    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

                     H.R. 658--THE ACCOUNTANT, COMPLIANCE,
                      AND ENFORCEMENT STAFFING ACT OF 2003
                                     AND
                      H.R. 957--THE BROKER ACCOUNTABILITY
                       THROUGH ENHANCED TRANSPARENCY ACT
                                    OF 2003

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                        CAPITAL MARKETS, INSURANCE, AND
                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                                  COMMITTEE ON
                               FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 6, 2003

                                   __________

           Printed for the use of the Committee on Financial Services

                                Serial No. 108-9

    87-797              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
    RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
    EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
    FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
    ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
    SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
        Chairman                         BRAD SHERMAN, California
    RON PAUL, Texas                      GREGORY W. MEEKS, New York
    PAUL E. GILLMOR, Ohio                BARBARA LEE, California
    JIM RYUN, Kansas                     JAY INSLEE, Washington
    STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
    DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    DOUG OSE, California                 RUBEN HINOJOSA, Texas
    JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
    MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
    PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
    CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
    JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
    VITO FOSELLA, New York               CAROLYN McCARTHY, New York
    GARY G. MILLER, California           JOE BACA, California
    MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
    SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
    PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
    MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
    TOM FEENEY, Florida                  DAVID SCOTT, Georgia
    JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
    SCOTT GARRETT, New Jersey
    TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
    GINNY BROWN-WAITE, Florida
    J. GRESHAM BARRETT, South Carolina
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                     Robert U. Foster, III, Staff Director
                Subcommittee on Capital Markets, Insurance, and
                        Government Sponsored Enterprises

                     RICHARD H. BAKER, Louisiana, Chairman

    DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
    CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
    PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
    SPENCER BACHUS, Alabama              BRAD SHERMAN, California
    MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
    PETER T. KING, New York              JAY INSLEE, Washington
    FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
    EDWARD R. ROYCE, California          CHARLES A. GONZALEZ, Texas
    DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
    SUE W. KELLY, New York               HAROLD E. FORD, Jr., Tennessee
    ROBERT W. NEY, Ohio                  RUBEN HINOJOSA, Texas
    JOHN B. SHADEGG, Arizona             KEN LUCAS, Kentucky
    JIM RYUN, Kansas                     JOSEPH CROWLEY, New York
    VITO FOSSELLA, New York              STEVE ISRAEL, New York
    JUDY BIGGERT, Illinois               MIKE ROSS, Arkansas
    MARK GREEN, Wisconsin                WM. LACY CLAY, Missouri
    GARY G. MILLER, California           CAROLYN McCARTHY, New York
    PATRICK J. TOOMEY, Pennsylvania      JOE BACA, California
    SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
    MELISSA A. HART, Pennsylvania        STEPHEN F. LYNCH, Massachusetts
    MARK R. KENNEDY, Minnesota           BRAD MILLER, North Carolina
    PATRICK J. TIBERI, Ohio              RAHM EMANUEL, Illinois
    GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
    KATHERINE HARRIS, Florida
    RICK RENZI, Arizona

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 6, 2003................................................     1
    Appendix:
        March 6, 2003................................................    25

                                   WITNESSES
                            Thursday, March 6, 2003

    Kelley, Colleen M., National President, National Treasury
      Employees Union................................................     5
    McConnell, James M., Executive Director, Securities and Exchange
      Commission.....................................................     4
    Shulman, Doug, President, Regulatory Services and Operations,
      National Association of Securities Dealers.....................    16

                                    APPENDIX

    Prepared statements:
        Oxley, Hon. Michael G........................................    26
        Emanuel, Hon. Rahm...........................................    27
        Israel, Hon. Steve...........................................    29
        Kanjorski, Hon. Paul E.......................................    30
        Kelley, Colleen M............................................    32
        McConnell, James M...........................................    40
        Shulman, Doug................................................    46

                     H.R. 658--The Accountant, Compliance,
                      And Enforcement Staffing Act of 2003
                                      And
                      H.R. 957--The Broker Accountability
                       Through Enhanced Transparency Act
                                    of 2003

                                  ----------

                            Thursday, March 6, 2003

                 U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance, and
                       Government Sponsored Enterprises
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to call, at 10:05 a.m., in
    Room 2128, Rayburn House Office Building, Hon. Richard Baker
    [chairman of the subcommittee] presiding.
        Present: Representatives Baker, Kelly, Ryun, Hart, Tiberi,
    Harris, Renzi, Kanjorski, Sherman, Meeks, Inslee, Moore, Lucas,
    Israel, McCarthy, Matheson, Lynch, Miller, Emanuel and Scott.
        Chairman Baker. [Presiding.] I would like to call the
    meeting of the Capital Markets Subcommittee to order. Today,
    our purpose is to receive testimony with regard to two
    legislative provisions, H.R. 658, the Accountant Compliance and
    Enforcement Staffing Act of 2003, and on our second panel, H.R.
    957, the Broker Accountability Through Enhanced Transparency
    Act of 2003.
        With regard to the former, it is clear that the SEC
    resources have been limited and the ability to engage
    appropriate levels of technical assistance in the complex
    securities world we find ourselves in is of extreme concern to
    all members. The question before us today is the appropriate
    mechanism by which we can secure professional staff to engage
    in the many new requirements recently adopted by the Congress
    pursuant to many of the identified problems in the performance
    of the markets.
        It is my belief that some immediate action should be taken
    to provide needed resources. It will be difficult to instill a
    high level of confidence in consumers, and therefore have them
    return to the investing market, without the assurance that the
    SEC has the strength, ability, and capacity to ferret out
    wrongdoing and provide remedies for those investors who feel
    they have not been professionally treated.
        In addition to that legislation, H.R. 957, is legislation
    which the NASD and others have expressed interest in, to enable
    a clearer and sharper picture to be drawn about activities in
    the marketplace legislation which I also believe to be of value
    in providing for enhanced investor confidence.
        I am looking forward to hearing the witnesses. I believe we
    have good testimony, and I believe this will be helpful to the
    members in making determinations about action that should be
    taken with regard to both matters.
        At this time, I recognize Mr. Kanjorski for any opening
    statement he chooses to make.
        Mr. Kanjorski. Mr. Chairman, thank you for the opportunity
    to offer my initial thoughts about H.R. 658 and H.R. 957 before
    we hear from each of our witnesses. As you know, Mr. Chairman,
    I have made investor protection one of my top priorities for
    work on this committee. As a result, I have regularly supported
    sensible and well-crafted legislative initiatives designed to
    advance this goal.
        During the last year, and only after a series of large-
    scale corporate scandals, many of my colleagues finally joined
    me in recognizing the importance of maintaining a strong
    federal regulator to protect the interests of American
    investors. Accordingly, we have significantly augmented the
    resources available to the Securities and Exchange Commission,
    including increasing the agency's budget by more than $270
    million, thus allowing it to hire more than 800 new employees.
        Unfortunately, the SEC has encountered some difficulties in
    identifying and hiring the best workers for these new
    positions, particularly in a number of specialized professional
    fields. Accordingly, H.R. 658, the Accountant Compliance and
    Enforcement Staffing Act, would seek to streamline the hiring
    process for accountants, competent examiners and economists
    that the SEC uses, similar to the rules all government agencies
    use to recruit and hire attorneys. Former SEC Chairman Harvey
    Pitt suggested this accelerated hiring process for these
    professionals earlier this year in a letter to the Congress.
        We will also hear from a witness later today about H.R.
    957, the Broker Accountability Through Enhanced Transparency
    Act. This bill seeks to provide investors with easy online
    access to critical information about securities firms and their
    brokers. These disclosures would include information on
    regulatory investigations, disciplinary actions, legal
    proceedings and customer complaints. The bill also will give
    the National Association of Securities Dealers certain legal
    protections for providing this information over the Internet.
        Since Congress required the NASD in 1990 to make such
    information available to individual investors without charge,
    this disclosure program has become increasingly popular. Today,
    the NASD maintains information on more than 665,000 registered
    security employees in this automated electronic system, and in
    2002 investors made 2.5 million requests for information about
    these professionals. The vast majority of those requests were
    made via the NASD Web site.
        In general, I believe that both H.R. 658, in expediting the
    hiring of SEC professionals, and H.R. 957, in expediting the
    access of investors to important information about their
    brokers and brokerages, have merit. Nonetheless, I also believe
    that our panel must answer a number of critical questions
    before proceeding with any markup on these matters. Moving in
    haste on legislation could cause multiple unintended
    consequences.
        Regarding H.R. 658, we should, for example, discern how the
    SEC will ensure a fair hiring system in the absence of
    competitive service process requirements. We should also
    examine how we can protect the civil service status of
    professionals hired through an expedited process. In my view,
    we may ultimately identify alternatives to the proposed
    legislation that achieves the same objective.
        With respect to H.R. 957, we must make sure that the
    information distributed by NASD about brokers and their firms
    via the Internet is accurate and proper, allowing individuals
    to dispute and correct information contained in the database.
    After all, a broker should not lose customers because they are
    guilty until proven innocent. The limited liability provisions
    contained in this bill should also not provide immunity for
    willful and malicious actions. We must additionally understand
    how the NASD resolves disputes concerning the information
    contained in the database.
        In closing, Mr. Chairman, I look forward to the hearing
    from our witnesses on these two important legislative
    proposals. I also look forward to working with you to improve
    these measures in the weeks ahead, and encourage you to move
    forward deliberatively on these matters.
        [The prepared statement of Hon. Paul E. Kanjorski can be
    found on page 30 in the appendix.]
        Chairman Baker. I thank the gentleman for his statement.
        Mr. Renzi, did you have an opening statement?
        Mr. Renzi. Thank you, Mr. Chairman.
        I thank Chairman Baker for convening this important
    hearing, and for our guests; I am looking forward to your
    testimony. I also remain thankful not only to the chairman, but
    to the staff for allowing me to be involved in this important
    legislation.
        I think it is important that I make a statement that this
    kind of common sense, simple legislation will help all
    investors. In particular, I agree with the comments that we
    have just heard, that the information be accurate and reliable.
    It is the intent of this legislation, that the association be
    able to put in place, procedures that allow for this accuracy
    and these proper reliable holdings to be made on different
    types of brokers.
        I would also point out that good, useful disclosure is the
    foundation of our security laws, and is the enhancement to
    investor protection that we seek in this bill. I think the bill
    increases transparency and fairness in the market and does so
    at no cost to the investor.
        So I look forward again to your testimony and thank you so
    much for joining us this morning. Thank you, sir.
        Chairman Baker. I thank the gentleman.
        Mr. Israel, do you have an opening statement?
        Mr. Israel. Mr. Chairman, in the interest of time, I will
    submit my statement for the record.
        Chairman Baker. Mr. Emanuel, do you have an opening
    statement at this time? Are there additional members on our
    side with opening statements? If not, then I would proceed to
    the first panel. I would like to welcome here this morning two
    distinguished individuals, Mr. James M. McConnell, Executive
    Director of the Securities and Exchange Commission, and Ms.
    Colleen M. Kelley, National President of the National Treasury
    Employees Union. Your official statement will be made part of
    the record. We would ask if possible to make your statement
    within the five-minute period if possible.
        At this time, I would like to welcome Mr. McConnell to make
    the opening statement.

