrsro. , nrsro monitoring and the third policy and rulemaking. Examinations of nrsro for compliance with laws and Commission Rules accounts for the majority of the opposite to these. The doddfrank act requires the office to conduct an examination of each nrsro annually and the scope of the inner examination covers eight review areas. Are there the office and is a risk based approach to exam planning identifying different risks for different nrsro. This improves the efficiency and effectiveness of the examinations as resources are prioritized resources are prioritize and focus on areas of higher risk. In addition to the examination, the office conducts sweeps and examinations to address issues and concerns and follow up on tips, complaints and selfreported. The marc wyatt have been responsive to recommendations. Many have implemented fundamental changes such as increasing surveillance act committees, policies and procedures for conflict of interest, adding staff to compliance and oversight functions in investing multiyear Technology Initiatives in enhancing disclosure, transparency and governance. The inner examination currently underway include a comprehensive review of compliance with the significant new rules and amendments adopted by the commission in august 2014 all of which became affect by june june 2015. As required by the act, the office prepares and examination reports summarizing the essential fighting for the examinations. December 2015 the Office Published the fifth annual examination report. The monitoring and constituent groups within the office gather, analyze and assess data and identify trends across the industry. Monitoring conducts periodic meetings with nrsro inmates on an ad hoc proactive basis as necessary to respond to development and importantly, monitoring meets a certain board for direct earth including a separate discussion with the independent directors. Constituent monitoring holds meetings with investors, issuers, rangers and trade organizations. The group conducts Ad Hoc Research by industry or credit market conditions. Information obtained by the Group Provides useful input for examinations and guiding direction of any rulemaking. The policy within the opposite is possible for developing recommendations, conducting studies, drafting reports and including those required by the subtwo act doddfrank act. Addressing among other things reporting on internal controls, conflicts of interest including an absolute prohibition requiring separation of sales and Marketing Activities from analytics, procedures to protect the integrity and transparency of methodologies and requirement for the board of directors to approve a methodology before its used in standards of training, experience and competence to credit analyst are the rules provide an annual certification by the ceo as to the effectiveness of internal controls and additional certifications to accompany Credit Ratings as for me no part of the rating was influenced by any other business that dignity. While the commission has Broad Authority to examine all books and records as a nrsro and impose sanctions for violating statutory provisions in the commissions world, the commission is not permitted to regulate the substance of Credit Ratings are procedures and methodologies used to determine Credit Ratings. Thank you again for having me here today and i would be pleased to answer any questions. Thank you, mr. Butler. Mr. Flannery, welcome to the panel. You are recognized for five minutes. I didnt date on the outset, but make sure you always put your button on. Tanks. Thank you good good morning, chairman gary, Ranking Member maloney members of the subcommittee. Thats ushered to be here to talk about responsibilities and recent activities of the division of risk analysis which we call era. Admission to datadriven highquality Economic Analysis. For the past several years weve grown from approximately 96 employees in 2013th through project at work for some 175 by the end of the fiscal year. By that time we anticipate employing 88 phd is mostly in economics or finance, but also some accountants and we have to phd physicist. Phd is boldly supported by 22 associates by the end of the year. Staff also includes the bursting of other technical experts and professional staff. The divisions rapid growth and expertise has allowed us to expand support across an everincreasing range of activities. Our mrsa wellknown function is to provide economic analyses in support of Commission Rulemaking another priority initiatives. Economists examine the need for regulatory action, analyze effects of the rules and evaluate Public Comments on those rules. We provide theoretical datadriven analyses of potential new policies and changes to existing policies. Work closely with staff elsewhere in the commission with the early stages of policy development through the finalization of the rule. In the course of assisting other divisions and offices, staff prepares white papers or staff studies and other documents that present novel economic analyses of specific policy issues a rulemaking. For example, last year staff produce white papers relating to liquidity requirements for openended mutual funds operations. The funds usage voluntary clearing activity of the same country and single name in another paper in the market for registered security offerings. In addition to research performed with rules, staff regularly publish research in journals and are posted on the webpage to provide the public with access to her Current Research on Financial Markets. The Analytical Capabilities extend that to rulemaking but also Risk Assessment. We provide modeling expertise to other divisions and offices in support of their surveillance and investigative programs. Our Data Analysis helps sec staff with prioritization and scoping including what to look for during the examination. One example is her broker dealer Risk Assessment tool which was developed in close collaboration with oc staff. This tool analyzes how a behavior compares to its peers to identify behavior that might indicate risks in brokerdealer operations, finance thing, workforce or structure. We also have a new corporate issue of Risk Assessment developed in conjunction with the division of enforcement that allows enforcement attorneys to examine 200 custom metrics to help them assess corporate issue of risk by identifying initial recording irregularities that may indicate fraud. We also work with the division of imports meant. During fiscal year 2015, deara staff provided assistance and 120 enforcement matters. Does that help identify security law vio