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▶ 0:37:21Good morning. The uh subcommittee on capital markets will come to order. Without objection, the chair is authorized to declare a recess of the committee at any time. Today's hearing is entitled safeguarding Main Street, Combating Fraud and Exploitation in Our Capital Markets. Without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion for the record.
▶ 0:37:48I now recognize myself for four minutes for an opening statement. Once again, good morning and I want to start by thanking our witnesses for being here today to discuss this very important topic. This hearing builds on the committee's work to protect American investors from financial fraud.
▶ 0:38:07In 2024, investment scams accounted for nearly half of the 12 billion dollar Americans lost to financial exploitation, representing a 24% increase from the previous year. Securities fraud can take many forms.
▶ 0:38:23From pumpand dump schemes where scammers use false information to pump up SC stock prices only to dump their shares and swindle everyday investors to account takeovers where hackers hijack brokerage accounts and send assets to untraceable locations. These scams ranked as the FBI's fourth most frequently reported cyber crime. Yet they cause the highest total financial loss to investors.
▶ 0:38:52Criminals are targeting our most vulnerable citizens, including seniors and adults with impairments. Today, as we know, April 15th is tax day. And now that the working families tax cut ensures that seniors have no tax on social security, we need to make sure that they are protected from these scams. The FBI reported that people over the age of 60 lost more money to fraud than any other demographic.
▶ 0:39:22But these statistics are more than just numbers. They represent real pain for families and businesses across our country. Retirement funds erased, emergency savings gone, and hard-earned investments wiped away in an instant. These threats not only hurt American citizens, but they undermine the integrity of our capital markets as a whole.
▶ 0:39:45When bad actors exploit the markets for their own gain, Main Street loses trust and their investments uh and their uh lose trust that their investments are safe. Unfortunately, new technologies have allowed scammers to proliferate fraud on a larger scale than ever before. Much of which is coordinated across social media platforms and encrypted messaging apps.
▶ 0:40:11Criminals now can now create websites that look identical to your broker dealers, siphoning away money that you thought was secure. Artificial intelligence opens new frontiers for scams through faked voices and altered videos with scammers masquerading as loved ones are trusted financial adviserss.
▶ 0:40:34On top of that, we now have overseas scam centers operating at an industrial scale far from the reach of US law enforcement. We've seen Chinese companies listed on our stock exchanges take part in ramp and dump schemes where scammers ramp up stocks price through bots and fake accounts to then dump their stock at a peak and profit at the expense of the American investor.
▶ 0:41:00This is a global problem that calls for a multi-level intergovernmental approach. That's why I'm glad regulators and industry stakeholders have made this a top priority, including the SEC under Chairman Atkins, which has targeted malicious foreign actors through the commission's crossborder task force. Fighting fraud and exploitation is not a partisan issue.
▶ 0:41:28It's about protecting Main Street investors who put their trust in our capital markets. Our witnesses today bring deep experience in financial regulation, law enforcement, market mechani um mechanics and fraud prevention. I look forward to today's sus uh uh discussion. And I now recognize the ranking member of the subcommittee, Mr. Sherman, for four minutes for his opening statement.
▶ 0:41:58Thank you for holding this hearing. I think your opening statement demonstrates why this administration should not have cut the SEC uh enforcement staff by 20%. Two or three things we need to focus on. First are the uh uh thin influencers on social media. Social media platforms need to do a better job of policing uh the ads uh that uh power their companies.
▶ 0:42:26Uh a Reuters has reported that Meta allegedly projects that nearly 10% of its revenue is derived from advertisements for scams and banned goods and that includes uh these folks who have a financial interest in the free financial advice they're providing.
▶ 0:42:43Uh second, uh Congress has recently uh targeted fraudsters uh by saying broker dealers can under extraordinary circumstances provide a 15-day uh uh hold when the uh uh reasonably suspect the investor is being targeted for fraud.
▶ 0:43:00When an investor wants to send a older male investor wants to send a million dollars to a beautiful young woman he's met only online, we have to say uh she doesn't love you and she's not a she. Um uh we need to stop the idea of tokenized securities because that kills the consolidated audit trail.
▶ 0:43:29you'll be able to see that this or that account number uh seems to be making brilliant trades but you'll never know who owns that account and without that you end up with in a a perfect methodology for insider trading. Uh Chinese companies often sell not the stock of their company to Americans but variable interest entities based in the Cayman Islands.
▶ 0:43:54such uh uh pretend to be common stock in the underlying well-known Chinese company. These uh variable interest entities viees do not belong in Insta index funds and I'm not sure they belong in any for portfolio. Uh we need to deal with naked shorting and I hope FINRA will take a uh a stronger view on that.
▶ 0:44:21Uh and finally uh when it comes to fraud in our capital markets, one need not look any further than Trumpcoin pumped to $75.35 dumped down to today's price of 280.
▶ 0:44:39Um but of particular concern with the fact that it is the president's uh coin is that anyone seeking uh influence with the president could have bought the coins from his family for $75.35 and then not worried about whether the coins are now worth $2.80 because after all the purpose wasn't to make a profit. the purpose was to influence a president.
▶ 0:45:09Uh so we have a lot of fraud to police here and uh I look forward to uh to these hearings and believe it or not we'll end my statement with 40 seconds left to go. I yield
▶ 0:45:23Very good start. Gentleman yields back. I now recognize the chairman of the full committee, Mr. Hill, for one minute for an opening statement.
▶ 0:45:31Uh thank you, Chair Wagner and Ranking Member Sherman. appreciate you having this important hearing. It's something that we're dealing with across all aspects of financial services. As emerging technologies and new digital platforms are rapidly reshaping the financial markets, making it increasingly difficult to detect and prevent fraud, posing significant risk to investors and I would say bank customers and and others across the country.
▶ 0:45:56Between 2020 and 2024, so since the pandemic, securities and investment fraud offenses have increased 25%. In 2024 alone, investors lost almost $6 billion to scams. Those are just the cases that we know about through reporting. Financial scams are becoming increasingly sophisticated, ranging from market manipulation like pump and dump to digital age Ponzi schemes and account takeovers. Unfortunately, seniors and retail investors are bearing the heaviest burden.
▶ 0:46:26The bad actors behind these schemes come in many forms. And the purpose of this hearing is to make sure Congress knows what tools that we can have and we can suggest be used by our regulators to keep Americans safe and encourage the best behavior by our private sector. I yield back to the
▶ 0:46:42Gentlemen, time's expired. Uh today we welcome the testimony of Mr. Brian Smith, the senior vice president of complex investigations and intelligence at FINRA. Miss Jillian Gunther, the national director of the Bank Safe Initiative at Mr.
▶ 0:47:04Matthew Michelle, the founder and managing partner of Investor Link Capital Markets, and Professor Andrew Verstein, a professor of law and vice dean forc curricular and academic affairs at the UCLA School of Law. We thank each of you for taking the time to be here. Each of you will be recognized for five minutes to give an oral presentation of your testimony. Without objection, your written statements will be made part of the record. Mr.
▶ 0:47:33Smith, you are now recognized for five minutes for your remarks.
▶ 0:47:38Chairman Wagner, Ranking Member Sherman, and members of the committee, thank you for the opportunity to appear today to discuss fraud within capital markets and FINRA's role in combating the problem. My comments are informed by my current role overseeing complex investigations at FINRA, but also my over 20 years at the FBI, where I led operations in cyber, financial, and organized crime. When it comes to fraud, the bottom line is we have a challenge in front of us.
▶ 0:48:06FBI Internet Crime Complaint Center statistics released just this month reveal over 20 billion in attempted fraud in 2025 with cyber enabled fraud accounting for 85% of that total. With fraud rising sharply in recent years, it will take a collective approach to combat this evolving threat. And to form this work, there's a few things to understand. First, the threat is international with actors and infrastructure widely dispersed.
▶ 0:48:35They are exploiting the interconnectess of the global economy and the ability to access targets 247 from across the globe. They are specialized and adept as early adapters of technology used to achieve their criminal ends. They're adaptable, evolving to bypass individual and company defenses and evade actions taken by law enforcement. And finally, they operate as a business.
▶ 0:49:01No longer is this a small, close-knit group of individuals in a boiler room. These are organized criminal enterprises focused on profits and losses where they leverage specific skill sets often outsourced to achieve their criminal goals through which we call the key services.
▶ 0:49:21These include malware and some sort of delivery system by which to get it onto the network, infrastructure needed to launch and facilitate the attacks, communications to engage with victims and with fellow criminals, and finally the most important, the financial piece. They need to discreetly transfer money from the victim's wallets to their own.
▶ 0:49:43As a self-regulatory organization focused on investor protection and market integrity, FINRA is uniquely situated to help tackle the fraud challenge given the expert and the rely upon the expertise of our member firms to inform our work while also equipping them with tools to address fraud. While FINRA plays a key role in protecting capital markets, our jurisdiction is limited. To be effective, we must operate within a broader network of regulators, law enforcement authorities, and private entities.
▶ 0:50:14One example of this collaboration is our recently launched financial intelligence fusion center, a secure information platform designed to collect, filter, and disseminate intelligence based in part on member firms sharing real-time threat activity and is already paying dividends. On its first day, three firms shared intelligence about a fraudulent scheme and within three hours, Finner had sent an alert notifying all firms about the issue.
▶ 0:50:43The information flow in this instance nearly kept pace with the crime and we know of no firms who are Collaboration is also important because FINRA has limit limited jurisdiction and where we cannot act, we work with parties who can.
▶ 0:50:59Recent examples include referrals that led to hundreds of millions in seizures by the DOJ and FBI resulting in money returned back to investors, the sharing of threat activity which led to takedowns of millions of social media accounts being used to facilitate fraud, and supporting a technology company which took down technical infrastructure being used to infiltrate customer accounts. One area of critical concern is the connection between cyber and financial crime.
▶ 0:51:26To assist firms and investors in this area, FINRA proactively shares our own intelligence and mitigation techniques with firms, including through our cyber workshops and tabletop exercises. These practical hands-on experiences and exercises bolster firm resiliency against the criminal experts. And while fraud impacts every generation, criminals frequently target seniors for their relative wealth. to help.
▶ 0:51:51Finner focuses on investor education, offers a helpline for seniors and their families, trains firms, and has rules that help firms identify a trusted contact for clients and permit temporary account holds where fraud is suspected.
▶ 0:52:07Investors and broker dealers are confronting a complex and evolving threat landscape with fraud expanding amid technological changes and The solution requires an ecosystem of groups working in concert to address the fraud and FINRA plays a vital role. We also know that as these threats evolve, so must we. It is why we remain committed to innovative solutions like the FIFC and continuous improvement of our regulatory programs.
▶ 0:52:35As the committee continues to focus on this issue, we welcome the opportunity to serve as a resource for you.
▶ 0:52:43Thank you. Uh Mr. Smith. Miss Gunther, you are now recognized for five minutes for your remarks.