    STATEMENT OF JAMES M. MCCONNELL, EXECUTIVE DIRECTOR, SECURITIES
                        AND EXCHANGE Commission

        Mr. McConnell. Thank you.
        Chairman Baker, Ranking Member Kanjorski and members of the
    subcommittee, I appreciate the opportunity to testify before
    you today on behalf of the Securities and Exchange Commission
    in support of H.R. 658, the Accountant, Compliance and
    Enforcement Staffing Act of 2003. This legislation would
    provide essential authority to the Commission in its effort to
    quickly hire accountants, economists and securities compliance
    examiners. We thank you, Mr. Chairman, and the members of the
    subcommittee for your leadership on this vital issue.
        Dramatic changes have occurred in the Commission's
    personnel environment during the past year. Thanks in large
    part to the efforts of this committee, the Commission has been
    granted the authority to pay higher salaries, provide
    additional benefits, and has received increased appropriations
    to fill over 800 new positions this fiscal year.
        While the new pay authority and increased appropriations
    have eased the Commission's crisis in hiring and retaining
    attorneys, substantial difficulties remain in our ability to
    hire accountants, economists and securities compliance
    examiners. The reason for this distinction between attorney
    hiring and the hiring of other securities industry
    professionals is clear. Attorney hiring is excepted from civil
    service posting and competitive requirements; the hiring of
    Commission accountants, economists and examiners is not. When
    we are filling a vacancy under the competitive service, the
    process can take months to complete. Under excepted service
    authority, the hiring process can be completed in a few weeks.
        In January, 2002, the Commission received its long-sought
    pay parity authority as part of the Investor in Capital Markets
    Relief Act. All Commission employees now have salaries
    comparable to the other federal financial regulators.
    Additionally, in August 2002, the Commission received a
    supplemental appropriation of $30.9 million, of which $25
    million was earmarked for 125 additional staff positions.
    Higher pay and the additional slots have worked well with
    respect to our ability to hire and retain the attorneys the
    supplemental provided. However, our experience in hiring
    accountants has been far less successful. Despite our best
    efforts, only a few more than half of the new accountant
    positions made available in the supplemental have been filled.
        The Commission's efforts to hire accountants under existing
    authority are further complicated by the special caliber of
    accountants that our mission demands. In order to ensure the
    adequacy of public company disclosures and to review the books
    and records of broker dealers, investment advisers and mutual
    funds, the Commission needs hundreds of accountants, most of
    whom must have specialized experience in public accounting.
        Our hiring difficulties are not limited to accountants. The
    complexity of the issues facing the Commission requires a
    similar level of skill and experience in our economists and
    securities compliance examiners. The solution to these problems
    is to allow us to hire accountants, economists and examiners as
    we have successful hired attorneys for years.
        Most of the civil service protections accorded to excepted
    and competitive service personnel are exactly the same. These
    include veterans preference, bargaining rights and union
    representation, health care options, EEO rights, and retirement
    and leave benefits. There are a few differences. First, MSPB
    appeal rights are limited for a new employee's first two years
    in the excepted service, as compared to one year for the
    competitive service. However, the Commission has historically
    provided a one-year probationary period for all staff,
    including excepted service employees, and we will continue this
    policy.
        Another difference might occur if the agency were to
    experience a reduction in force, since mandatory protections
    are lessened for excepted service employees in a RIF. A RIF is
    highly unlikely at the SEC, and we have the authority to extend
    the protections and we would exercise it to treat all employees
    the same.
        Finally, an employee in the excepted service would not have
    the same advantages an employee in the competitive service if
    he or she wanted to transfer to another government agency. For
    all practical purposes, we simply do not lose program staff to
    other federal agencies. For all these reasons, there is no
    meaningful distinction between excepted and competitive service
    at the SEC.
        Some may view the legislation you have crafted as highly
    technical and not very exciting, but I want to assure you that
    it is among the most important actions that Congress can take
    to support the SEC and its mission of protecting investors and
    restoring confidence in our markets. It is very exciting to
    those of us responsible for enforcing the securities laws.
        Thank you for your support. I look forward to your
    questions.
        [The prepared statement of James M. McConnell can be found
    on page 40 in the appendix.]
        Chairman Baker. Thank you, Mr. McConnell.
        At this time, I now call on Ms. Colleen Kelley.

