Congressman Hill on Innovation, Fit-for-Purpose Regulation, and Capital Formation

Kenneth E. Bentsen, Jr.: So Congressman Hill, thank you very much for being with us today. Being chairman of one of the major committees, you are a very busy individual, so it’s an honor to have you with us. I’d like to start going back to your pre-congressional days. You’re one of the few members of Congress, both the House and the Senate, with an experience in the securities and banking world. You also, of course, I should note, held a senior position at the US Treasury Department, and you also were a senior Senate staffer. We won’t hold that against you, but…

Congressman French Hill: When your dad was in the Senate.

Bentsen: Yeah. Well, that’s true. But I think most importantly, your experience in the private sector, in the business, if you will. How’s that influenced your views, given your role today?

Congressman Hill: Well, thanks, Ken. It’s great to be with the SIFMA audience, and thank you for the invitation to be together. I think practicality is the answer to that. I’ve been both in commercial banking and investment banking since the late 1970s. My first job was working for my dad and my grandfather at Hill Crawford and Lanford, in Little Rock, Arkansas, which is now part of Stifel by a couple of different mergers over the years. And my job was typing confirmations, and so I know what carbon paper is and how to double-check the commission to make sure it was typed correctly. So I’ve been in this business a long time, 50 years. I was on the District Business Conduct Committee for old NASD, FINRA, in the ’90s for District 5, served on FINRA’s Small Firm Advisory Board, SIA’s Bank-Broker Dealer Committee, so I’ve tried to be involved in this industry my whole career. So I’d say the answer to your question is just that practical experience lets me look for solutions and find something that’s pro-growth, pro-client, pro-consumer, and at the same time, contribute to the best capital market system in the world.

Bentsen: I remember I had the benefit of meeting your father, I think when you were swearing in or whatever, because I used to run around Little Rock occasionally chasing bond business when I could sneak around, come up from Texas and sneak around and not get caught.

Congressman Hill: Yep. We had people everywhere though.

Bentsen: Yeah, that’s right, it’s great. So let’s switch. I talked about when I introduced you, you have been one, if not the preeminent leader on issues around digital assets, native digital assets, cryptocurrencies. You ran the subcommittee in the last Congress, you’re in the full committee now. You’ve now done a stablecoin bill that’s become law, you’ve pushed out the CLARITY Act, which the Senate is now considering, so there are a lot of questions around that, and given your background, I think really appropriate discussion. So first and foremost, having come out of the securities business, banking business, you understand the rule book as well as anyone, how do you strike the right balance between encouraging innovation and protecting investors and the financial system as a whole?

Congressman Hill: Yeah. Well, this is such an critical part of the success of the American financial experience for the past 80 or 90 years. I’ve always been a big believer in the S in SRO, self. It’s been abandoned for the last 30 years, I would argue, as a former practitioner. But that ability for industry and the regulator to come together and be proactively recognizing innovation’s a part of life. You can’t put your head in the sand about technological advance, whether it’s going from paper to digital, or when I was typing those confirmations, it was T+5. So the fact of the matter, innovation and technological advance are part of our daily lives, and we shouldn’t be afraid of it, we should embrace it.

So in the tokenization debate and in the digital asset debate, the use of blockchain operating systems, the House has taken the decision that we want to be pro-innovation and we want to have fit-for-purpose rules. So we’re not trying to deny regulatory or supervisory oversight in that space, we’re trying to customize that regulation, oversight and supervision, as appropriate, in a fit-for-purpose way. And so, I’d say that’s the approach, is that be pro-innovation, be afraid of innovation, but recognize we’ve got to modify the system to capture its advance.