▶ 0:52:49Good morning. My name is Jelene Gunther and I'm the national director of ARP's Bank Safe Initiative. Um, I'm really honored to speak with you today on behalf of more than 100 million Americans aged 50 and older. Um, I've spent my career working to prevent fraud. uh first with victims of crime in Missouri and now running programs nationally at AARP.
▶ 0:53:15Congress's work addressing fraud has opened up real opportunities for prevention, including protections that allow financial institutions to act when they train staff. And we are seeing the results. ARP's Banks Safe program builds on those goals of those laws. We've partnered with more than 1,500 financial institutions, including investment firms, to stop the exploitation before the money leaves the account.
▶ 0:53:45The free training we created with the industry, paired with policy adoption, has helped prevent more than estimated $560 million from ever being stolen from But this fight is personal. It's in my DNA. My grandfather worked in the financial and was a victim.
▶ 0:54:12In his 90s, someone was stealing cash from his wallet. My uncle, also in the industry, recognized the red flags. And in a move only someone in the industry would think of, he placed a die pack in my grandfather's wallet. And our family literally caught the thief red-handed. Most families aren't that lucky. They don't have bankers.
▶ 0:54:36They don't have die That's why I built a program with my father at the very institution my grandfather had worked at so other families don't have to rely on luck to protect the people they love. Because fraud is not an accident. It is a crime and it's happening at a devastating scale. The FTC estimates that older adults lose between 7 billion and 62 billion each year.
▶ 0:55:06In a blink of an eye, someone can lose their entire retirement savings. The financial industry can be the last line of defense, but only if we give them the authority to act. Right now, we're leaving critical tools on the Criminals coordinate across telecom, tech, social media and across the financial system. We do not. We operate in silos.
▶ 0:55:37That gap is where fraud succeeds. We need to operate as a connected ecosystem. That means enabling real time targeted information sharing across institutions and sectors. Fraud doesn't start at the point of transaction. It starts upstream with a text message, social media post, or an online ad. By the time someone is liquidating their assets, the victim has already been manipulated.
▶ 0:56:07If we do want to stop losses, we have to intervene earlier. When we act earlier and act together, we can stop fraud before it turns into a devastating financial loss. We need a coordinated federal response and under your leadership, you can make that happen.
▶ 0:56:26That means empowering the entire financial industry to delay suspicious transactions without the fear of Enabling real-time information sharing about fraud across the entire financial system, not just in securities. and requiring social media, tech, and telecom platforms to be part of the solution, not hiding places for Other countries are doing this.
▶ 0:56:52In Australia, scam losses dropped 43% in one quarter after launching a coordinated national response. We can do the same. This isn't just about stopping theft. is about protecting trust, preventing negative impacts to business and government, and preserving independence of Americans later in life. Thank you, and I look forward to your questions.
▶ 0:57:18All right. Thank you, Miss Gunther. Um, Mr. Michelle, you are now recognized for five minutes for your remarks.
▶ 0:57:26Chairman Wagner, Ranking Member Sherman, and distinguished members of the subcommittee, thank you for the opportunity to testify today. My name is Matt Michelle. I'm the founder and managing partner of Investor Link Capital Markets. I've spent the best better part of my career in the equity capital markets supporting the distribution of over 1500 IPOs and follow-on offerings representing more than $400 billion in capital raised.
▶ 0:57:50This experience has given me an unobstructed view of how capital is formed and distributed in our public markets and how easily those processes can be exploited. In recent years, I've turned my attention to the mechanics of that exploitation. Specifically, ramp and dump schemes that target retail investors through social media promotion, online investment clubs, and coordinated volume spikes, and lowerpric securities.
▶ 0:58:15As the only witness today focused on market structure and manipulation, I'll keep my remarks squarely in that lane. These schemes are not abstract. They take real money from real people. savings meant for a child's education, a retirement, or a first home. But the damage extends well beyond the individual investor. Our small cap markets run on retail participation.
▶ 0:58:38It allows early stage companies to fund growth and mature into durable businesses, and that growth is a key driver of wealth creation. It's a virtuous cycle, and manipulation breaks it. When fraud erodess confidence in the small cap space, capital dries up, the cost of capital rises, and legitimate issuers are shut out of our markets. The result is not just investor harm. It is American innovation stifled in our own markets. Here's the core insight from the front lines.
▶ 0:59:08We no longer have a detection problem. We have a response problem. Over the past 18 months, private sector tools have demonstrated the ability to generate high confidence early warning signals on these patterns, often with meaningful lead time before significant investor harm occurs. These capabilities have been developed, validated, and shared with regulators and market participants for review and discussion.
▶ 0:59:34The technology exists, but the critical gap is what we what happens after a warning signal is identified. Our current regulatory and compliance framework is fundamentally reactive, optimized to investigate fraud after the fact. It is not structured to enable proactive intervention, nor is it flexible enough to allow firms to safely adapt new tools and methodologies at the pace of evolving fraud.
▶ 0:59:59As a result, firms seek that seek to act on forward-looking intelligence face uncertainty about when and how they can do so without exposure to second-guessing. There are however encouraging developments. FINRA's financial intelligence fusion center provides a nocost channel for sharing threat intelligence on ramp and dump and investment club schemes.
▶ 1:00:21The speed bumps proposed in HR 2478 and proposed rule offer firms a targeted mechanism, a brief delay when there is a reasonable suspicion of fraud paired with notification safeguards. These are constructive steps toward earlier response times without imposing heavy new mandates.
▶ 1:00:41A modest amount of regulatory clarity could unlock meaningful progress, particularly around when firms can rely on validated signals to act proactively and with confidence. Principles-based guidance, flexibility across business models, and approaches that combine shared intelligence with firm level capabilities would go a long way toward closing the gap between detection and response.
▶ 1:01:06I look forward to sharing the advancements the private sector has made in early detection and to discussing the gap between what is now possible and what firms can practically adopt under our current framework. Thank you, and I look forward to answering your questions.
▶ 1:01:20Uh, thank you, Mr. Michelle. Professor Versteing, you are now recognized for five minutes for your remarks.
▶ 1:01:29Committee Chair Wagner and Ranking Member Sherman and the rest of the distinguished members of this subcommittee. Thank you for the opportunity to testify. I'm Andrew Burstein, vice dean and professor of law at UCLA School of Law. I'm here in my personal capacity and not as a spokesman for UCLA. Today's hearing concerns fraud in our financial markets and I want to address what I consider to be after my research the most pressing concern about fraud at the current moment which is insider trading by individuals in the government.
▶ 1:01:59Um I consider this problem to be significant but I'm not the first one to talk about it. The most famous book on insider trading uh was written by Henry Manny, a George Mason professor in the 1960s and Manny took the surprising view that insider trading by corporate executives is good and uh he he defended it for 200 and some pages. That's not my view.
▶ 1:02:23But uh I pointed out because even Manny who wanted to decriminalize the whole space drew the line at government insider trading. Even he thought there are really big problems where that logic unravels. Government officials have access to information that they can uh that they can profit from. They can use information as payoff devices and using the powers of the state. They can create the very outcomes they're betting on.
▶ 1:02:48Uh and when they do things that aren't appropriate, the accountability mechanisms are reduced because there's no shareholders to vote them out. There's just the voters to vote them out. and uh and it undermines trust in both the corporate sector and the governmental sector. So Manny drew the line there and if that guy drew the line there, we we should take that line very seriously. And that's why I'm very concerned about um recent media reports of susp suspicious trades in commodity and stock markets. I'm troubled by patterns. I'll just mention a few.
▶ 1:03:18I'm sure you've been made aware of the same kinds of stories I have, but on March 23rd, roughly $580 million of crude oil futures were sold in a two-minute window, approximately 15 minutes before the president announced a halt to strikes on Iranian energy infrastructure. And so those were very profitable commodity trades.
▶ 1:03:38Another example, in January, a previously inactive polyarket account uh wagered that Venezuelan President Maduro might be uh deposed or abducted or put out of office. And of course, he was uh through a covert military operation. And uh that allowed that trader, who we don't know, to make $34,000 turn into $400,000.
▶ 1:04:01Now, I can't tell you that either of these events or other events constitute illegal insider trading, nor can I say for sure that they are linked back to the administration. Uh to know any of that, we would need to do investigations into uh beneficial owners, establish access to non-public information, trace accounts. Uh it's possible that either of these traders were just lucky or that their access to information was lawful or it was unlawful from another source besides the administration.
▶ 1:04:29Nevertheless, these are trades that bear the hallmarks of illegal insider trading and ideally we would be investigating them and whether anyone is investigating is something this committee should care a great deal about. This leads to my second point. Suspicious trading does far more damage to the public when the public has no confidence that anyone is investigating. Weak enforcement doesn't merely fail to catch wrongdoers.
▶ 1:04:55It invites suspicion that there's trouble everywhere and it raises trading costs and the cost of capital more broadly and therefore I'm concerned about the erosion of the SEC's capacities in recent days. As you know, its enforcement results recently announced uh celebrated the closure of a thousand matters without action. Whistleblower awards are down 90%, staffing down some 20%. Meanwhile, the consolidated audit trail, a comprehensive surveillance tool only recently deployed, is being scaled back.
▶ 1:05:25I take that last point very seriously. My research as a scholar involves using publicly available data from the SEC to try to track insider trading. For example, co-authors and I found about a hundred billion dollars a year of overvalued stock being sold. We were able to determine uh corporate insiders were doing that on the basis of public information. But when we tried to look at whether this went back to the time of Enron and WorldCom, we we couldn't check because the SEC had shredded the relevant information, making our research hit a brick wall.
▶ 1:05:54When information is deleted or lost, it means that scholars and enforcement officials to say nothing of journalists and shareholders can't learn the truth and can't protect themselves and they may suspect the worst. So, I'm concerned about reduced transparency and reduced capacity at the SEC and I'm concerned about how that will affect all of the issues before the committee today. I I think that elder fraud is a really big problem. Chinese rampid dump schemes are a problem.
▶ 1:06:21Influencer fraud is a big problem and insider trading, corporate and governmental, is a big problem and markets benefit when there's a robust regulator working to enforce on these issues. The United States has the most trusted financial markets in the world appropriately so and uh it's important that we defend it so that we can keep them uh
▶ 1:06:40time's expired.
▶ 1:06:40I thank you for your questions.
▶ 1:06:43Thank you very much, professor. Uh we'll now turn to member questions and I recognize myself for five minutes for The Federal Trade Commission's uh reports that Missurrians, my home state, lost over $76 million to investment scams last year, a staggering $24 million increase from 2024.
▶ 1:07:07During that same time, the FBI saw a 300% increase in victim complaints about ramp and dump stock fraud. Investment scams are not new, but this astonishing rise is deeply concerning. Miss Gunther, uh, what do you attribute this increase
▶ 1:07:29Thank you, Representative, for the question. Um, it is driven by criminals are really scaling faster across platforms using artificial intelligence. Combine that with the low friction for moving money quickly and then limited ability to intervene at the point of the Um what we're seeing also is the greatest wealth transfer um that we've seen in history which is 900 trillion dollars being passed from one generation to the other.