      STATEMENT OF COLLEEN M. KELLY, NATIONAL PRESIDENT, NATIONAL
                        TREASURY EMPLOYEES UNION

        Ms. Kelley. Thank you, Mr. Chairman, Ranking Member
    Kanjorski, and members of the subcommittee.
        NTEU represents the 2,000 bargaining unit employees who
    work for the Securities and Exchange Commission across the
    country, including the accountants, the examiners, and the
    economists. As a professional accountant myself, I understand
    and appreciate very much the work that they do. With me today
    also is Mike Clampitt, the president of NTEU Chapter 293, which
    is our local chapter at the Securities and Exchange Commission.
        Mr. Chairman and members of the committee, you know as well
    as I do of the serious staffing and morale problems at the SEC.
    For all too many years, this went unaddressed. Pay and benefits
    were grossly substandard; working conditions were not conducive
    to a positive working environment; and morale was very low. The
    good news is that we are making progress at the SEC. For
    example, a newly negotiated agreement between NTEU and the SEC
    has given employees confidence that they will be treated fairly
    on the job. Under the leadership of the Financial Services
    Committee, pay parity legislation was passed by Congress.
        We are still, however, in need of the full funding that the
    president has requested, and we also need SEC management to
    fully implement pay parity and benefit parity with other FIRREA
    agencies. As the SEC struggles to recruit more employees, it
    would be a shame to lose qualified current employees to other
    agencies because they still offer better pay and benefits.
        On the matter of new hiring, I think all interested parties
    are substantially together on the need to be able to quickly
    hire qualified employees as authorized. The question is, what
    is the best way to do this? I believe that the goals of this
    proposal can be fully realized without taking away the
    competitive service status from the accountants, the economists
    and the examiners at the SEC. I believe we should preserve the
    competitive service status for these employees because it does
    provide distinctions and advantages and rights for the
    employees once they are hired.
        Keeping competitive service status for these employees is
    important when applying for positions elsewhere in the federal
    government, such as at the FDIC, at the Treasury and other
    agencies. Without it, employees cannot count their years of
    experience at the SEC when applying for other government jobs.
        One of the arguments for pay parity was that the disparity
    in pay between the SEC and other FIRREA agencies meant that SEC
    management lost out on the advantage of an exchange of
    employees among FIRREA agencies. The argument was that such
    movement of employees was a benefit to the development of
    experienced, well-rounded professionals, and it was a benefit
    to the FIRREA agencies as well as to the employees.
        In addition, as you have heard, excepted service employees
    have a two-year probationary period rather than a one-year. I
    am pleased to hear that the SEC has made a commitment that in
    any circumstances that would be a one-year time frame instead
    of the two-year. But this is a significant issue, and it is
    still a pending one prior to any formal resolution on the
    issue.
        Competitive service is also important for bump and retreat
    rights in the case of a RIF. While I am sure today no one can
    imagine the SEC ever in that situation, we have seen agencies
    put in that situation with unintended consequences. I would
    suggest that the better approach would be to keep the SEC
    accountants, examiners and economists in the competitive
    service, but to grant the SEC the hiring flexibilities it needs
    independent of a change in status for employees.
        In electing to focus on hiring flexibilities, rather than a
    total change from competitive service to excepted service, a
    model you may wish to look at is the government-wide provisions
    that are included in the recent homeland security legislation
    that were developed by Senator George Voinovich. This gives the
    OPM the right to grant direct hiring authority to an agency
    that faces a critical shortage of qualified applicants. The SEC
    may have concerns about the length of time required to go
    through an OPM approval process, but Congress could directly
    grant this authority to the SEC. In doing so, I believe it is
    very important that it should be directed to first-level
    positions only. Obviously, employee morale would be severely
    hurt if new hires were brought in at higher-graded positions
    and the qualified on-board employees were not given the chance
    to be placed in these positions.
        I would also urge that any such authority be temporary, and
    that the SEC provide this subcommittee and other appropriate
    congressional committees with a report detailing the guidelines
    used, the numbers, types and grades of employees hired under
    the authority, and the benefits and shortcomings associated
    with any change in the policy.
        Again, I thank you for the opportunity to be here this
    morning to share NTEU's views with the subcommittee.
        [The prepared statement of Colleen M. Kelley can be found
    on page 32 in the appendix.]
        Chairman Baker. I thank you, Ms. Kelley.
        Mr. McConnell, I want to make sure that I am understanding
    the characterization of current SEC treatment of excepted
    service employees. Although by statute I presume there is a
    two-year probationary period, by matter of practice you limit
    yourself to the first year review, as is the case for
    competitive service employees. That being the case, and
    apparently this being a significant issue, is there any
    advisable reason why the committee should not simply make that
    change in this bill as well, to simply state that excepted
    service employees shall be subject to a one-year probationary
    period?
        Mr. McConnell. We would have absolutely no objection to
    that, because that is the way we will operate. If you were to
    ask an attorney at the SEC how long their probationary period
    is, they would say one year. So we would be happy to have that
    memorialized in whatever way.
        Chairman Baker. With regard to an excepted service
    employee, prior to their engagement, it is my understanding
    that they are given in writing a description of the
    consequences of going from competitive into excepted service,
    meaning if there is an issue with regard to a RIF or any other
    condition that might ultimately lead to their dismissal, they
    are made aware of that prior to their engagement and their
    employment is voluntary. They could remain in the competitive
    service by not coming to the agency, or taking that particular
    position.
        Mr. McConnell. That is correct, yes, sir.
        Chairman Baker. So there is notice. Are there any other
    elements where excepted service employees are treated
    differently from competitive service that you could offer to us
    that could be included in the bill to mitigate some of these
    concerns, beyond the probationary period? We have not really
    talked about it.
        Mr. McConnell. There is. In cases of a reduction in force,
    we actually have the authority to treat everybody the same. We
    have specific authority to do so. We would do so, but you could
    add to this bill a specific provision that says the SEC shall
    treat all employees using their authority in the same manner
    under the circumstances of a reduction in force.
        Chairman Baker. So that would then leave us with just the
    one issue of a person who voluntarily applies for an excepted
    service position, knowing that if they were to leave and go to
    another position in the federal government they would have
    potential liability for lack of accumulated seniority, which is
    the only other point that I understand is being raised as an
    objection to the legislation.
        Mr. McConnell. Yes, sir, that is my understanding as well.
        Chairman Baker. Given the fact that these folks, and let me
    phrase a question; I am making an assumption that may not be
    correct. The difficulty in hiring most of these individuals is
    that they are not B-school graduates. It requires a certain
    level of skill sets in order to do the work the SEC is looking
    for. Much the same in the legal profession; that you are going
    after a certain type of individual with a very narrow, but very
    good set of abilities to perform a very specialized task within
    the agency. Given that person then is likely to be mid-career
    or advanced in career, this is a person who is fully capable of
    making a judgment about whether the risk of excepted service is
    good for their long-term career or not. How long, if nothing
    changes and we proceed with the current system, even though you
    have funding and authorization, to go from where you are today
    to get to the end of the process of having 100 percent ability
    within the agency?
        Mr. McConnell. If we do not obtain this legislative
    authority, I cannot tell you precisely how long it would take.
    I know that we could not do it this year. We have looked at
    this very carefully. We have analyzed it. I would like to be
    proven wrong, but I am confident that unless this legislation
    passes and passes quickly, the SEC will not be able to hire the
    staff that it has authorized for 2003. When it may actually
    happen will be certainly, I think, well into next year.
        Chairman Baker. And that is what the current statutory
    requirements that Congress has passed. If the Congress were to
    enact any additional standards in any new area, that would even
    make your job even more complex.
        Mr. McConnell. It would compound the problems we have.
        Chairman Baker. I think you have made a case for action,
    and given your responses I think we can make some modifications
    to the proposal that would go a long way down the road to
    eliminating objections.
        Let me ask Mr. Kelley, while I still have a few seconds, if
    we were to make those two modifications, would you still have
    strong objection to the passage of the legislation?
        Ms. Kelley. Mr. Chairman, I would be very interested in
    seeing whatever the language would say, of course, and I would
    surely consider any suggested changes. It was very good news,
    as I said, to hear Mr. McConnell say that this morning. I was
    not aware of those commitments by the SEC. But the competitive
    service, the way it operates today within the federal
    government, is as a rule it is not given within an agency. It
    applies across the board to an occupation. For example, the
    attorneys; attorneys throughout the federal government are
    excepted service. So this would be putting a whole new
    definition on excepted service. So I would want to have a
    chance to look through and think over the ramifications of
    that, and of course then react to whatever language you would
    be suggesting.
        Chairman Baker. I thank you, Ms. Kelley.
        Mr. Kanjorski?
        Mr. Kanjorski. Mr. McConnell, do I understand that it is
    the intention of the SEC to work closely with Ms. Kelley to
    resolve these issues, and to see if we cannot get a very
    cooperative stance so that we could move this legislation as