Bentsen: And how would you say… With the CLARITY Act, which, in some ways, may be more important than the stablecoin legislation, maybe they’re equally important. They’re affecting different types of asset classes, I guess, in some respect. And you’ve got the administration, which is taking, I don’t know if this term is still used or not, a whole of government approach, we had Chairman Atkins and Acting Chairman Pham here today. The SEC CFTC is… In fact, I participated in a joint roundtable on how they can better coordinate. The Treasury’s obviously very involved, they’re doing rulemaking on stablecoin. You have the President’s Working Group. From our viewpoint, there’s a lot of activity and coordination going on across the government. From an insider’s perspective, how do you see that working? Is it working hand in glove, are there conflicts or…

Congressman Hill: Yeah. Well, both even in the Biden administration and now in the Trump administration, both on a bicameral basis, the House and the Senate, in the committees of jurisdiction, we worked mightily to try to be on the same page from a regulatory harmonization point of view, guidance from our point of view of where you could use exemptive relief to move forward a blockchain-based distributed ledger approach to solving some of these financial problems. But it’s been made much easier in the Trump administration, because you’ve had each of the appointed leaders, both in the banking supervisory sector and in the commodity and securities sector, agreeing with a common set of principles, which has allowed us to find, I think, a good landing spot for both the US dollar-backed stablecoin legislation, GENIUS, and in the base text of CLARITY, which did pass the House with nearly 300 votes, it’s a strong bipartisan effort.

I will argue that market structure is, I think, the slightly more equal partner of those two bills. I told, when we were debating them in July, I said, “If you were to pass the GENIUS Act, the dollar-backed payment stablecoin method, setting up a new payment rail, but you don’t pass market structure legislation,” which we called CLARITY in the House, “it’d be like in 1996, when we deregulated telecom, that we approved the creation of a handheld cell phone with a computer in it, but no cell towers.” It’s a item that will be used in a blockchain, be used effectively for making payments, both perhaps institutional, B2B and B2C and C2C, but you’ve got to have that institutional structure around it with a fit-for-purpose set of rules, and I think that will accelerate the use and give some guardrails to it.

Bentsen: That’s a great analogy, by the way. And maybe taking that a step further, so from my vantage point, and this is my personal view, Congress had to act. I think that the regulators had some authorities, and how much they have always can be a question, sometimes it can be challenged. But there were a lot of things, with this new technology, new asset classes, that maybe existing regulatory authority wasn’t entirely clear. So my own view is Congress needed to act, and Congress has acted, so you created a legal framework around dollar-backed stablecoins, as you mentioned.

Now, there are other types of native digital assets, like cryptocurrencies, which look a lot like a commodity, I think. There are native digital assets that look a lot like security-backed swaps. And then, of course, I don’t want to say to the extreme, because that sounds extreme, but to one end, or getting to one end, is the whole idea tokenized traditional securities, tokenized equities, for instance, where the beneficial owner is the owner of the tokenized equities, just it could be in paper, it could be in the ledger of DTCC, or it’s a tokenized equity traveling around on a blockchain. How are you and Congress thinking about that? So when a security is a security, then should we expect all of the rules, and we’ll take equities, for instance supplies, NBBO, best execution, feeding the price into the tape, is that how we should be thinking about this?

Congressman Hill: I do think so. I think that you should think of when we moved from paper to electronic, and from electronic, with an intermediary, to the potential of doing a decentralized trade using a computer protocol, that it should be subject to all those same parameters, meaning the trade is reported, the two sides know their obligations to each other in a tokenized market. And so, that’s why I try to describe this as we’ve got to craft rules and an outlook that’s fit-for-purpose, and it’s going to take some time to do that. This is a very fledgling emerging market category, that like so much in technology, gets oversold, I think. There’s a lot of excitement about these topics, and maybe that overdoes it from time to time.

But this is technology marching on that says, this is a new way to do things, that has lower cost, a better audit trail, could be more effective, that has a good settlement period that emulates the settlement period we have now that’s at lower cost, maybe it’s more days a week, maybe it’s more hours per day, all those sorts of benefits that I think will be debated. But fundamentally, if it’s same mission, it’s going to be under the same rules to create… It wouldn’t be a level playing field, in some ways, because it might end up being a better, more competitive system to the existing, in theory, but it still would have the same obligations that one has today.

Bentsen: Yeah. I think that’s certainly how we would see it, and maybe rather than level playing field, more that opportunities that are granted to a new entrant are granted across the marketplace.

Congressman Hill: Yeah, right. It’s so complex when you get into the details about how one would do some of these things on distributed ledger, from speed to accuracy to redundancy to then the consumer compliance-related topics or tax compliance topics. That’s why I say it’s an emerging asset class. But you see real world assets on a distributed ledger that you could envision how that lowers costs, certainly outside the securities industry and potentially in it. You have Franklin Templeton’s own experimentation with the Benji in their money market fund. You can go to in Frankfurt to Deutsche Börse and see their tokenization essentially of their daily commercial paper market.