▶ 1:07:57And to really get ahead of this we've got to look upstream where you've got the first point of contact between the criminal and the consumer is really key to preventing this. And how do you see uh criminals using AI, artificial intelligence to make scams more believable?
▶ 1:08:13Yeah, so a lot of they're doing a lot of different things. Gone are the days where you can pinpoint a scam because someone's making a spelling error or grammar mistake. They they're using AI to write realistic messages. They're cloning people's voices. They're doing deep fake videos of people they that they may know. So it makes those scams feel a lot more credible. um but also reduces the chance that a consumer is really going to question that interaction.
▶ 1:08:38And that's why it's so important, critical to really look at upstream with the first point of interaction between the criminal and the potential victim.
▶ 1:08:48Uh Miss Gunther, AARP has been a vital partner in endorsing my bill, the Financial Exploitation Prevention Act. This legislation grants investment companies the power to pause redemptions for seniors and individuals with impairments when exploitation is suspected.
▶ 1:09:09We know that once a fraudulent wire transfer or security redemption is processed, that money is often gone forever, leaving seniors with no path for recovery. Under current law, mutual funds are often forced to process these redemptions within a very strict window, even if they see what I'll call real red flags.
▶ 1:09:31How does my bill provide that critical breathing room for financial institutions to actually stop the theft before the damage is
▶ 1:09:41Thank you so much for the question. um really stopping money before it gets lost um before it leaves that account is really critical to preventing um exploitation. So we had Virginia Tech do a random control study within the financial industry.
▶ 1:09:57about 200 financial institutions participated and the number one thing in terms of the most effective intervention was when they had the ability to pause a suspicious transaction that gives both the mutual fund um institutions the ability to ask so suspicious ask questions is this suspicious take time to investigate it but it also gives that time to the potential victim to slow it down to get out of that fight
▶ 1:10:27versus flight that they're experiencing. So, it is extremely critical um for mutual funds to have this power.
▶ 1:10:36The Financial Exploitation Prevention Act that uh I've authored and sponsored in other uh previous congresses is absolutely vital that we make this into law, especially as we see this uh these these terrible increases. Given that so many investment scams originate overseas, it was encouraging to see the SEC announce the creation of its crossber task force to strengthen the commission's efforts to identify and combat international fraud. Mr.
▶ 1:11:04Smith, can you explain how law enforcement and regulators work together to target bad actors overseas and what barriers exist to doing so?
▶ 1:11:14Thank you for that question. Um, as I said in my opening statement, this is an international problem and we've got actors and services that are leveraged across the globe to um, defraud American investors. And within that ecosystem, if you think about all those key components to it, there's no one entity that has oversight or authority amongst all those.
▶ 1:11:36And that's why the more that private sector entities, government, regulators can get together to bridge the gaps between those will help investors in
▶ 1:11:47and really just more cooperation is needed between countries to hold foreign scammers um that are targeting Americans accountable. My uh time has expired and I will didn't get to all my questions at all, but I am now pleased to recognize the ranking member of the subcommittee, Mr. Sherman, for five minutes for his
▶ 1:12:12The SEC launches effective Somebody sees they're in the crosshairs. They buy $100 million worth of Trump they uh magically the investigation Trump is $und00 million richer. What could be better than that? Um now we've talked a bit about u a 15-day delay in someone getting their money.
▶ 1:12:41I would point out that uh when I first met my wife, many people recognized that she was completely out of my league. figured she must think I was wealthy. It worked out. So, not every um uh I I am concerned about the loss of freedom, but uh 15 days is not too long to wait.
▶ 1:13:06Uh in extraordinary circumstances, I am concerned about whether this would apply to political An organization could say, "Oh, you want to spend money on your campaign to defraud voters, or you're fraudulent in thinking you have a chance of winning, we're going to hold your money." So, we've got to make sure given the politicalization and how uh extreme things are getting in our world of politics, that no political organization is prevented from spending its money by a financial institution.
▶ 1:13:40uh there's this idea of having de uh by trading tokenization of our uh our Uh, of course, exchanges uh provide transparency with regarding to fees, conflicts of interest, access, user segmentation, and most importantly, if on an exchange you buy uh $und00 million worth of a particular stock five minutes before the announcement, there's a decent chance they'll
▶ 1:14:10figure out who you are. Um, if we were to tokenize our securities, wouldn't this be a uh an an open door to those with insider
▶ 1:14:23Well, it's it's a technological question what the current tokens do and it's a political question how we feel about that. I think it's really important to have systems of surveillance and accountability. It's important that when you place a stock trade on Charles Schwab, if it looks suspicious, you're going to get a call from your broker. FINRA might call you or they might call the SEC. That's appropriate. It's appropriate that there's a system of accountability that can trace things and figure things out. Uh we don't necessarily have to use the same fiber optic cables and the same exchanges we've been using for a long time.
▶ 1:14:52We could go to new technologies, but it's really important that along the way we not lose the visibility that we uh that we need in order to keep people. The whole purpose of tokenization is to eliminate the know your customer rule. Um, if you take the crypto out of crypto, take the hidden out of [clears throat] crypto, it's not crypto
▶ 1:15:13I do think
▶ 1:15:14you're you're saying that uh if we have we need to um somehow have a know your customer for every account. I think we we don't want to have a slight of hand where we lose visibility just because we change technologies. It seems like that could happen with a lot of the changes that are happening.
▶ 1:15:32I want to focus. Okay. Uh uh staggeringly Meta allegedly has projected 10% of its revenue is derived from advertisements for scammed banned goods. International documents uh suggest they are serving as many as 15 billion high-risisk scam ads every day.
▶ 1:15:52Um, Miss Gunther, at what point do we need to recognize that the business models of social media, uh, which prioritize ad revenues and traffic over fraud prevention, are becoming a real threat to financial stability?
▶ 1:16:10Hello, Miss
▶ 1:16:12I'm sorry. Can you repeat the question?
▶ 1:16:16Um, does did any other witness hear the question and want to answer? Okay, Miss Gunther. Uh, uh, at what point do we recognize that the business models of social media and telecom companies which pri prioritize ad revenue and traffic over fraud prevention are becoming a threat to financial stability.
▶ 1:16:35Yeah. So, one of the things that we need to do is we need to put guard rails there for social media companies. It's really important to have to fight things upstream. That's one of the most important things. I think we spent a lot of time focusing on the downstream. We need to be a lot more proactive in preventing this so that the criminals are never contacting that potential
▶ 1:16:59Thank you. My time is basically expired.
▶ 1:17:02Gentleman yields back. The chair recognizes the chairman of the full committee, Mr. Hill of Arkansas, for five minutes for questioning.
▶ 1:17:10Thank you, Madam Chair. This is important. You're having this hearing and and the committee on both sides of the aisle are really concerned about this. We have Dan Muer who chairs our oversight committee also working on this in various ways and then Andy Bar who chairs our financial institution subcommittee. That committee also is looking this in the banking space. I want to thank uh Sherman and Wagner for moving this topic into the fintech broker dealer space.
▶ 1:17:36equally important, overwhelming numbers when you look at the the fraud numbers that have been announced. So, let me start with you, Mr. Smith. You know, I was a a registered person in broker dealer business for three decades and also in community banking in my career before Congress.
▶ 1:17:53And every Wednesday we met uh on the phone our operations people and we talked about the bad people lurking around Little Rock uh trying to pass a bad check or make a bad loan or have a fraudulent financial statement probably wasn't condoned by law but it was condoned by protecting our customers. So, these kind of things that we've been talking about today are important.
▶ 1:18:16And FINRA, I think, has proposed rule 2166, this so-called speed bump rule that's been referenced here that would put a temporary 5-day business day hold on suspicious transactions. Can you tell me how you think that would benefit? And is that uh legal under the SEC's uh statutory authority for FINRA to have that kind of a hold?
▶ 1:18:40Yeah. So you hit on two things there. One is the sharing of intelligence. So we don't think we called it that back then, but that's really important so people understand what we're dealing with, which is why we've implemented some things that we've done at FINRA. Regarding the speed bump rule, I'll also go back to when I was an agent working investigations and Ponzi schemes and investment frauds.
▶ 1:19:00And I will tell you anecdotally that in every single one of those instances that if the victim had asked one more question, if they had inquired about what they were going to do with the money, when they'd be getting the money back, if they said, "I don't understand what's happening here," those Ponzi schemes, those investment frauds would have fallen apart because the bad actor didn't have the answer to those questions.
▶ 1:19:24And so when you look at the proposed rule here in this instance, it's a bit of putting that speed bump in place so people can make rational decisions based off the facts and based off real information. And if that means that you have an institution coming in asking that question and getting those hard answers, that's really important. I think it really can help victims and
▶ 1:19:46I think it's important. But I do think a lot of customers, I mean, I've seen this firsthand and I've seen it as a member of Congress, too. insist they're right and they don't need you telling them to get in their business and tell them how to spend their money. And I think that puts broker dealers and bankers in an awkward position, but I think still that rule may, as you say, slow down that uh rationality. Um, how are you coordinating with state regulators?
▶ 1:20:10I know our state attorney general Tim Griffin, my my predecessor here in the house, reported that 73% of all Arkansas adults have been a victim of a cyber related fraud, mostly coming to them probably through the telecommunication system. But how are you coordinating with the state regulator, securities regulators and the state's attorneys
▶ 1:20:32Yeah, as I have talked about in the opening statement, we have a limited role in our jurisdiction over broker dealers. Um, but we recognize that the problems that our firms and registered reps and the investors in those are also the ones being seen by other entities, which is why we have ongoing engagement with the SEC and with state regulators. Uh, it's critically important that we understand what they're seeing on the ground because what may be happening in Arkansas may not be seen in Texas.
▶ 1:21:02And so if we can get intelligence from what's happening there and share it with other individuals as well as then with our member firms that builds up some resiliency within the ecosystem and firms whether they're you know uh in Arkansas, Texas or Washington can identify this and learn from each other.
▶ 1:21:23Thank you very much. appreciate ARP's deep engagement on this topic with your members and your work and I was intrigued to read about your banks safe curriculum. Can you tell us how you keep it up to date with this just exploding you know AIdriven attempt at changing the rules of the game every day?
▶ 1:21:45Yeah, thank you representative for that question. Um we rely on our 1500 financial institutions that we work with um who we put together advisory groups. So we're always updating our training and our policies and resources that allows us to act really quickly to address emerging um threats like AIdriven uh scams. It's one of the reasons why we've been able to save consumers over $560 million on behalf of consumers.
▶ 1:22:15Um, and one example that we've just recently put into our training is a video testimonial where a criminal cloned one's voice. You
▶ 1:22:23just would expand on that for the for the record for us and I know our members benefit from your work and I yield back.