    speedily as possible?
        Mr. McConnell. That is correct, sir. We have worked closely
    with the union so far. We have had several meetings and a good
    bit of interaction. I understand that the local union supports
    this legislation. I think we are very close.
        Mr. Kanjorski. Is it possible in the next week you could
    all meet and send us a nice letter saying all the issues are
    resolved and we should proceed through with this on suspension
    and get you this authority before we go home for Easter?
        Mr. McConnell. I am certainly ready to make the effort.
        Mr. Kanjorski. Well, let's do it. It sounds to me like the
    agency is pliable in regard and sympathetic to some of the
    issues raised by Ms. Kelley, and I think she has raised some
    important issues that, rather than expanding and changing all
    these definitions, we can get to expedited hiring very quickly,
    without a lot of major disturbances. So if I could recommend
    you do that over the next week and communicate that back to my
    chairman so we can move on this legislation as quickly as
    possible.
        With that said, I wanted to take advantage of your
    appearance, Mr. McConnell, and I apologize for talking about an
    issue completely unrelated to what is here today. But Senator
    Grassley the other day I thought made a very significant point
    in raising the question that there is about to be a settlement
    against some of the corporations involved in the scandals, of
    about $1.5 billion. As a result of the structure of the
    settlement, the entire proceeds from the settlement will go to
    the investors fund for payment for losses. But because of the
    structure of the settlement, tax benefits will be derived by
    the corporations, which will reduce their tax burden and
    payment to the federal government. The end result of the $1.5
    billion fine will be a negative revenue flow to the federal
    government of significant proportions.
        I think he commented that he was surprised that the SEC had
    informed him that they do not consider anything else other than
    the immediate nature of the fine, and they do not consider the
    implications of the tax code and how that impacts on the
    revenues of the United States government. As you know, that
    should be important to us, and since we just increased your
    budget to $720-odd million dollars, you know, obviously we are
    going to have a shortfall, and we are going to be asking either
    for additional taxes or additional debt. I suspect that we are
    not going to have additional taxes. Because of the tax cut, we
    are actually imposing additional debt on future generations of
    Americans.
        Are you familiar with this issue I am talking about? Do you
    have any reason why; I thought Senator Grassley was eminently
    correct in his analysis of a federal agency imposing fines that
    directly impact in a negative way on taking more revenues from
    the tax payers, and those benefits not passing into the
    treasury, but passing onto the benefit of investors who lost in
    the recent debacle in the market.
        Mr. McConnell. Sir, I am not sufficiently familiar with
    that topic or that issue to discuss it. I can assure that we
    will take it back and have the appropriate people respond to
    the subcommittee or directly to you in whatever manner.
        Mr. Kanjorski. I would appreciate it if you could do that
    very quickly, and also respond to Senator Grassley, because I
    thought it was an extraordinarily well-raised issue that
    generally does not catch the light of day, but has a tremendous
    impact on $500 million or $750 million on the loss of revenue
    to the United States government at a time when we are
    struggling, and we have given your agency a significant
    increase.
        It would be a shame to see the significant increase that we
    have given the SEC reverberate with the loss of funds for other
    vital projects of the United States government through the loss
    of these revenues as a result of your structured settlement. So
    if you could address that issue, and if for some reason you are
    not familiar with it, I happened to see it in a news statement
    by the Senator, so we could contact whatever media that had
    that news conference. I suspect he must have written a letter
    on the subject. But I would appreciate a response for myself on
    that issue, and also to Senator Grassley if that is possible.
        Mr. McConnell. Yes, sir. We will take care of it.
        Mr. Kanjorski. Thank you very much.
        Chairman Baker. I thank the gentleman.
        Mr. Renzi?
        Mr. Renzi. I yield back my time to the Chairman, for any
    comments he might have.
        Chairman Baker. Terrific. I appreciate the gentleman
    yielding.
        While we are on the topic that Mr. Kanjorski was speaking
    to, since we are speaking through you to other people, I will
    try to keep it brief. I also have concerns previously
    expressed. From published press reports, I think the companies
    that have been found guilty of wrongdoing should have the
    fiscal responsibility for paying the obligation and not have it
    engaged through insurance or the shelter of tax provisions. But
    there is another important element of this as well, and that is
    that the defrauded investors get some recompense as a result of
    these settlements. The proposed settlement, as I have read it,
    was $1.4 billion, with approximately $900 million previously
    identified in press reports as likely to be given back to
    defrauded investors, as identified by the SEC.
        The troubling thing that I have read in recent days is that
    some states now are planning on whatever portion they may get
    back of these funds, rather than using them for investor
    restitution, are talking about DMV offices and a whole host of
    operational concerns. I believe that is highly inappropriate,
    unless of course, we are going to repeal the driver's license
    of some fraudulent investor as a result of his DMV office. I
    think people would feel much better if they got a small check
    in the mailbox saying, the United States government has been
    working on your behalf, one, to put these guys behind bars;
    secondly, to get compensation back; and thirdly, this is your
    money. I liken it to the case where you are back home, your car
    is stolen, you call the sheriff, you get a call back two days
    later and he says, good news, we found your car; the bad news
    is the sheriff's going to keep it. Somehow that does not seem
    to me to be justice.
        This has been a bipartisan effort of this committee, to get
    investor restitution, and to have the biggest settlement ever
    by the SEC and others hammered together over many, many months,
    I would hope that this glimmer of provision would also be
    constrained, much like the gentleman suggested with regard to
    corporate abuse, that we constrain the disposition of that $900
    million or whatever, specifically to investor restitution. So
    when the folks are responding to Mr. Kanjorski's issues--just
    please add mine onto the bottom of the letter.
        Mr. Kanjorski?
        Mr. Kanjorski. If you will, Mr. Chairman. I think you would
    join me, that you would be displeased to see the Federal
    Treasury suffer the loss because of the tax credits that the
    corporations may gain as a result of the nature of the
    structure of the agreement, so that all the taxpayers become
    losers, even though a significant amount goes to the investor
    fund, but it really is not corporate money that is going there,
    it is taxpayers money because we would be losing those revenues
    as a result of the corporate tax credits.
        Chairman Baker. I thank the gentleman for making that
    point. I agree. The wrongdoers should be held accountable, no
    one else. However we have to construct these settlements in
    order to ensure that, I think that is of principal importance.
    Secondarily, if we are going to have $900 million sent to
    anybody, it ought to go back to the people it was taken from. I
    think those two points can be joined together very
    successfully.
        I thank the gentleman for yielding his time.
        Mr. Israel--
        Mr. Israel. Ms. Kelley, you represent many workers in my
    district, including employees at the IRS' Brookhaven campus and
    customs workers at JFK. Can you tell me how employees at other
    agencies will be impacted by this bill? Is there a "camel's
    nose under the tent" problem here? What is the implication for
    other agencies throughout the government?
        Ms. Kelley. I guess depending on how the language is
    written, it could be argued that no one would be impacted but
    the SEC. But as we all know, as soon as this starts, then it is
    just a matter of how quickly it spreads. In thinking about the
    three primary issues that have been identified; the one-year
    probationary period, the impact in a RIF and the ability to
    have years of service count throughout the government; if the
    SEC is willing to commit to the one-year probationary period
    and use their authority to say all employees are treated
    equally in a RIF, then it almost seems as if it would be much
    easier to get to the crux of this problem to maintain their
    competitive service status, and figure out how to get this
    hiring done faster, rather than making up new definitions for
    what excepted service will or will not be.
        I do have the fear that you expressed, because we have seen
    it over and over again in this whole area of flexibilities,
    that once a new definition arrives for a traditional word or
    phrase that has always existed, it tends to impact not just
    those originally intended. So it is a very big concern--
        Ms. Kelley. Again, I think probably the easiest way would
    be to say they continue as competitive service employees, but
    let's figure out a way to do the expedited hiring, which is the
    only thing that the agency has, or the primary goal the agency
    has identified, which we agree with. We want to find a way to
    help make that happen. If these other things that are
    traditionally in excepted service are not going to be, then it
    does not seem to make a lot of sense to rewrite that. I would
    hope we could focus in this next week's discussion on the
    hiring issue, and figure out how to do that without impacting
    the status and redefining everything that everybody knows
    today.
        Mr. Israel. I yield back.
        Chairman Baker. I thank the gentleman.
        Mr. Emanuel?
        Mr. Emanuel. I was just trying to stall until I came up
    with my questions.
        Chairman Baker. I am sure that was sufficient time for a
    guy like you.
        [LAUGHTER]
        Mr. Emanuel. I appreciate that confidence.
        Actually, I do first of all, without trying to brush over a
    point, that if you can work it out, clearly you have had
    discussions. I think that would be a great thing. I think what
    Ms. Kelley said in relationship to using the model that was
    negotiated and recommended by Senator Voinovich during the
    homeland security debate could be a guiding principle, since we
    have been around this bend with other employees, and it may be
    a good template here.
        I do believe, as somebone who worked for a short period of
    time as an investment banker, that clearly the SEC is
    overwhelmed. Clearly, the SEC needs both not only financial