So there are elements of where I think it fits, and their elements where I don’t think it’s ready for prime time yet. But that’s why if you have rules, and have people believe they can safely innovate and raise capital and experiment and write code to do these things without being accused of a federal crime or some sort of a regulatory violation, you get a better environment. I think the US will lead in this technology, as we have in the previous rounds of technology advance over the last five or six decades.

Bentsen: Last question on this. Let’s fast-forward, the Senate passes a bill, House and Senate come to an agreement on however you want to do a conference or do a conference, and CLARITY becomes law, and of course, there could be all sorts of other stuff in there we don’t know today that [inaudible 00:13:24] do you see your committee spending a lot of time, over the next couple of years, looking back and looking and seeing what are the regulators doing? Because presumably, the regulators will have a large task of rulemaking and…

Congressman Hill: Yep, it’ll be a big task. You may note on GENIUS, the stablecoin legislation, that the Treasuries are issued in advance.

Bentsen: We’re working on comments right now.

Congressman Hill: And those comments are very, very important to get that right. It’s the first opportunity for the private sector to engage with that law, having been signed into law in July by President Trump. And I do see a year-long process at minimum of the CFTC and the SEC and the bank supervisors working in tandem to craft the provisions that we have in CLARITY on dealing secondary markets, custody, trade reporting, compliance and all that work as it’s unveiled in a joint rulemaking process. Because so many of these tokens may well be considered commodity tokens and traded under the rules of the CFTC, and so for many of your member firms, they may well have jointly registered folks and running a trading desk that’s integrated between securities and commodities in that instance, and that’s going to be a real place where all the members of SIFMA can play a major role to get that right.

Bentsen: Yeah, two things I would say to that. One is, having been involved in the intersection of the CFTC and SEC over the years in different capacities, and I mentioned this on the roundtable the other day, when Congress is clear as to what they want the agencies to do, particularly with respect of joint rulemaking, that helps the coordination quite a bit, and so I encourage you on that.

The other thing I’d point out, and then we’ll move on, and I’m going to come back to Prudential stuff in a second, but I do want point out, and I think you know this, a concern for what is called TradFi, a term that I don’t particularly like, but for particularly US banks or dealer banks to engage in this new area, when Congress finishes its work, is potentially hamstrung by the Basel Committee’s capital rules, which are extraordinarily punitive. Now, we don’t know what the US is going to do with regard to this. Europe has adopted it, Japan’s adopted it, the UK’s still talking about it. And for global firms, that could be complicated, even if the US doesn’t. But is that something you all might take a look at in terms of what’s going on?

Congressman Hill: Yeah, absolutely. I wish, if we could roll the tape back, that Chairman Powell would, after the comments were received in the Basel III recommendations from his Vice Chairman, then Michael Barr, were so negative and demonstrated all the complexity and the differences between the United States proposal and Basel III and actually what was pitched by the Basel Committee in Switzerland, I wish they had just said, “Well, let’s keep working on it.”

But instead, it was put out for comment, and you had tens of thousands of comments negative about it. And so now, we’ve had a two-year waiting period when we could have been making progress on how does it interconnect with, particularly, as you point out, dealer bank operating risks? How does it interconnect with the resolution rule, the TLAC rule, from Dodd-Frank? Does it, in fact, gold plate capital, which Basel did not? And then, how do those work together? So I hope the new vice chairman of the Fed, Miki Bowman, will work with Congress and advance a proposal early in 2026, and then, absolutely, as we consider how those dealer desks will be working in this digital asset space, that that’s taken into account in that operating risk assessment.

Bentsen: Yeah. And I’d encourage you… Well, first of all, thank you for the work you’ve done on that so far, it’s very important, and we’ve spent a lot of time talking to the Prudential regulators about, particularly when you think about capital markets, US capital markets are the primary funding mechanism for the commercial sector in the US. Completely opposite in Europe, and even the UK and Asia to some extent, they would like to get to where we are today. And as you point out, the US interpretation of the Basel III end-game, particularly when combined with CCAR, stress capital buffer, and the global market shock, which we would argue is detached from empirical reality of how markets have operated, is extraordinarily punitive. So beyond things like digital assets, you think about securitization.