▶ 1:22:29gentleman yields back. The chair recognizes the ranking member of the full committee, Mrs. Waters, for of California for five minutes for
▶ 1:22:38Thank you so very much, Chair Wagner. Uh this um subject matter today is entitled safeguarding main street combating uh rather fraud and exploitation of our capital markets. Well, you missed a mark.
▶ 1:22:58Uh this is too narrowly designed uh to deal with the issues uh that the subject matter that you have initiated here um does. It does not do that. Um, the Trump family is openly using the office of the presidency to enrich themselves and their billionaire friends. Using meme coins and other ventures, they have extracted billions of dollars from the American people.
▶ 1:23:26At the same time, Trump is raising gas, grocery, and uh housing costs. So part of the scam against the American people has been to weaken the Securities and Exchange Commission, that is the SEC, so that it is no longer able to enforce securities laws and protect investors.
▶ 1:23:47The SEC has done nothing to address several welldocumented crypto frauds and suspicious trades, often timed to Trump's press conferences and tweets. If we want to address fraud and scams, we need to look no further than 1600 Pennsylvania. Bernstein, you're an expert in insider trading and market manipulation.
▶ 1:24:15Your testimony highlights how insider trading market manipulation and a weakened SEC can break trust in Americ's financial markets. On March 23rd, roughly 580 million in crude oil futures were sold in two-minute window just 15 minutes before the president announced a halt uh to strikes on Iranian energy infrastructure.
▶ 1:24:43On April 7, 16 investors placed approximately 950 million in bets that oil prices would fall just hours before President Trump announced that the United States and Iran had entered into an apparent ceasefire agreement.
▶ 1:25:02There are yet several other examples of individuals placing abnormal amounts of bets on specific government actions or announcements using the prediction market platform. Please explain how the future of the SEC to enforce the securities laws and otherwise [clears throat] detect and prevent fraud and can hurt our markets. What should the SEC be doing to enhance confidence in the financial markets?
▶ 1:25:31Well, this goes to the basic building blocks of a successful financial market. Financial markets don't operate uh spontaneously without any support. They operate if people feel like they're going to get a basically fair shake. In a human sense, ordinary investors don't take their money out from under their mattress if they think they're playing on an unfair unfair field.
▶ 1:25:50But even sophisticated investors, big cybernetic uh trading firms, highfrequency trading firms, everybody at the top of the food chain too cares about whether they're trading against somebody who is getting secrets from the White House or from some government official. People don't play the same way if they [clears throat] think that there's no accountability. Trading costs rise, liquidity falls, capital withdraws from markets, and a culture of trust erodess. And it's not hypothetical.
▶ 1:26:15There are places in the world where the markets fail because an unraveling occurs as people think, well, I'm going to be cheated, so I might as well cheat or I shouldn't participate if I'm not willing to cheat. Cultures of trust built on foundations of law are really hard to build and they're they're worth maintaining.
▶ 1:26:30And I I am I am concerned that if we make it common knowledge that the SEC is underresourced and unable to do its part, then people will begin to take for granted that more is permissible and less is safe than we So I uh mentioned the prediction markets. Do you think that the president knows and understanding uh and his understanding are participating uh in some way in the prediction market?
▶ 1:26:59Well, I I wish I knew. I mean, I'm I'm a reader of the newspaper like everybody else. The newspaper stories look pretty suspicious. There are suggestions that the president knows friends of his are doing well in these markets and has bragged about it. But I I would say the the important point is not that I can point the finger and say this was illegal. This was inappropriate. It's that people are led to wonder these look like suspicious trades. They are consistent with leaks from the White House. They might not be weeks leaks from the White House.
▶ 1:27:24We would we would feel better as ordinary Americans reading the paper if we knew a robust CFTC, a robust SEC, a robust congressional subcommittee. We're all examining these things and then reporting back, hey, everything is squeaky clean. Let me show you. Or hey, we found some problems, but everything else is fine. Thank you very much. I yield back.
▶ 1:27:44Gentle lady yields back. And the chair now recognizes the chair of our task force on monetary policy, Mr. Lucas of Oklahoma, for five minutes of
▶ 1:27:52Thank you, Chair Wagner. And I'd like to enter into the record this letter from the Securities Industries Financial Markets Association on the work their members are doing on uh combat to combat
▶ 1:28:03It's ordered.
▶ 1:28:04Thank you, Madam Chair. Uh, and thank you to witnesses today for being here and sharing your expertise on a threat that unfortunately continues to persist across the entire country. Uh, Mr. Michelle, you mentioned in your testimony the prolific use of new and emerging technologies to facilitate fraud and scams. What are the trends you are noticing in the past several years as it relates to the abuse of innovation and technology?
▶ 1:28:27Thank you for the question. uh representative. One of the key things that that sort of underpins the entire mess is the proliferation of these these issuers that list on national exchanges. Once that the issuer lists, it's it's available everywhere. And the liquidity that underpins that um is is is global.
▶ 1:28:46Um, furthermore, the the use of what I will call industrial AI uh across encrypted platforms is is what makes the speed uh very hard to to to get our arms around. So, the the access to liquidity, you know, the national exchanges that which which they trade on and the ability to promote these things 24 hours a day has, you know, decimated the retail investor over the past couple
▶ 1:29:14And continuing with you, Mr. Smith, how could Congress streamline efforts across multiple agencies and jurisdictions so that we can have a coordinated approach to combating fraud?
▶ 1:29:26This is a complicated ecosystem that the adversary is leveraging and so it takes multiple entities to have a successful resolution to it. uh efforts that encourage information sharing, efforts that encourage bringing the right skill to the fight is going to be helpful for investors and for the capital markets.
▶ 1:29:48How have agencies specialized in certain aspects of fraud response and how can others benefit from increased collaboration and the lessons learned? Yeah. So, one of the things that you know with our unique position as an SRO, we have a subset of this ecosystem that we can see and we can leverage our expertise in that fight, but there's also other entities who have skill sets and authorities. So, law enforcement has the ability to seize assets when we might identified that there's proceeds from criminal activity.
▶ 1:30:19And the more that we can connect that and enable entities to take action, we've seen some positive results over this last year in the small cap fraud space where the DOJ and the FBI seized over 214 million based off a referral from a firm to us about activity and then we reached out to the to the government.
▶ 1:30:39Miss Gunther, we all know the old line about an ounce of prevention is worth a pound of cure, particularly when it comes to financial fraud. What are the most effective mitigation techniques in preventing these crimes before they affect investors?
▶ 1:30:54Yeah, one of the most important things um people can do um at the financial institution level is really to put that speed bump in which gives people that gives the investor the time to think about hey something's going wrong. Um it also gives the institution the ability to also look at hey we need to do an investigation.
▶ 1:31:17It's that speed bump that we found in a random control study is the most helpful for both the victim but also for um the institution as well.
▶ 1:31:27Thank you and thank you Madam Chair. I yield back the balance of my time.
▶ 1:31:32Gentleman yields back and the chair recognizes a gentleman from Georgia Mr. Scott for five minutes of questioning.
▶ 1:31:38Thank you very much. Uh, chair lady, I'm, uh, want to address my questions to Mr. Verman. Is it I got to get Am I pronouncing that right, Mr. First?
▶ 1:32:02Yes, perfectly. Thank you. You know, I think I would like for you to tell us what can we do here in Congress addressing this issue. Now, I'm trying to do something along with my partner, Lauder Mill.
▶ 1:32:30He and I are working on a bill that will address some of these uh and our bill really is a legislation. It's called the SEC data protection act alongside of course I mentioned with Congressman Lauder Mill.
▶ 1:32:58we can do something and we need to know as we move this what do we need to do? Um and um what we're going to be looking at is the vulnerabilities, the bad actors, and how do they
▶ 1:33:29access this information? But when you're doing a bill and we want to respond to it, I want to hear from you. the exores. What would you like to see in our bill? [clears throat] What must be in there? Number one, to address the concerns that you raise.
▶ 1:33:53Thank you. Um, well, I would say there are three things that I would propose that a member of Congress looking at this area would do. The first is a suite of things to largely reverse the defanging of the SEC. The SEC in the past may not have been perfect, but I think we've overcorrected defanging Uh what I mean is the reducing of staff, the reducing of the uh consolidated audit trail. I I would say these trends are are not good trends for the SEC.
▶ 1:34:19It would be better if the SEC had enforcement capacity, funding, and surveillance capacity. So that would be the first thing would be to reestablish those parts of the SEC's.
▶ 1:34:28How bad is that situation? The lack of the talent in there to do this. our bad actors are outnumbering our people that can stop them.
▶ 1:34:41Well, I think the situation, as you've heard from the members, uh the witnesses down here, is pretty bad. There's an army of fraudsters out there. And so, uh having staff sufficient to deal with elder fra fraud shouldn't mean you can't deal with ramp and dump. It shouldn't mean you can't deal with insider trading. So, having enough sta staff to actually do the work is vital. The second thing would be uh to make sure that we're taking uh common sense prophylactic approaches to government officials trading. I don't think any government official should have a polyarket account.
▶ 1:35:10I can't see any justification for their family members having one. So, we should have stronger rules to prevent not just insider trading but the appearance of insider trading or the possibility of it.
▶ 1:35:21And then third, yes, Congressman, did you want to
▶ 1:35:24Yeah. Now uh routers uh had an excellent article in here and I want to share it with you. Uh it was they highlighted a decline in the SEC's enforcement measures by How do you excuse my coffee? It won't. It probably agreed with me.
▶ 1:35:54Uh, but how do you address that? I mean, are you aware of that? I
▶ 1:36:01I'm terribly sorry to say the noise from the hallway was so loud I couldn't really hear the question. I I'm sorry to say that. I heard
▶ 1:36:07routers article had highlighted a decline in the SEC's enforcement measures of 20% in the latest fiscal year.
▶ 1:36:22And on top of that, a staffing reduction also of Well, they have 18%.
▶ 1:36:31Yes. I I Congressman, I'm sorry to make you repeat that. Yes, it's true. These staffing cuts are real. They're huge. They're significant. They're worrying to me. It's true that any organization needs to change things from time to time. It's okay for the chairman to reshuffle, but I think it looks like an overcorrection to
▶ 1:36:45Would that be something that you would recommend that Congressman Lomeck and I kind of
▶ 1:36:53I would recommend that you fund and staff the SEC robustly and then we can debate which the relative priorities are, but I think it needs to be funed.
▶ 1:37:00Times expire.
▶ 1:37:00Good. Thank you.
▶ 1:37:02Gentlemen yields back. The chair recognizes the chair of our subcommittee on national security, Mr. Davidson of Ohio, for five minutes of questioning.
▶ 1:37:09Uh, thank you, Chairwoman, and to our witnesses. Thank you for your work in preparation for this and your testimony and your participation today in today's hearing. Uh, very timely hearing. when you look at safeguarding uh American citizens against scams, I think uh there's no real partisanship here and [clears throat] I've been really encouraged by the work I've had with uh ranking member Batty on confronting that with respect to traditional scams.