    resources, but also human resources, and I think we can
    accomplish that goal without doing any damage or long-term
    hurt, not here, but using it as a model that other agencies
    then would take too far. My goal is, and my wish, is that this
    would not be an attempt to get one's goods through customs,
    meaning that we would do something that would damage, I think,
    worker protections that have been a long-term and long-time
    standard here.
        To the issue of what both the Chairman and the ranking
    member talked about as it relates to the agreement reached on
    some of the corporations, I have one clarification. Usually, it
    is not a choice. This is not a choice between the investors and
    the United States Treasury. That is a false choice. It really
    relates to how the company is getting the tax benefit.
        I do not in any way want the language to come back, and it
    is presumed that somehow we want Treasury to get the resources
    and then do it as chump change to the investors. Those two are
    not the trade-off. It is whether the corporation that has been
    in violation that passes, and then getting extra credit in the
    tax structure. So I would say, how you do that is very--and I
    know again, Mr. McConnell, we are talking through you to others
    at the agency. I think it is a very, very important point,
    because I do not think it should be constructed or implied by
    any of the questions that we somehow presume that it is a
    choice between the investors and the Treasury.
        Thank you very much to both of you, and good luck over the
    next week.
        Chairman Baker. Thank you, Mr. Emanuel.
        Mr. Scott?
        Mr. Scott. Yes. What time frame does the SEC believe that
    it will be fully staffed in order to meet the demands of the
    Sarbanes-Oxley legislation?
        Mr. McConnell. That question depends on the success of this
    legislation, it seems to me. Speed is of the essence with us
    obtaining the authority to be able to hire more efficiently. As
    I stated earlier, if this authority is not available to us for
    hiring, we will not be able to do it this year. We will not be
    able to hire those people this fiscal year. How far into next
    fiscal year it would go, I cannot speculate. As you may
    appreciate, the same people who make the hiring decisions are
    the same people who are implementing Sarbanes-Oxley and who are
    going after the bad guys. So we just cannot but throw so many
    resources at hiring. We have got to have some help to do it.
        Mr. Scott. The federal government is experiencing a large
    number of employees who are eligible for retirement coming up.
    What impact would this have on the SEC? Are you all expecting a
    similarly large surge of retirements?
        Mr. McConnell. We are not facing that same sort of bulge
    that a lot of other agencies do. We have a very young
    workforce. Our turnover in the past has been so high that we
    have dealt with planning for replacements as a regular course
    of business. With pay parity, we have substantially improved
    our ability to retain people. Our attrition rates are down
    dramatically and it has been very helpful. But at the moment,
    currently we do not have that same kind of retirement bulge
    that you see in a lot of other agencies.
        Mr. Scott. Finally, if I have time, did I hear you
    correctly, did you state that the unions are fully on board?
        Mr. McConnell. I do not think I can make that statement.
        [LAUGHTER]
        I believe that we have a very common interest all across
    the spectrum on this, and it seems like we can work something
    out, but there are certainly some differences.
        Mr. Scott. What are those differences, may I ask?
        Ms. Kelley. Based on our public conversation this morning
    for a half an hour, it seems like the only difference now is
    figuring out how to get the hiring done fast. It is not about
    redefining or the concerns that NTEU had raised about
    probationary periods, because it would be the same as in
    competitive service, so let's just leave them there. They would
    not have different rights in a RIF, so let's just leave them in
    competitive service.
        So I think we have isolated the issue to quick hiring and
    the Commission's ability and authority to do that. I think that
    is the open question, and hopefully we can find a resolution
    that we could agree on that would maintain the competitive
    service and get these new employees on board as soon as
    possible, which is what we all want. We do have a common
    interest in that.
        Mr. McConnell. If I may, I would like to wade back in on
    that same issue. Speed is critical. We need this authority
    right now. Anything that delays it, delays our ability to bring
    people on and to meet the goals of Sarbanes-Oxley and to meet
    the goals this Congress has set for the SEC. I just have to
    leave you with that.
        Mr. Scott. Thank you.
        I yield back the balance of my time.
        Chairman Baker. Thank you, Mr. Scott.
        Ms. McCarthy?
        Mrs. McCarthy of New York. Thank you.
        We are hoping, too, that certainly with the passing of this
    legislation it is going to make it a lot easier for you to do
    the hiring. But hiring is one part of the process; accepting
    the applications is another part that you have to go through.
    From what I hear from an awful lot of people, not just with the
    SEC, but from other job applicants, they apply and then they
    hear nothing. Obviously, when someone is applying for the job,
    they are not going to wait a long time. Obviously, they want to
    get into the job market and work faster. Just looking at how
    you take the applications and the process that it has to go
    through before it can be moved on back to the point of being
    hired, hopefully we can streamline that for you a little bit.
        I guess basically what it comes down to, do you have any
    idea how long it actually takes from the time someone applies?
    Do you actually call those people back, say, that they are in
    the pocket, that they have a decent chance of being hired, or
    anything else like that so they know? That is usually how the
    best applicants usually end up going somewhere else.
        Mr. McConnell. I am afraid that I must admit that at the
    SEC, like at many other agencies, it takes months sometimes for
    people to hear. This legislation will give us the ability to
    move that along in weeks, so people will know very quickly what
    their status is and they can move on to other employment
    opportunities if that is necessary.
        Mrs. McCarthy of New York. What I would say which would
    help obviously everyone is to really sit down, as the chairman
    has mentioned, and work out your differences so we can get this
    on a suspension bill and get you going. That would be the best
    thing for everybody.
        Thank you, Mr. Chairman.
        Chairman Baker. Thank you, Ms. McCarthy.
        Mr. Lynch? Do you have a question?
        Mr. Lynch. Thank you, Mr. Chairman.
        I would like to thank both of the witnesses for coming here
    and helping the committee with their work.
        President Kelley, I just have a two-part question, if you
    will. First of all, I understand under the legislation that
    current employees may be grandfathered under certain treatment
    under civil service, and then new employees would be treated
    somewhat differently. As a former union president myself, that
    always presented a difficulty for me in trying to enhance
    solidarity and unity, while having two sets of different rules
    for my employees.
        My first question is, have you had discussions with your
    members about how this would be handled, and if you might
    relate to the committee some of their concerns, if you have
    heard from them. And also just a general question, how do you
    think this legislation could be improved? What do you think
    might not be addressed here within this bill that you would
    like to see addressed?
        Ms. Kelley. On the first question about the grandfathering,
    that is a very interesting point. As a former union president,
    I can see why it would be on the top of your list. The
    discussions with the employees in large part have to start with
    the education process as to what it means to be excepted
    service versus competitive service. Once the discrepancies are
    understood, then there is a clear concern that, will they be
    impacted, too? While not often, but once in a while, it is
    important for unions to agree that there has to be a different
    treatment and grandfathering has to occur, but that is in a
    case where I think there can be such distinct or specific cases
    made as to why that is necessary to the success of the agency,
    as well as the success of the government. I do not think that
    is the case here. I do not think the separation between
    excepted service and competitive service is necessary.
        I think we have established today that really at the core
    of this is just about expedited hiring, and not about the other
    things that go along with the excepted service. So I can tell
    you that the local chapter, Chapter 293, and the employees who
    we represent are opposed to the hiring of future employees as
    excepted service employees, and are interested in figuring out
    how, of course, to get the Commission staffed up to where it
    needs to be, but to find the right solution and not to create
    this grandfathering provision when it really is not necessary.
    That is not the problem. The problem is how do we get employees
    hired faster and the qualified employees that the SEC needs.
        So that is the first part. I guess to the second part of
    your question about what else, I have really been focused
    solely on this issue because it is the one that touches the
    employees, both current and future, and their working
    conditions. And also I view it as a responsibility of NTEU's to
    help to ensure the ability of the SEC to hire qualified
    employees. Employees who we represent want to be successful in
    the workplace. For them to be successful, the agency they work
    for has to be successful. So we come at this from the same
    direction.
        Mr. Lynch. That is great.
        Thank you. I yield back.
        Chairman Baker. Thank you, Mr. Lynch.
        If no member has any further questions, I want to express
    my appreciation to both of you and offer that if my office can
    be of any assistance in facilitating a resolution on the
    pending matter, I certainly want to be involved and helpful. It
    would be my intent to try to move this bill as quickly as is
    practicable. I think any protracted delay would not be good.
    Let me suggest that if we can informally visit over the course
    of early next week, perhaps we can get to a point where we can
    move this to the suspension calendar and accomplish what we all
    want to see happen.
        I thank both of you for your appearance here today. Thank
    you.
        Mr. McConnell. Thank you.
        Chairman Baker. I would also at this time ask for our
    second panelist to come forward.
        The purpose of our second panel is to receive testimony
    relative to H.R. 957, the Broker Accountability Through
    Enhanced Transparency Act of 2003. To that point, I welcome Mr.
    Doug Shulman, President, Regulatory Services and Operations,
    the National Association of Securities Dealers.
        Welcome, Mr. Shulman.