We braced this with the administration, in fact, that as they’re thinking about maybe what should we do with Fannie and Freddie, and the MBS market is such a key component of it, or going back and taking a look at Reg AB II, which Chairman Atkins has put on the agenda, that’s going to run smack into Basel III if the whole fundamental review of the trading book is not corrected, along with CCAR. So we’re encouraged by what we’re hearing, but it’s helpful that Congress is looking over the shoulder of the regulators on that.

Congressman Hill: Well, the Congress, on a bicameral basis, really encouraged the Fed to withdraw and re-propose instead of putting out for comment after there was a lot of discussion about it. And so, as I say, that’s put our companies non-compliant two years behind, and we have people who come by and see us on a regular basis from other G7 countries in the world saying, “When are you going to finish Basel III implementation?” And part of that’s for global harmonization of the rules, but it’s also these are global companies and they don’t want to have two different rule books that they’re trying to comply with. So I’m committed, certainly to the extent we can in the legislature branch, for pushing that to a conclusion.

Bentsen: Yeah. My impression, from talking to regulators from other jurisdictions who have adopted the endgame, is that they are watching closely. I think if the US goes in a slightly or somewhat a different direction, I think they’ll revert to what the US is doing, actually, because of your point, that you have global firms that are operating in global markets.

Maybe shifting gears a little bit, something that you’ve been very active in throughout your time in Congress is, and not surprising given your business background, is capital formation. I was going to ask your perspective, but I think you would come out and say, “Well, my committee has marked up…” I don’t know if it’s two dozen, but many, many bills. But do you think things are headed on the capital formation, your agenda on capital formation? Are your friends in the Senate, you think, going to be able to pick up the ball that you all have handed to them?

Congressman Hill: Well, we’ve got great partners in the Senate and Tim Scott, who’s our chairman of the Senate Banking Committee, and Mike Rounds, who chairs the Capital Market Subcommittee in the Senate, so I do believe that we’ve done a lot of collaboration about the work that we can do in the House. But the House is able to produce legislation purely on a majority vote, and so we have got, as you say, two-dozen-plus capital formation bills that we think lower the cost for being a public company, particularly for smaller companies seeking to go public, increase choice in the defined contribution space and retirement space, increase choice for individuals who want to do private investing, sort of in the themes of the JOBS Act, that was one of the great success stories between Republicans and Democrats at the end of the Obama administration, to recognize that capital formation is one of the crown jewels, unstolen in Paris, one of the crown jewels in our economic system.

And so, an idea there would be to broaden the definition of what’s an accredited investor, something that we haven’t tackled since 1982. Before I was in Congress, one of my business niches at our company was doing a lot of Reg D capital formation for start-up companies and for follow-on offerings for private businesses, and it was always very frustrating for a non-C-suite executive in that business, who knows the business [inaudible 00:22:31] , they’re a scientist or they’re an oil and gas engineer, whatever, but they don’t meet the definition of an accredited investor. And so, the founders could have made an exception under Reg D, one of the 35 non-accredited investors, but no lawyer will let you do that.

And so, we want to have expertise as a logic for an accredited investor, and that, I think, will connect talent and intelligence about the investment analysis with the ability to do it. And the same would be true if someone is a CFP or CFA or registered with FINRA, that they would have the knowledge to serve as an accredited investor. So we’ve tried to tackle it on cost of going public, lowering the cost of raising capital, and offering up some opportunities for people to tap into private investing that they can’t today.

Bentsen: Well, I want to take that last point a little bit further. We talked with Chairman Atkins about this, he talked about the work the SEC is doing with the Department of Labor, there’s an executive order, the Department of Labor’s talking about doing rulemaking with respect to ERISA plans, SEC is looking at it with respect to non-qualified brokerage and wealth accounts. How are you and the committee thinking about increasing access to private markets, private equity, private capital, but of course, at the same time, thinking about, and I know, as you’ve mentioned, you’ve already been working on accredited investor, a definition of accredited investor, but also, again, thinking about investor protection and how you balance all those things?