▶ 1:37:35When you look at some of the scams in the capital markets, uh there's been a long time concern that, you know, you've seen a rise of what have historically been known as pump and dump scams where you you see something hyped and then then there's a rug pull later.
▶ 1:37:54some of that is allegedly taken place in in crypto. And uh for the longest time really since 17 when the initial coin offering market was going on I started working with colleagues to produce uh market clarity back then we called it the token taxonomy act and the SEC has recently put out their own taxonomy and I think that's the goal is to make a clear bright line test for when something is a security and when something's not a security and
▶ 1:38:24so um you know Mr. Smith, maybe we start with you. Um, how important is it that we get those clear rules of the road uh versus regulation by enforcement?
▶ 1:38:36So, in my experience both in law enforcement and here in Fenra, having clarity as to what what things are, what the rules are in road in the road are are important and taxomy is really important to that. Um it's why we focused on you heard me talk about the key services about how the adversary is using cyber enabled tactics to enable pump and dump schemes to enable BEC to enable romance fraud and ransomware.
▶ 1:39:05That taxomy that we've used is now pervasive and so everyone understands that those are key and areas to address those frauds. um and is a great example of if we all are focused, we understand what the problem is, then we understand where we fit within it and how we then can address it.
▶ 1:39:21Yeah, thank you. And I think one of the things that you see increasingly is like crossborder and you I think the the other things you look at particularly with crypto people are saying well does this token really represent uh real voting rights or real control of a company but on the other hand every Chinese company that's traded in America is effectively a proxy. You don't really control that. What kind of safeguards do we have for crossber fraud in those
▶ 1:39:48Anyone want to weigh in on that issue?
▶ 1:39:51Yeah, certainly we have a responsibility in those areas where it's a member firm or registered rep that's involved in those transactions and we will take action when we see an issue where we've seen instances where we do not have authority. That's when we partner with other entities like law enforcement and hand it off to them. And so the broker dealer does have some liability, some risk for their recommendations and their due diligence in that sense. Correct. To the SEC,
▶ 1:40:17they can. Yes.
▶ 1:40:18So, Mr. Michelle, could you kind of come in on that when you look at kind of the the the role and importance of broker dealers and maybe maybe also, you know, part of the appeal in the market is to get more democratic access to capital. I mean, with only, you know, less than 5% of the world's population, we've got more than 50% of the world's invested capital.
▶ 1:40:38Our markets are incredible, but a lot of the the reach uh we've wanted to see is to get, you know, ordinary Americans to have easier access to this.
▶ 1:40:49Um, so how what's the role of the broker dealer there and why why isn't it just a plain accredited investor and it's my money, I can do what I want?
▶ 1:40:58Thank you for the thank you for the question. uh the broker dealers are the front lines and I think FINRA you know I I formed a broker dealer I ran one so we we consistently hear that messaging. Um one of the key things that we can do is give them an environment from which that they can evolve into the various threats uh that that face them and ultimately the retail investing community.
▶ 1:41:19So by having a a framework that allows the their regulatory posture to kind of meet the threat, you know, as it as it evolves is critical for for preserving exactly what you're asking.
▶ 1:41:30Yeah. Okay. Well, thank you for that. And as the tools evolve, I think probably the biggest threat and we'll surely cover that some is artificial intelligence. I was encouraged to see Secretary Bessant uh and Chairman Powell and others talking about uh Claude as a tool or you know ongoing roles of these kinds of tools. So you know Congress really hasn't kept up with privacy laws let alone artificial intelligence. Um what should we be doing or is an executive order enough?
▶ 1:42:03Mr. Michelle, you got a thought on that? Uh again, you know, that's not really my lane of expertise in terms of the policy aspect of this. Um but but the the phenomenon that you're describing and ramped up is certainly observable and firms need to be able to evolve to protect themselves from that.
▶ 1:42:17Thank you. I yield.
▶ 1:42:20Gentleman yields back. The chair recognizes the ranking member of our task force on monetary policy, Mr. Vargas of California, for five minutes of questioning.
▶ 1:42:29Thank you very much, Madame Chair, and I appreciate this um hearing. I think it's been very good and I appreciate all the witnesses here today. Um, Professor Verse and I did hear the conversation between yourself and Mr. Scott, I mean the cuts at the SEC having sufficient staff.
▶ 1:42:47Um could you go into that a little bit further because I do think that one of the things that makes um the the uh the capital markets so robust in our country is the SEC's disclosure and the worldass staff that we have there policing this. So could you go into a little bit more depth about that because I think that that is a problem.
▶ 1:43:08Well, I think um we should distinguish between ordinary politics of different administrations liking different things out of an office from the nuts andbolts issue of of what talent is there and how and how capable you want the capacity uh of this group to be. The SEC is a 100-year-old organization with uh with blue ribbon history and at its best it is commendable in every way and at its worst makes some mistakes. I think we've seen an overcorrection though. I think there are really talented people that we've seen.
▶ 1:43:36Overcorrection in the sense of what?
▶ 1:43:39Well, I think you know u we uh we had we've had Republican administrations with robust uh enforcement and Democratic administrations with robust enforcement. There's there are ways to have robust talented well-resourced SECs uh without having uh without having without axing all the talented people.
▶ 1:43:57All right. Thank you. Um, you know, two of the things that really jumped out at me today was this that was said that we no longer have a detection problem. Mr. Shell, you said this, now we have a response problem. Then I heard from a few of you that really if we could have a brief delay or a pause that that would be really significant. Uh, Mr. Smith, first of all, thank you for your service in the FBI. We appreciate that and thank you for your work at FINRA. Could you comment about that?
▶ 1:44:28Yes. Um, as I talked about, you know, just as a case agent working these things, very often you would see instances where people just went along, they were embarrassed, they didn't want to ask a question, they didn't understand something. And so, putting a speed bump in uh to get the information that the investor needs can be helpful because at the end of the day, what we want is rational decisions that are made that are not based off a sense of
▶ 1:44:53what does that mean? I mean, what does that mean in a practical sense? So, you know, you're trying to pull money out of your mutual fund or whatever. What does that mean? If someone's trying to screw you overseas, what does that mean? What does it mean to put a pause in there to ask the question?
▶ 1:45:06Yeah. So, in that instance, it would be that the firm is asking the potential victim, how did you get in contact with these individuals? What is it that you're investing in in this? Oh, it this is now a micro cap stock that you're investing in and you've always been in blue chips. And so, it it pauses them.
▶ 1:45:24And then if there's a trusted contact in the family who can help them through this because the other thing that we've seen with particularly elderly victims is that they have coached them through how to respond and having that trusted contact from a family to help is really beneficial to prevent.
▶ 1:45:41Miss Luther, you said that there should something similar but there should be no liability. In other words, pause it, stop it a little bit, but no liability to the firm. Could could you talk a little bit more about what that means? Yeah. So, I can talk a little bit about um is a liability to actually report um the financial exploitation. And I wanted to key on something that was said earlier about um older investors.
▶ 1:46:08Um one of the things that's so important about a trusted contact is we know from um somebody needs to be told from three different people that something's a miss before they realize and they get out of that fight or flight. And that's why the speed bump is really critical. but also that trusted contact who can be one of those three people um so they can realize that something's a miss.
▶ 1:46:29Okay, I have about a minute left. So I what I do want to say this of course I agree with the insider trading. I don't think that politicians anybody should be able to trade individual stocks or on future anything like that we should have in our investments in in mutual funds and that's that we shouldn't be able to pick winners and losers because again we do get a lot of information. I hope we pass that law. I've always been in favor of that.
▶ 1:46:52I have my money in mutual so I don't pick individual stocks but we did talk about technology today and I think that that is an important thing AI and other things how really can that help here to make sure that we don't have more fraud because it also we heard from Mr. Smith it also hurts the other way technology is also improving the way the thieves rip our money off.
▶ 1:47:14That's right. I this is part of why I'm concerned about the decline of the consolidated audit trail. I think one of the great things that AI lets you do is use the information you have to be more effective. And that's why you want to have good information. So having the SEC have at its fingertips all the personally identified information, all the brokerages, all the transaction history, uh I I understand uh that it's expensive, but it's valuable.
▶ 1:47:34My time's up and I thank the chair. Thank you. Yield back.
▶ 1:47:38Thank you. The gentleman yields back and the chair recognizes the chair of our subcommittee on digital asset assets, Mr. Style of Wisconsin, for five minutes of questioning. Thank you very much uh Chair Wagner. Appreciate you holding today's hearing. Uh before I begin my questions, I just want to return uh to a previous colleagueu's uh assertion about tokenized securities. In particular, uh there was an assertion made that would make it easier uh for insider traders to trade on non-public uh information if the security was tokenized.
▶ 1:48:08Um that's not true. Uh and so to be clear, placing a security on a blockchain uh does not confer any special treatment. it does not alter its regulatory status. Uh it remains a security and must comply with all applicable laws and regulations. I think that's really important to put that back in the record based on the the previous assertion that was made. Um now I want to dive in uh to my comments. Uh US capital markets are the envy of the world.
▶ 1:48:36Uh there's really no second uh when it comes to US capital markets. They provide uh families uh with lowcost ways to save to build wealth. uh and they give companies the opportunity to raise capital and create jobs here in the United States of America. Uh increasingly uh a lot of our capital markets under threats from fraudsters and criminals and a majority of Americans are encountering scams. Uh the dollar amounts are staggering in particular uh with our seniors.
▶ 1:49:02Uh the FTC reported it was 16 billion but if we assume that there's under reporting which I think we all agree with, it's significantly higher than that. It's not a partisan issue. It's something we need to be working with uh broadly to prevent this from occurring. I want to start with you uh Mr. Smith if I can based on your work with FINRA.
▶ 1:49:20Uh in your opening testimony, you were talking about the landscape dominated by international actors uh who are using technology to exploit jurisdictional gaps across countries um and regulators and evade uh prosecution. uh want to dive into that um and identify some of the jurisdictional or regulatory gaps that international criminals uh are leveraging uh to the detriment of US capital markets and US consumers. Uh can you comment on some of those jurisdictional and regulatory gaps?
▶ 1:49:52Certainly, you know, when you're dealing with an adversary that's located across the globe, the rules that they operate operate under vary. Uh I saw this when I was at the FBI of the law enforcement capabilities you have that you also see that within the regula regulatory environment um you know and so we recognize we have to recognize that a problem in another jurisdiction could very quickly become a problem with our jur within our jurisdiction and so that's where the concept of engagement and partnerships and collaboration is key.
▶ 1:50:23We've seen some success in this of bridging some of those gaps where we've done information sharing with our partners in Japan on the small cap fraud space and let them know what we're seeing. They then let us know about new activity with new account fraud and account takeovers involving cyber means which encouraged it which informed our
▶ 1:50:43You can replicate that.