     STATEMENT OF DOUG SHULMAN, PRESIDENT, REGULATORY SERVICES AND
         OPERATIONS, NATIONAL ASSOCIATION OF SECURITIES DEALERS

        Mr. Shulman. Thank you, Mr. Chairman.
        Chairman Baker. Your formal testimony will be made part of
    the record, and if you wish to present your views within the
    five-minute expectation, that would be great.
        Mr. Shulman. Thank you very much. That would be great.
        First, I very much appreciate the opportunity to be here
    and testify on the Broker Accountability Through Enhanced
    Transparency Act of 2003. This bill will allow NASD in summary
    basically to take information we can now make available via
    toll-free line and via mail, and move that information onto the
    Internet, which is what investors are looking for now.
        Let me give you quick background on NASD and our public
    disclosure program. As you know, we were chartered by Congress
    to write the rules which govern the behavior of securities
    firms, investigate firms and do examinations of their conduct,
    and when necessary do enforcement actions and disciplinary
    actions on those firms. Every broker-dealer who does business
    with the investing public must be a member of the NASD. Our
    responsibilities range over a wide variety of activities,
    including transparency in the fixed income world, to our trade
    system, licensing and registering brokers, doing our
    traditional regulatory activities, investigation, enforcement,
    and dispute resolution.
        Clearly, as a regulator, we have a couple of jobs. One is
    the traditional job, writing rules and making sure they are
    enforced. The second, and vital to what we do, is getting
    information into the hands of the investing public, so they can
    make informed decisions when they enter the capital markets. In
    the case of what we are trying to get done and what your bill
    would help us do today is getting information about the brokers
    with whom they do business.
        A quick background on our public disclosure program. We
    have 665,000 brokers in the securities industry who do business
    with the public. All of them register with us. We then make
    certain information available to the public to help them make
    decisions about which broker to use. The information we make
    public is disciplinary actions, customer complaints,
    arbitration decisions, civil judgments in securities or
    commodities-related activities, felony and misdemeanor criminal
    convictions that are investment-related, as well as
    bankruptcies and unpaid judgments and liens. To give you a
    sense of the volume of the program, we launched this program in
    1998. We had about 6,000 people look for information on their
    broker in 1998. Last year, we had 2.5 million people come in
    looking for information on their broker.
        To speak specifically about the bill, what we are looking
    to do is to provide the same exact information we make
    available to people via paper online in real time. In 1990,
    Congress passed the statute which gave us statutory liability
    protection for our toll-free number and for paper-based
    information that we give to investors. Clearly, Congress was
    quite wise in insisting at that time that make a toll-free
    number available. The toll-free number was the way that an
    investor could easily get information on their broker and
    quickly.
        Over the intervening years, the last 13 years, we had the
    Internet revolution. Today, 96 percent of the inquiries that
    come into NASD come in via the Internet. Simply put, what we
    are trying to do is make the process for those investors to get
    the information from NASD about their broker meet the
    investor's expectation of getting that over the Internet.
        Let me comment, in speaking with some of your staff, a few
    questions have come up, and let me comment on those directly.
    One is the 1990 statute gave us good-faith liability. This
    statute does not have the qualifier of good faith in there.
    There are three reasons why we think this is sound. First is
    our desire to secure a uniform federal standard. The good-faith
    criteria that was in the bill, if it ever came to this and an
    investor disputed that, we would have to basically look at and
    understand defamation laws in all 50 states. It would be
    cumbersome and expensive for us to do that. Our rules are
    written under federal security rules approved by the SEC, and
    we think establishing a uniform standard for all 50 states is a
    good thing.
        Second, this bill would conform to the current case law
    that is out there on NASD as an SRO with liability protection.
    We have been given absolute liability without qualifiers in
    every case that has come along about us doing our regulatory
    job. This bill, without putting the good faith in there, would
    basically be a conforming, and make sure the statute conformed
    to what the courts have ruled.
        Finally, this bill, and wisely so, you asked us to make
    sure that we had procedures that were approved by the SEC to
    handle any disputed information that goes out in the public
    about a broker. We think those procedural safeguards are in
    essence the same thing as making sure we operate in good faith,
    and hence obviating the need to have that good faith standard.
        Let me just finish up by saying that while this bill does
    not address what we put in the system, it only addresses how
    investors can get this information from the system, you should
    know what we go through and how we try to decide the balance of
    information we put out about a broker. The word "balance"
    speaks clearly. What we need to balance is transparency in the
    capital markets and getting as much information out to
    investors as possible, against the fact that we are getting
    information about a broker out into the public and we need to
    make sure we are sensitive about getting the right information
    about a broker, and that broker is treated fairly in the public
    eye.
        When we go through a process, which we are going through
    now, which really has nothing to do with the bill, but when we
    look and see what information we put into the public, we have
    extensive dialogue with the industry, both the firm
    representative and brokers, with investor groups, with the
    states and other SROs, and finally any of our proposals have to
    be approved by the SEC.
        We continually strive to get that right balance. It is not
    an easy balance to get. Our default is always towards getting
    investors more information, with one major caveat. We are quite
    aware of the issue of identity theft. We do not and will not
    put information out about a broker that could be used to
    compromise that broker's safety or reputation, et cetera. The
    things we will not put out are Social Security numbers, home
    addresses, physical descriptions, the kinds of things that are
    used in identity theft. We are very careful about that.
        In conclusion, this bill is trying to get investors
    information in the form that they clearly are demanding it. It
    is going to go a long way towards letting us as a regulator do
    our job better, which is to get information into the market, to
    keep markets safe, and to make sure that investors are
    protected.
        I would be happy to answer any questions.
        [The prepared statement of Doug Shulman can be found on
    page 46 in the appendix.]
        Chairman Baker. Thank you very much.
        I think it makes a lot of common sense, given individuals'
    access to the Internet to get information. I do not have any
    hesitancy to think that this is a good thing to do. I guess the
    only point that we need to have clarification on is the
    mechanisms to ensure that accurate information is provided.
    With regard to a civil judgment, felony, misdemeanor,
    bankruptcy; those things are pretty clean and clear-cut. You
    are not going to put anything out just because they are in
    court. You are going to wait until the appeals are final and
    determinations or sentence is imposed.
        The area where I have some sensitivity, though, would be
    customer complaint. If I called in and said I am entitled to
    return of funds from my account and I have not gotten them in
    six months, that is a complaint. If I call in and say I acted
    on my broker's advice and I lost money, I do not know if that
    is a complaint. How do we sort that out? What process do we go
    through before we report a broker has 26 complaints against
    him? What is the review process that enables you to feel
    comfortable in moving forward and having that on the Internet?
        Mr. Shulman. That is a great question, Mr. Chairman. Let me
    try to answer it.
        First, let me just state what I said before, that this bill
    is not about what information is out there, but clearly it will
    make sure there is more information out there and that the
    right information is out there. In terms of customer
    complaints, as I said before, it is a very delicate balance. We
    do a couple of things to ensure that when complaint information
    is out there, it can be put in context.
        The first thing we do is when we release customer complaint
    information, that information, the broker has the opportunity