Congressman Hill: Well, it’s an important topic, accredited investor’s just one. But this whole issue that we saw in the JOBS Act, again, where we facilitated crowdfunding, we facilitated access to a private placement with some modest advertising, and we looked for trouble there, the regulators and supervisors didn’t find abuse in that instance, they found crowdfunding was supported, so we’ve tried to ease that. So from angel investing, we’ve tackled that, all the way up, as I say, to an IPO.

But at the same time, what about all these employees that work for private companies? How do we make sure that they have a shot to earn ownership, and also have liquidity in that ownership, because the companies are waiting so much longer to go public? I think I read in Barron’s the other day where I think people are waiting eight or nine years now to go public for that first IPO opportunity as opposed to maybe five or six earlier. So companies are being financed at lower cost and staying private longer, which means those same employees, they may get some restricted shares but don’t have liquidity, so we’ve looked at that and how the tax law could be changed to encourage that.

But we’ve also looked at if companies are going to stay private longer, and that’s a large part of our economy, how could those assets be put in a defined contribution retirement type account versus a 40-year track record that we have, frankly, with defined benefit plans, where the pension industry in this country, both public and private, have increased their allocations from, say, 5% in private in the ’80s, back when I was in that business, to now well over 30%, associated with some form of private asset ownership. Can we craft it for the changing circumstance in a defined contribution plan? You don’t have a permanent holder, you have a fiduciary, but you have different liquidity issues, you have different time frames associated with defined contribution plans, you have the emergency withdrawal capability. You’re not a limited partner in a big private equity or private real estate partnership, like you are in the defined benefit space.

So I think the allocation to private investing there is attractive for a long-term holder with the right timeframe, but I think it’s a structure challenge. And so, I think that we’ll have hearings on this. You’re going to see, I’m sure, the Senate will do that. I’m sure Mr. Atkins and the SEC will do roundtables. Again, SIFMA members are outstanding members to participate in how do we tackle some of those issues so that we get product design, allocation design, that’s fit-for-purpose, to use another one of my favorite terms, for an individual investor that’s in a defined contribution environment.

But I think we have plenty of proxies to recognize that that allocation could be beneficial with a long time horizon because of the performance in the defined benefit space, and because we’ve seen, in the public equity markets, between 10 and 25 years, the performance in business development corporations from the private equity firms that have gone public themselves, and in some instances, what’s our experience in the corporate-held, REIT-held real estate industry, for example. So to me, it’s a design and a structure to get right for an individual investor, but I’m sure that we can find a way to do that.

Bentsen: We’re getting close to our time, but we wouldn’t be having a conference, or even be alive in 2025, if we didn’t talk about artificial intelligence.

Congressman Hill: I work in Congress, I know a lot about that.

Bentsen: Yeah. I’m going to let you answer that. But how are you and the committee thinking about artificial intelligence? And I’m not necessarily suggesting you should legislate or regulate, but…

Congressman Hill: Yeah. Well, Mike Johnson and Hakeem Jeffries last Congress had a really outstanding effort. We had a industry-wide, Congress-wide bipartisan artificial intelligence task force last year, we issued a very interesting report, industry by industry, about the views around artificial intelligence. You can find it on the House website. And then, we’ve done that work in the House Financial Services Committee as well. I think, again, you have to embrace innovation, you cannot put your head in the sand about it. So I would argue having a human in the loop right now, as this is being used to benefit consumers, reduce costs, serve consumers better, solve compliance challenges in a better way, reduce fraud, these are all great uses.

But I think you’ve got to do two things in a highly regulated business, keep a human in the loop and be able to show your work, because if you’re going to use artificial intelligence to produce an allocation in an investment context or to produce mortgage targets for a new mortgage loan or something of that nature, you need to be able to show your work to be able to comply with so many of these federal rules. But we really appreciate the engagement with you, Ken, and I’m glad to spend a few minutes with you. As soon as Congress gets back working full and back out of this shutdown, you’ll see us go to the House floor, and I think the next thing you’ll see us take on is this capital formation agenda. And we appreciate all the engagements of your members over testimony and many years to develop that agenda, and look forward to heading over to the Senate, and you’ll help us pass it over there, I’m sure.

Bentsen: Great. Well, thank you… First of all, thank you for your service, and thank you for being with us today and for your leadership.