▶ 1:50:45Great. Are there specific jurisdictions uh that are causing you concern
▶ 1:50:50you know within the small cap fraud space? Uh that's particularly concerning with us with the issuers that are coming out of China. Um and that's why we've pushed a significant amount of intelligence out about that to firms to let people know what we're seeing in that space.
▶ 1:51:05So a lot of that is about jurisdictions policing their own jurisdiction. Is that what you're saying in particular as it relates to China?
▶ 1:51:12At times yes it can be. Let let me jump to you Miss Gunther if I can. Um criminals are are perpetuating fraud scams becoming increasingly sophisticated. Um AI can work in two ways, right? They can work to to to create scams. They can also work to prevent scams. Um can you talk about this balance about how we can leverage AI to prevent the scams that are occurring but also the risks uh that AI is bringing?
▶ 1:51:39Yeah, absolutely. Um and thank you for the question. AI is both a tool for good and for evil. Um, one of the ways we really encourage financial institutions to use artificial intelligence, machine learning, they can detect patterns faster um to to stop this crime. Um, they can but then it's also important to with artificial intelligence is then you have got to train someone for that human touch point to tell that victim.
▶ 1:52:08The other thing is that artificial intelligence can also be used um by criminals to um scale scams. They're using bots um and other things, but it's really critical for financial institutions to use artificial intelligence to recognize those
▶ 1:52:27I I appreciate all of our witnesses for being here today. Mr. Chair, I yield
▶ 1:52:32Gentleman yields back and I thank him for correcting the record on tokenization. The chair now recognizes the gentleman from Illinois, Mr. Casten, for five minutes of questions.
▶ 1:52:42Thank you, Madam Chair. Um, just briefly, I want to correct something Mr. Styles said. It is true that a tokenized security is a security. The SEC has been very clear for that. It is also true that section 202 and section 203 of the Clarity Act says that if you raise a security less than $200 million, you are exempted from those provisions. So this Congress, this committee has opened a back door if that clarity act becomes law.
▶ 1:53:07And I think it's important for us to understand that if we care about fraud, let's not pretend that laws we passed just because I haven't passed the Senate yet is does not represent the intentions of this committee. Not yours truly, but this committee. Um I did a this I'm happy to have this hearing. I'm grateful to Chair Wagner for doing this and uh support your efforts and the legislation you've introduced noticed for this hearing. It's extremely timely.
▶ 1:53:30On Monday, I did a coincidentally, I didn't know this hearing was coming, did a a roundt back in the district specifically on senior fraud with seniors. And the statistics we're hearing, they just come out in all of these stories.
▶ 1:53:44You know, sat with a credit union who's sitting there saying, "We don't actually have the ability legally to prevent a senior from withdrawing their money to put it through, but we try to put practice in." And you know, they told this story about going through two levels of escalation within their bank and finally persuading a senior that the Hollywood celebrity who she claimed was her husband and needed money for a home repair was highly unlikely to be her husband um because they'd never met and was therefore highly
▶ 1:54:14unlikely to also need need money for a home repair. And they were ultimately able to stop that. But they had no legal authority to prevent that. This was just about persuasion. And I'm, you know, grateful for the work you're doing with Bank Safe and others, but the the consistent sort of nexus of all this fraud was was some combination of social media and crypto ATMs. Um, and and I guess I guess I just want to start leaving the tools aside for a minute and I don't know Mr.
▶ 1:54:43Smith or Mr. Hursten if either of you want to comment on this. Can you can you clarify if if I convince you to transfer money to me for fraudulent purposes, what is the statute that I have violated and what is the penalty if I'm found guilty and who is the enforcement agency that chases that
▶ 1:55:06Uh I'm happy to take a stab at this. Uh I have written about crypto in the securities context and I have I think the only article on crypto and insider
▶ 1:55:15Okay. And and I'm and I'm not even really asking about crypto. I'm just saying like I I show up and I tell you I tell you a lie that gets you to give me
▶ 1:55:21Uh section 10B of the Exchange Act says that if there's a purchase or sale of a security and there's a material misrepresentation or omission in connection with that, that's a that's a fraud and a violation of the 34 act. So that's a civil and can be a criminal violation just like any anytime your brick broker misleads you about whether you're sending money to the right person or something that that can be a
▶ 1:55:41Okay. And and what if I what if I tell you that I'm Matt Damon and you or I are married and I need $10,000 for home repair and you know as long as it's a material misrepresentation might be
▶ 1:55:50Yeah. Okay. So now does that same statute apply if if I am abetting that crime. So I I I connect I connect the mark to the perp and I get a fee in exchange for that service. Am I also I don't know does that go into RICO? Like am I also liable in that case? Yeah. Well, there's RICO, there's aiding and abetting, and there's scheme liability. All three are kind of uh theories that float around the underlying violation.
▶ 1:56:18Okay. And that's a felony.
▶ 1:56:19It can be. Yes. Yeah. Absolutely.
▶ 1:56:21Jail time, financial,
▶ 1:56:22you can get Yes, you can get jail time if those things are established.
▶ 1:56:25Okay. So, given what Mr. Sherman and others have raised that the Reuters reporting that Meta something like 10% of their income has come from connecting from these you know these fraudulent scams. Do those could those tools be applied to Meta if a prosecutor wanted to apply them or is that exempted because of you know all of our other rules around social media?
▶ 1:56:51Uh I'm not sure whether it's the social media exemption. My guess would be that that would be uh uh that that their awareness of these issues would be something we'd really look at. We'd look at whether there's cyenter. If Congress wanted that to be illegal, what Meta is up to, Congress could clearly clarify that it's illegal. Right now, I think it would be an unclear thing whether a court would determine that that is a violation of our law.
▶ 1:57:13But so, but so the implication is that Meta could do something potentially and not violate the law and not be subject to penalties that I as a I as an individual could not do. I think the uh we're in country that's new. We haven't had enterprises like Meta for many years. And so
▶ 1:57:28I'm I'm close on time. Same question for crypto ATMs because some of these Bitcoin sales in the ATMs, they're getting 15 50% markups. So they're profiting from monetizing these transactions. Could the law apply to
▶ 1:57:41I think it it ought to be the case that that law applies there. I think the law under the Commodity Exchange Act, which is not subject to this committee's jurisdiction, is probably weaker than for securities.
▶ 1:57:50Okay. Well, we're out of time, but let's welcome any thoughts on how we get those regulated in the same way that other criminals are regulated, reward the same behavior, incentivize the same behavior, and if it's a money transfer business, regulate it like that.
▶ 1:58:03Gentlemen, times expected.
▶ 1:58:04Yield back. Thank you.
▶ 1:58:05Gentleman yields back and the chair recognizes the chair of the House Homeland Security Committee, Mr. Gabberino of New York, for five minutes of questioning.
▶ 1:58:14Thank you, Madame Chair, for having this hearing and thank you to witness re here. Before I ask questions, I have a a request to enter a a letter from OTC Markets um in support of legislation being considered here today uh into the
▶ 1:58:27Not objection.
▶ 1:58:28Thank you. the US securities regulatory framework relies in part on self-regulatory organizations like FINRA which operate under the oversight of the SEC. Unlike purely external regulators, FINRA has continuous access to firm level data, conducts routine examinations, and enforces compliance standards within broker dealers.
▶ 1:58:51That proximity allows for earlier detection of suspicious activity, faster intervention, and more practical insight into how fraud develops in real world marketing settings. It also positions FINRA as a first line of defense in identifying emerging risks before they escalate. Mr. Smith, how does the SRO model and FINRA's proximity to firms help identify and reduce fraud?
▶ 1:59:13We are in a very unique position because of the authorities that we have and the insight that we have into the markets that others don't. And that is an advantage that can be leveraged by investors. It's an advantage that can be leveraged by firms for better protection. and then the knowledge and expertise that we can provide to then government entities and regulators of really stitching together expertise and authorities that individually none of us have.
▶ 1:59:40And that's why the model has worked so well for us and it we've seen results from that of late of where we've informed entities about threats that are coming their way and we've been able to reduce and prevent fraud because of what we see that otherwise they would never have seen before.
▶ 1:59:56Thank you very much. And um just Following up on something um my colleague Mr. Style was talking about recent research from FINRA Investor Education Foundation highlights that younger investors are increasingly turning to social media platforms for financial information investment ideas. This shift has exposed them to a growing number of fraud schemes including influencerdriven promotions, crypto scams and coordinated pump and dump activity.
▶ 2:00:20Uh the speed and reach of online content can amplify misinformation and make it more difficult for traditional safeguards to keep pace. These trends raise concerns about investor protection in a rapidly evolving digital environment. Mr. Smith, what is FINRA doing to address this It's natural that the younger generation is getting their investment advice from social media because that's where they are and so that's where the bad guys go.
▶ 2:00:45Uh so one we try and engage in a lot of investor education inform uh individuals particularly younger individuals about the risks and about where they're getting information so they can make informed decisions. In addition we're partnering with technology companies uh and in certain instances we've identified fraud that's been occurring on some of their platforms and alerted them to some of the indicators of that which then they've been able to put a stop to the activity on that platform.
▶ 2:01:12Thank you. Uh, Miss Michelle, how have you seen market participants adapt to this trend?
▶ 2:01:18Uh, we're certainly seeing the the advent of, you know, these the proliferation of online platforms driving liquidity through these names that's ultimately been hyped on these these institutional platforms. So to the extent that the plat the trading platforms can either disclose to their client that this is ongoing or if the platforms themselves the meadows of the world can you step in with a with a a heavier hand to to reduce this you know we can kind of make a a better um more more of a dent in the problem.
▶ 2:01:48Have they been stepping in? Have you seen them step in with a heavier hand?
▶ 2:01:50Who who who specifically
▶ 2:01:52meta and the
▶ 2:01:53We've not No.
▶ 2:01:54All right. Thank you. Um I'm going to switch gears here for my last minute. Um, cyber enabled threats including account takeovers, ransomware and AIdriven impersonation are increasingly targeting financial institutions, market infrastructure and retail investors often by sophisticated and sometimes foreignbased actors who exploit gaps in coordination information.
▶ 2:02:14CISA cyber security information security agency uh infra infrastructure um security agency plays a c central role in safeguarding critical infrastructure by facilitating threat intelligence sharing. Mr. Smith, how important is the reauthorization uh of CISA 2015? We have it's reauthorized through September 30th but expires after that. How important is the reauthorization to strengthening cyber security coordination and protecting US capital markets from increasingly sophisticated cyber attacks?
▶ 2:02:46Information sharing in the cyber arena is critical to success. Um, we recognize with an ecosystem they're attacking a bunch of different targets. And if we can identify IP addresses, we can identify the VPN services that they're using and share that amongst entities, it gives us a chance to actually identify who they are and then the ability to then respond to that.
▶ 2:03:07Would we be less safe if this if this
▶ 2:03:11I can't speak to the individual uh legislation on that. I can speak to the just general information sharing is critically important.