    to have their side of the story right there next to each other.
    So basically if it is in dispute that this is a legitimate
    complaint, that will be flagged by the investor. Second, when
    we look--this is a long-standing procedure in the securities
    industry; it has been for years we have released this kind of
    information; when we look at the balancing act around
    customers, first as I mentioned, the industry is fully
    involved, lots of people are involved in this. If there is
    information on someone's record that is clearly erroneous or
    defamatory in nature, it can be expunged from the record.
        What we try to do is have information out there that will
    engage someone in a dialogue with their broker. So if someone
    comes out and sees there is one customer complaint, first they
    will see what the complaint is and see the broker's answer.
    Second, we are trying to put information in context separate
    from this legislation. We have a review going where what we are
    trying to do is get authority from the SEC to put this
    information in context, so we would be able to say 4 percent of
    all brokers have a complaint against them; less than .5 percent
    of brokers have five complaints against them, or whatever the
    information is. So we can put it in context for an investor.
        Chairman Baker. Let me jump to another point before I
    expire my time.
        Assuming for the moment we have got a system in place that
    minimizes erroneous reporting, that reflects accurately the
    professionalism of a particular brokerage firm, using your
    information from 6,000 inquiries in 1998 to 2.5 million last
    year, once we are fully online, it is not incomprehensible,
    given the ease with which people would feel they could access
    this information, to have several millions of hits beyond the
    2.5 million you currently are responding to. What about your
    resource limitations to be able to adequately respond? I know
    in a congressional office, the number of e-mails you get versus
    letters, versus telephone calls, a disproportionate share is
    moving radically in one direction. It makes it very difficult
    to stay up with it.
        Do you have concerns, or what is the prognostication a year
    or two out from now if this is authorized? How are you
    preparing for the additional inquiries?
        Mr. Shulman. It is a great question. First, my team just
    told me I said "1998." I meant "1988." So hopefully it will not
    escalate. We want investors coming in, but we do not anticipate
    huge escalation.
        This actually would make it much easier because right now
    we have to go through the cumbersome process of getting the
    phone call, putting the information in mail, mailing it out to
    the investor, because the investor then cannot access the
    information quickly, they might have to come back and ask for
    more information, et cetera. What we think this would do is
    actually limit the resources and save us resources, because the
    investor could pop it up online. All we need to do is have the
    program coded correctly so that the information can be accessed
    online.
        Chairman Baker. So this will not facilitate online
    complaint initiation. Complaints will still have to be
    originated in the traditional way. This is only to send the
    information out, not to collect it.
        Mr. Shulman. Exactly. This is just about the information
    that the investor gets, not about all the channels that
    information comes into the NASD and other SROs.
        Chairman Baker. Terrific.
        Mr. Kanjorski?
        Mr. Kanjorski. This is just about publication?
        Mr. Shulman. Yes.
        Mr. Kanjorski. That is pretty important, isn't it? Isn't
    that the whole issue in libel law and slander law; publication?
        Mr. Shulman. Excuse me?
        Mr. Kanjorski. Publication is the important thing. It is
    one thing to send a letter or information to an inquiry made
    over the telephone, and another thing to hire a bulletin board
    and put up information on it, that everybody that drives down
    the highway can see, or everybody that uses the e-mail bulletin
    board can see. I am very much interested in this whole idea of
    what happens with a mistake. In your testimony you said you
    were worried about identify theft. Hell, I am worried about
    character theft. What if you make a mistake? The person is
    dead. What happens if someone makes a customer complaint or
    some information is put up on the Internet that is absolutely
    false. You say there is a method to expunge it. If you get a
    court order, how much does it cost for an average broker or
    person who feels they are being slandered or libeled to get a
    court order? You are talking tens of thousands of dollars, and
    months of time, before you can get that off.
        Mr. Shulman, I am very sympathetic that the best
    information be made available, but I qualify it with "best"
    information, truthful information; examined, studied,
    conclusive information. I hear you talking about customer
    complaints, not final jurisdiction or a judicable issue that
    has been finalized, but something that is in the process of
    occurring, where we do not know what the final result will be.
    Once you put that on the Internet, it never leaves existence.
        Now, I know you are not in public life, but I am and I know
    the Chairman is, and all you could do is make one charge
    against a politician that gets printed, and it can be the most
    ludicrous charge in the world, and it can never be expunged
    from the obituaries that exist across the country. You revisit
    that erroneous mistaken charge a million times.
        We are sort of enamored with a certain thickness of skin to
    accept that. But now we are talking about people's livelihoods.
    What more important thing to a broker does he have than his
    integrity and his credibility? If you mistakenly put something
    up on the Internet that is grossly erroneous, he probably will
    not find out about it for a reasonable period of time, until
    some of his friends at the bar several weeks later are joking
    about it, and he happens to hear his name mentioned. I mean, no
    broker is going to get in the morning and run to the office and
    throw on NASD and see what they are saying about me today. So
    it is out there, and once out there, it gets captured in many
    lines or recordings across the country.
        Something said in a U5 report would be put on the Internet,
    if I understand this. That is a one-sided statement, as I
    understand it, why a person was discharged. Have you ever been
    in a circumstance that there has been an employee-management
    disagreement, and either a discharge or a firing occurs, or a
    quitting occurs, and there are different facts and
    circumstances as to why it happened?
        Let me give you an example, that I would worry about just
    from a sexual aspect. The young lady is not honoring
    indications from her employer to be responsive in ways that are
    improper to be responded to and she gets fired. He puts down
    that she was fired either for incompetence or she was fired
    maybe for being promiscuous. How in the world when it comes to
    that U5 is she ever going to capture back her character or
    integrity?
        Now, I think information, and this is the issue that I want
    to get to; are there such corrupt brokers in the United States
    that we really need all this information put up on bulletin
    boards in a permanent way? I mean, we are doing like a Megan's
    Law here. I understand that with sex perverts, but these people
    are generally not sex perverts. They have complaints filed
    against them; some proper, some improper. I am wondering, the
    standard you are using here in your industry; even doctors who
    commit acts of negligence or gross and wanton negligence in the
    majority of cases once resolved or settled, are sealed and no
    one can ever hear about it. There was an actual court case
    where the damage that occurred, proven or ceded to, means that
    everything is locked up.
        Most lawyers who are subject to charges are limited as to
    what part of the proceedings can be made public. Judges; well,
    they are a special branch in our system. Very seldom do we ever
    find out their dalliances. But most of these things are held in
    very tight control because of the tremendous amount of damage
    to the individual, the irreversible nature of that damage to
    the individual if improper facts or statements or conclusions
    are made and posted.
        So it would seem to me that you have a burden to show us
    how bad your industry is, that these crooks are running all
    over Wall Street, and if we do not throw out the whole thing on
    the Internet, that the financial markets are going to come
    apart. I do not believe that is true. I do not think there is
    any more impropriety out there than in any other profession or
    activity. We want to find a way to protect the public against
    the 1 percent, that 2 percent, that 3 percent--whatever it is.
    But at the risk of damaging the other 97, 98 or 99 percent,
    with irreparable damage if mistakes are made, I do not
    understand that. I think the balance is out here.
        It is one thing about; hello, NASD; you have a broker Jack
    Smith who I would like to find out information about. You send