▶ 2:03:18Thank you very much. I yield back. gentleman yields back. The chair recognizes the ranking member of our subcommittee on digital assets, Mr. Lynch of Massachusetts, for five minutes of questioning.
▶ 2:03:29Thank you, Madam Chair. I do believe this this hearing is very timely. Uh combating fraud, that's the name of this committee. And uh you know if we are really interested in combating fraud I I would suggest where we could look. I even have the address 1600 Pennsylvania Avenue.600 Pennsylvania. That is fraud central.
▶ 2:03:59Frauds a rust. They should have that sign on the on the front of the White House as they're doing it over. And it is no secret President Trump has gutted enforcement at the SEC which is responsible for protecting investors and and uh consumers. He's reduced the staff by 20%. His SEC chair uh Mr. Atkins has has dropped some of the most notorious cases. He's dropped a case against Justin's son.
▶ 2:04:29Justin's son, just so you remember, he he made about $400 million for the Trump family. Uh he also dropped cases against the Wlvoss TR tw twins who who donated 21 million to a a uh pack that supported Donald Trump and he would have dropped the case against Changpang Xiao the CEO of Binance but he was a little late because Changpang Xiao had already plead guilty to money laundering.
▶ 2:04:59He had plead guilty. So what did Trump do? Trump pardoned him. Jangpang Jiao invested $2 billion dollar in Trump's World Liberty Financial benefiting the family tens of billions of dollars which excuse me tens of millions of dollars which uh which they as the SEC has retreated as we have as the Trump administration has cut enforcement dropped the number of
▶ 2:05:29cases uh they no longer I think they're they're uh Their enforcement actions are down by 30% uh compared to the previous administration. As the SEC SEC retreats from securing America's capital markets, the Trump administration is fostering a culture of corruption. Plain and simple.
▶ 2:05:48Since the beginning of the second Trump administration, a disturbing pattern has also evolved in the prediction markets uh where large trades are placed just hours or minutes leading up to a major announcement by President Trump, which posts massive profits after news of the announcement has broken.
▶ 2:06:09The serendipitous timing and scale of those trades would suggest that those placing them had prior knowledge of the White House's intentions and they raise serious concerns that the president and his associates knowing that those announcements are almost always result in large market swings are purposely manipulating the markets and sharing confidential government information which puts our sons and daughters in uniform at risk.
▶ 2:06:38in order to enrich themselves, their family, and their friends. There's a I have a select number of uh cases. I know the the uh ranking member of the full committee has already mentioned some of these, but the Trump tariff announcements uh netted people uh hundreds of millions of dollars in terms of uh Trump announcing uh relaxation of some of those tariffs.
▶ 2:07:03uh one particular investor uh had placed $51 million in short positions in hours leading up uh to the post regarding uh regarding the attacks on Iran and uh made approximately $170 million in profit after the story broke after the announcement broke suspiciously. This is amazing.
▶ 2:07:25This one individual of the last 16 trades that individuals made, all 16 posted large gains like the aforementioned instances this individuals and others who shorted oil prices would appear to have prior knowledge of President Trump's announcements. Why aren't we looking at that? Why is not the SEC uh in the middle of an investigation on that? Uh Mr. Burstein, you know, there's plenty of evidence out there.
▶ 2:07:51What what should our uh cops on the beat be doing right now in light of all this evidence?
▶ 2:07:57Congressman Lynch, the optics are terrible. The stories that you're citing are are in the media. People read them and they wonder why nothing is happening. This is not a court of law. We don't know which incidents were illegal and which were not, which were dumb luck and which were not. But it's really important that the American people and that traders
▶ 2:08:1416 case 16 times in a row though that that's more than luck. It's very suspicious and we we really wish the SEC, the CFTC were looking at these cases and reporting back. Yes, we found raw renewing in this case. We didn't find it in that case. Uh clearing people's names is also part of the job, but you've got to have robust enforcement in order to do that
▶ 2:08:33Thank you, Madam Chair. I yield back.
▶ 2:08:35Gentleman yields back. And the chair uh reminds members to avoid engaging in personalities or imputing motives of another member or the president of the United States. The chair now recognizes a gentleman from New York, Mr. Lawler, for five minutes of questioning.
▶ 2:08:51Thank you, Madam Chair, and thank you all for being here today. Uh, ramp and dump stock schemes frequently involve small Chinese companies listing on US exchanges. U, most use the variable interest entity structure, which gives shareholders interest in an offshore shell company rather than actual equity and rights. Mr. Mr. Michelle, does the VI business structure contribute to the rise in ramp and dump schemes?
▶ 2:09:20Uh, thank you for the question. Uh, it is certainly tangential to the problem. Um, but it we we've seen domestic issuers experience this phenomenon as well. So, while most have that structure, um, there are other kind of complicating factors within these small issuers uh, that make them susceptible to to the phenomenon that we witness.
▶ 2:09:42Miss Gunther, the committee continues to hear from families and older Americans who are being targeted by increasingly sophisticated scams, AI generated impersonations, remote access fraud, and high pressure social engineering tactics to drain savings in minutes. Financial institutions are trying to keep pace, but the threat environment is evolving faster than the tools designed to stop it.
▶ 2:10:08Your work with AARP's Bank Safe Initiative gives you a unique vantage point uh on what actually works on the ground and where the gaps still are. And so with that in mind, I'd like to explore the landscape of solutions and challenges. What do you see as the biggest barrier or challenge facing the financial industry in the fight against
▶ 2:10:32Thanks so much for the question. One of the largest challenges we see and you mentioned this is that there is so much attention. We're really getting in being reactive and not proactive. We're waiting until it gets to the point of transaction. And what we really need to do is look at where is it that criminals what methods are they using to contact consumers.
▶ 2:10:53So telecom, social media, um those types of things and having faster takedown so criminals aren't even a even have the ability to contact that consumer. That way we're staffing off so that we're not having to be so reactive at the financial institution level or even in the in the um law enforcement.
▶ 2:11:16With that in mind, I mean, the reality is scammers are exploiting new technologies, new platforms, new uh psychological tactics at a scale we haven't seen before. Uh and while banks are investing heavily in fraud prevention, the criminals are adapting just as quickly uh to get around it. And that's why understanding where true innovation is happening and what's actually making a measurable difference is important to this committee.
▶ 2:11:42So, what innovations are showing the most promise in detecting and stopping these scams?
▶ 2:11:48Yeah, thanks for the question. Um, so we did a study with Virginia Tech to really look at what are the interventions that actually stop the money from leaving the account. About 200 financial institutions participated. The number one thing is when you are able to hold that transaction, that gives time to the institution to conduct an investigation. It also gives time to that consumer to slow down, get out of that fight versus fear response.
▶ 2:12:16Um, and then the other thing that's really helpful is a trusted contact, right? We know that people have to hear it from three different people before they realize something's a miss. So having a trusted contact at that financial institution that they can call and say, "Hey, something is a miss. you might want to call um your parent is really really helpful.
▶ 2:12:38Also, asking the right questions, training people at the front lines of saying, "Hey, asking, you know, where did you meet this person?" Um, you know, what is this for? Asking those questions is really, really helpful to get to the end of it of is this suspicious.
▶ 2:12:57Mr. Smith. One of the most heartbreaking patterns we hear about in our districts is seniors losing their life savings in a matter of hours, often after a fraudster has coached them through a transaction step by step. Um, firms can sometimes see the red flags, but by the time anyone intervenes, the money is already gone and almost impossible to recover. FINRA's proposals around temporary holds and trusted contacts are clearly aimed at giving firms more room to act.
▶ 2:13:24From where you sit and based on what Miss Gunther said, how often do you see situations where a longer hold or earlier intervention would have prevented a senior from losing their
▶ 2:13:35It's hard to get to quantify that of the prevented fraud and and say how many times we've seen that, but we certainly see instances where when firms have the information they need to ask the right questions that slow down that transactions that people make different decisions than they would when they're being pushed into this by an adversary. Thank you. I yield back.
▶ 2:13:56Gentleman yields back and the chair recognizes a gentleman from Texas, Mr. Gonzalez, for five minutes of
▶ 2:14:02Thank you, Madam Chair. Uh, Miss Gunter, we often say retirement is a three-legged stool. Social Security, personal savings, and pensions or investments. But right now, that stool is already unstable for millions of Americans. According to recent retirement readiness data, only about 45% of Americans feel financially prepared for retirement and 78% are worried about inflation eroding their savings.
▶ 2:14:29At the same time, we're seeing an explosion in financial scams. What concerns me is that for many seniors and near retirees, personal savings is the most vulnerable leg of that stool. It's also the one they're mo they're they've spent decades building and the one that can be wiped out in one swoop. How are these escalating scams undermining retirement solveny for seniors in America?
▶ 2:14:54And what more can Congress be doing right now to protect that critical leg of retirement of of our retirement
▶ 2:15:02Yeah, thank you for the question, Representative. Um there's a lot that we have done and there's a lot more to to be done. Um, as you mentioned, you know, people are losing the average, according to the FBI, is $38,000. Um, if it's a known other that is the perpetrator, it's $120,000. That's typically what a 50-year-old has in retirement savings. So, in a blink of an eye, they can lose everything.
▶ 2:15:26Um, one of the most important things, and I I'll say it again and again, is that we need to get to the point of where is this criminal contacting the consumer and taking those things down when they're on social media, when they're advertisements, whether it's telecom, getting at the point of the front of the upstream is really, really critical. Having trusted contacts is another one.
▶ 2:15:51um having a speed bump um for uh hold holding that transaction is also training front line so they know how to deal with this, right? People are in a fight versus flight. How do you calm that person down? And we know statistically that one out of two times that frontline worker is talks to that consumer, they're able to get them out of that fear bubble, that fight versus flight, and actually stop the money before it leaves the account. Are we doing enough in communicating to seniors in this country about the risks that are out there?
▶ 2:16:22We we are doing a tremendous amount in terms of educating consumers um but we're not doing enough and the fact of the matter is we want to get it be before anybody ever communicates with a
▶ 2:16:35How are we communicating to them? How are we educating seniors?
▶ 2:16:38There's a variety of different education. So we run uh ARP's fraudatch network. Um we do events all over the country really educating people not only just older adults but also their children and caregivers. Um government agencies are also doing that but we have to have effective communication. Um but we really do need to go beyond just communicating the consumer. Right? These are hardworking Americans. They are raising their families. They're working their jobs. They're going home fixing their houses.
▶ 2:17:07They wake up the next day and they do it all over again. They don't have time to read consumer disclosures terms and agreements. They deserve to have a a government have a critical role in preventing financial
▶ 2:17:20And if I could add sir, one of the key components in that is that we got to get to the investors, but we also get got to get to the institutions that are having those conversations with them, which is why FINRA has done a lot of work engaging with broker dealers and reps, leveraging the expertise of ARP so that we have multiple layers of defense in there and some resiliency.
▶ 2:17:39Very well. Well, thank you. Um, my next question is for Mr. Versstein. Uh, Mr. Versstein, last year I was proud to lead a provision included in the House version of the Clarity Act that would direct the Department of Treasury to study and strengthen resources for the Security Exchange Commission and Commodity Futures Trading Commission to better address the misuse of digital assets in money laundering. But the urgency of this issue is only growing.
▶ 2:18:05Recent FBI reporting shows that Americans lost 11 billion dollars to digital asset fraud last year alone. That staggering that's an a staggering 37% increase in cyber fraud. And while we often think about seniors being targeted, this isn't limited to one group. Younger investors, and I think we talked about that earlier, tend to be more willing to take risks and engage in emerging uh technologies um are increasingly exposed to these schemes as well.
▶ 2:18:33Professor Burstein, from your perspective, what additional resources or information sharing authorities or information sharing authorities should Congress provide um provide to help federal regulators and law enforcement to better combat digital asset fraud? And what are the key coordinating gaps between Treasury, the SEC, and the CFTC that need to be
▶ 2:18:56Congressman, I commend you for bringing this issue uh uh to the table. Uh the fact is that digital assets are a part of our money laundering and our fraud landscape. Whether or not that's because of intrinsic features to the assets or just because of the marketing that is now associated with them, the the the rasmataz of a new thing that attracts a a different kind of ignorant person to lose their money on them. Uh they're they're where the action is and so we need to be giving the resources to people to focus on these and develop the expertise to coordinate one agency.
▶ 2:19:27Thank you. And I look forward to continuing this conversation. We were out of time. Thank you. And I yield
▶ 2:19:31Uh gentleman yields back. And if I could take a point of uh personal privilege, I can say that in our own district, uh we do have a program called Beat the Cheats and we go among our our senior communities and vulnerable um uh citizens with a full template. I'm happy to share with you um uh my district. I think that's great
▶ 2:19:51about how to to for them to avoid this include with including a hotline for them to even call. So I'd be pleased. I think it's a real education effort that we need to push.
▶ 2:19:59I couldn't agree more. So anyway, the chair now recognizes a gentleman from Iowa, Mr. Nun, for five minutes of
▶ 2:20:06Well, thank you, Chairman Wagner, and I appreciate you holding this meeting on fraud. Look, before I begin, I just like to ask for a show of hands. If you or one of your loved ones or someone you know has gotten that call, there's something urgent. We need to talk to you. you're going to deposit your money here only to later find out that you've become a victim of fraud. I see our AP folks in the background too, all raising your hands. This is an impact which is outsized.
▶ 2:20:34In my home state of Iowa, I briefed this committee last year on the grave threat coming from fraudsters. At that point, 52 million dollars was lost to fraud and that's just in a farm state like Iowa. Well, Madam Chair, I'm sad to say that today that number has jumped to almost hund00 million. So, in less than 12 months, we've nearly doubled the amount of fraud loss happening on the front lines in a hometown community.
▶ 2:21:01But that number should all stop us cold in our tracks when we realize who is the target of the types of fraud we're talking about. In Iowa, the average victim was over 60 and lost $9,000 last year. This year, that's quadrupled to a loss of nearly $37,000 per individual. This is catastrophic. It is wiping out a family's wealth, but it's also destroying their future. This is no longer a trend.
▶ 2:21:32This is now a real crisis impacting each of us. Behind every one of those dollars is a real person, an Iowa farmer, a De Moines retiree, an Inkeny small business owner. And the worst part about this is those dollars aren't being taken by a criminal down the street. In too many cases, they're being actioned by foreign governments. They're being perpetrated by slave labor camps in South Asia, and they're being taken overshores to fund some of the very horrific events that are happening to Americans right here on our own shore.
▶ 2:22:00That's why I believe that there are two bills that I've led on that deliver a direct one-two punch to go after our scammers. The first is the Guard Act. It arms our state and local law enforcement with blockchain tracing technology to follow the money before it disappears offshore so that when you get that phone call and you call the sheriff, their answer is I'm sorry, they'll have to report it to the FBI. The second aspect is the Traps Act.
▶ 2:22:26And the traps act brings together our banks, our telos, our tech platforms and our local enforce law enforcement both at the hometown level all the way up to the federal level to be able to really go after this and trap these fraudsters before they proliferate their behavior. Madam chair, I would offer we cannot wait another year to act on this important legislation. Now, Miss Gunther, I want to thank you and your team at the AP for all the work that you've done. You've been a strong supporter of garden traps act.
▶ 2:22:54Do trusted contact designations and report and hold authorities give frontline employees at a small Iowa community bank enough authority to stop a transaction before this money disappears. Do you
▶ 2:23:07Thank you for the question. Um the trust of contact and report to hold authorities are critical tools but they're not enough on their own. As you mentioned fraud up it starts upstream. We have to stop the criminal from contacting the consumer. efforts like the uh traps act are really really um important. We've got to get more on the legislative and law enforcement arena.
▶ 2:23:31Um but we also need to get ahead of this as well and it's essential for in the traps act to have and to create innovative ways and get people to share information so we can stop these scams um entirely. I totally agree with you and we shouldn't put all the responsibility on both the individual and the local lender, our banks, our community um lenders to have to do this. Getting upstream is probably the best possible way to get after this comprehensively. So, Mr.
▶ 2:23:57Michael, I'm going to turn to you because when we talk about comprehensively, we recognize that criminals extracted an estimated $16 billion dollar last year through pump and dump schemes. As a result, 25% of small capital Chinese IPOs show manipulation. At what point does a red flag appear clearest and do we have the authority and the data to act before a retail investor would be impacted by
▶ 2:24:21Thank you for the question and I can really only speak to our platform and how how it identifies such things. So um over we launched the platform about 18 months ago and we've issued 40 alerts uh where we've captured $15 billion worth of documented harm a median lead time of 19 days prior to the loss event. Our work product has also been supported multiple SEC section 12K halts of issuers suspected of manipulation.
▶ 2:24:46Very good. Mr. Smith, very quickly, my traps act creates a treasuryled task force to drive coordination across agencies. Does the information sharing between FINRA and the SEC, FBI, and other state regulators move fast enough to stop these type of ramp up dump schemes and with the trap act help? I can't speak to the legislation, but I can speak to that the more and faster information sharing that we have, the better off investors will be.
▶ 2:25:11Thank you very much, Mr. Smith. That's exactly what the traps act does. Thank you, Madam Chair. I yield back my time.
▶ 2:25:16Gentlemen yields back and the chair now recognizes a gentleman from Montana, Mr. Downing, for five minutes of
▶ 2:25:22Uh thank you, Madam Chair, and thank you for the witnesses for being here. Uh I'm going to start off just uh correcting the record on a point. One of my colleagues made uh the comment that the Clarity Act creates a loophole to exempt individuals from complying with with securities laws if you if you raise under a certain amount for a digital commodity project. So I just want to for the record say that that is utterly false.
▶ 2:25:45You know, under the Clarity Act, the SEC retains jurisdiction over insiders disclosures and obligations such as lockup requirements on on related parties where digital commodities are involved in a capital race. And furthermore, the Clarity Act reaffirms that the SEC maintains robust anti-fraud and anti-manipula uh anti-manipulation authority. So any claim that the Clarity Act allows insider trading is unfounded. It's inaccurate. It's it's just false. So just wanted to get that correction out there.
▶ 2:26:14Um so uh in 2024, the FBI reported that the costliest type of scams perpetrated uh on our elders were investment scams totaling a staggering 1.8 8 billion in reported losses. And as the former securities regulator for the state of Montana, one of my primary responsibilities was to protect investors from fraud where possible and give victims some restitution. And we did a lot of stuff as as the securities regulator for Montana. We set up elder justice councils uh around the state.
▶ 2:26:44Uh had uh some great success in those. I created in my office a financial abuse specialist team that specifically dealt with this type. It was prosecutors, lawyers, you know, folks to to help with this. And we saw just so much coming through the state, you know, from pig butchering scams to romance scams to uh using tech to imitate uh federal agencies and and we see more and more technology coming in to to defraud and scam uh folks.
▶ 2:27:11And you know, we did a lot of public outreach, a lot of tours, fraud summits, and one of the other things that we did that I'm particularly proud of is we had the Lynn Egan Memorial Securities Restitution Fund, which we used to help give relief to folks that were scammed. and uh that was uh named after my former deputy securities commissioner who unfortunately lost a few years ago. So uh I'm gonna start on my questioning with uh Miss Gunther. Uh can you discuss the important role that state securities regulators play in combating fraud?
▶ 2:27:41Yeah, they can see local patterns, they can do local enforcements um are and so they remain a critical piece of the
▶ 2:27:50Thank you. Do you consider state regulators or federal regulators like uh the SEC as the primary enforcer of anti-fraud laws? Um I can't speak to that but what I can say is there a critical part uh everybody we need everybody on ground to fight this as you mentioned some of the horrible statistics you know we're seeing losses of up to 196 billion dollars total and that doesn't even target the people who don't realize that they are a victim and so it's really important
▶ 2:28:20to have uh all government players in this space um helping to protect consumers Are there any states that you have in mind that you believe have been particularly effective in combating
▶ 2:28:33What I can say is one of the most effective tools that states can can use is a reported whole laws. Right now we have almost all states that have that, but there are a few states that do not. And that is one of the most important things that we found in a study of financial institutions was the number one thing to stop money before it leaves the account.
▶ 2:28:52Right. Well, I appreciate you saying that because that was something that we have some pretty strong delay and report laws in in in Montana. Uh, one of the issues that I ran into as a regulator is the training for folks to actually use those, you know, because the the the rules there were pretty simple as long as you had, you know, uh, uh, procedures in place uh, and had minimal training, then you could, you know, uh, keep yourself out of liability and and do that.
▶ 2:29:19And you know, as most people in this room know, once the money's out the door, it's out the door. So, if you can actually delay that and um take care of it, it's it's very um very helpful. So, uh appreciate that. Um moving on. So, I'm going to go to Mr. Smith on here. Um we know that many scams originating overseas like pig pig butchering scams come from China.
▶ 2:29:44So, how do we hold overseas bad actors accountable when they're not easily subject to our jurisdiction or our justice systems and foreign officials who might not be willing to cooperate with US law enforcement?
▶ 2:29:56That's where in our role as an SRO, we have unique insight that others may not have, but we also have limits into our authority and our jurisdiction. And that's where the power of the engagement and partnerships with other entities like federal law enforcement where they may have a reach in these overseas jurisdiction or they may have partners with other law enforcement that can reach out and put a stop to the activity is critically important.
▶ 2:30:21Right. Thank you. Uh I could go on another 10 minutes but unfortunately I've run out of time. So on that uh Madam Chair I yield.
▶ 2:30:27Gentleman yields back. And I'd like to thank our witnesses for their testimony today. And without objection, all members will have uh five legislative days to submit additional written questions for the witnesses to the chair. Questions will be forwarded to the witnesses for their response. Witnesses, please respond no later than May 20th, 2026. This hearing is now