    him a confidential letter back to that one inquiry. That is
    just one single person getting that information. Once you put
    it on the Internet, anybody can use that for any purpose. If
    that information is not absolutely accurate and tested, it can
    never really be expunged because it exists somewhere in its
    improper form. Secondly, you literally have committed a
    character theft or assassination. Those people can never get
    their reputations back.
        I think we ought to slow down. We are not trying to prevent
    terrorists from attacking the country here. We are not trying
    to save a life here; maybe some assets. But aren't we running
    to open up a field of uncontrolled flow of information based on
    innuendo and charge, without substantiation, to the extent that
    it could be tremendously injurious to individual lives? What do
    we do? You are asking here for immunity. You want to even take
    good faith out. What, do you want to be able to put bad stuff
    on the Internet under bad faith? Why wouldn't you want to make
    a standard of at least good faith?
        What if you had somebody working for NASD that did not like
    their spouse, and they decided to open up, just write charges
    out there? What do they do?
        Mr. Shulman. If that happened, sir, clearly we have
    rigorous SEC oversight. I think the SEC--
        Mr. Kanjorski. You what?
        Mr. Shulman. There is rigorous SEC oversight.
        Mr. Kanjorski. Oh, you are going to call them in and
    discharge them for a couple of weeks or give them a fine, or
    maybe even fire them. What does that do to the person who is
    injured? They do not give a damn. It just seems to me that we
    have an obligation. We are dealing here with the most sacred
    and important thing and privacy that we have, the ability to
    destroy character and integrity of individuals. Unless the
    injury, if it occurred in society generally, is so much greater
    that we should waive that protection, I think we have to walk
    very softly.
        I hate to think that I was a broker for 25 or 30 years, and
    some dissatisfied customer could write anything about me and
    make any charge, and it gets up on the Internet and my career
    is gone, particularly if I am in a small town or a small
    community. It is gone. What do I do? Who do I look to? I go to
    you and I say, that is not right. There is no factual support
    for this. And you say, oh well, it was done in good faith, but
    hell, we do not even have to have good faith; we just have
    immunity. Congress gave it to us. We just stripped you of your
    protections.
        I would urge, Mr. Chairman, and Mr. Shulman, we should do
    something to make sure we make information more readily
    available. But let's not run down this road. I was just
    thinking here. I remember in contract law in law school, hell,
    I think it is the law in all 50 states of the union, you cannot
    post on a bulletin board in a business place if somebody owes
    you money. Why? Because you destroy that person. It is a
    private relationship and you destroy that person's reputation.
        And yet you can put on that somebody did not pay an
    account; somebody owes money; somebody did not do something.
    You are vitiating all that expression of the long-time common
    law protections for individual rights.
        Chairman Baker. Mr. Kanjorski, if I can suggest that with
    this vote announcement that just occurred; there is a series of
    three votes. Given the few number of members remaining, it
    might be possible to proceed with other members?
        Mr. Kanjorski. Sure.
        Chairman Baker. And try to conclude.
        Mr. Renzi, do you have a question? Mr. Renzi waives.
        Mr. Scott?
        Mr. Scott. I have one. I have some reservations about this
    as well. I do not think I can more eloquently state them than
    Mr. Kanjorski did--excuse me, I hope I pronounced your name
    correctly.
        I would like to ask you about the toll-free number that you
    are currently working under. How do you get that toll-free
    number out, communicate it out to the investor community so
    they know that it is there?
        Mr. Shulman. We use a variety of venues. We try to make it
    available through PSAs in the past. We have done statement
    stuffers with securities firms so that they know that there is
    a place to come and get that information. We continually talk
    about it in public appearances. We do that on our Web site so
    people know where it is. So we try all of the traditional
    mechanisms that you would use to get information out into the
    public.
        Mr. Scott. Okay. Thank you.
        Chairman Baker. Thank you, Mr. Scott.
        Ms. McCarthy?
        Mrs. McCarthy of New York. Thank you.
        Just to follow up, I live on Long Island and we have
    certainly a number of brokers that are in my district, my son
    included. Where exactly do you get the information that is
    going to go up on the Web site, especially any information that
    might be damaging? And just to follow up quickly because we are
    on time, being that people seem to want this information, based
    on the hits that you have had on the Internet, why wouldn't the
    securities firms themselves actually as a service bring this up
    themselves? I do not know whether they have ever been asked or
    not, but at least they would have a little bit more control
    over the information that is going up, to protect their brokers
    from, in my opinion, God forbid somebody makes a mistake. You
    can ruin somebody's life.
        We have seen that. Talk about reputations; we have to go
    through campaigns every two years, and I look on the Internet
    and what they say about me, I do not even know who they are
    talking about most of the time. So I am very sensitive to this.
    But where do you get your information?
        Mr. Shulman. It is a great question. Let me answer it.
        First, just for clarity, we are not planning on posting
    information up on the Internet that people control. We are
    looking to get the exact same information. When someone calls
    and does an inquiry right now and says, send me information on
    that broker. What they would have to do is go in, not look
    through a list, but query and say, send me information on Joe
    Broker. The only difference would be instead of receiving it
    via the mail, it would come up on the Internet. But it is not a
    list.
        The place we get the information is, information comes into
    NASD; comes into the New York Stock Exchange and other SROs;
    comes into states; comes in via registration forms where we run
    all of that information; as well as complaints that go into the
    SEC and other kind of information. So it comes from a broad
    range of federal, state regulators; from the firms themselves;
    as well as from SROs, is where the information comes from.
        Chairman Baker. Thank you, Ms. McCarthy.
        Mr. Sherman?
        Mr. Sherman. One quick question. I share the ranking
    member's concerns. Would the broker be able to put right there
    a rebuttal to anything?
        Mr. Shulman. Yes, absolutely. The other thing I would say
    about that is, these brokers, Congressman Kanjorski brings up
    many very good points.
        Mr. Sherman. Let me ask one other thing, and that is, if
    something was posted about a broker, would that broker be
    notified immediately that something was posted or supposed to
    be posted?
        Mr. Shulman. Yes. The debate that has gone on around this
    is trying to weigh the investor's interest if they are on the
    complaint, which is clearly the most controversial; the
    investor's interest to know that there are complaints out
    there, against the broker's privacy right. I just would remind
    you, this legislation does not address that issue. It only
    addresses the way that that information--
        Chairman Baker. Will the gentleman yield on that point?
        Mr. Sherman. I yield after noting that a broker's life can
    be ruined by bad and false charges, but an investor's life can
    be ruined by a bad or false broker.
        Chairman Baker. I thank the gentleman for yielding.
        I just want to make a point which I think I understood
    previously, that prior to the publication, distribution, 1-800
    number response, that the broker is informed prior to the final
    determination and the information being released. Is that
    correct?
        Mr. Shulman. The complaint usually comes directly to the
    broker. There are multiple pieces of information, but we focus
    on the complaint. That comes to the broker.
        Chairman Baker. But let's take an odd case. Let's take
    where the person is sophisticated and does not go to the broker
    and make the complaint, but goes directly to the SEC and files.
    Prior to publication of that information, does the SEC contact
    the broker? How does that work?
        Mr. Shulman. If it comes into us before, we make that
    information available to the broker.
        Chairman Baker. I think what would be helpful to us is if
    you just gave the committee two or three practical examples.
    Joe Broker hears the complaint stemming directly from the
    defrauded investor or angry investor; it comes to the SEC;
    angry investor comes to the broker first; angry investor goes
    to some local consumer organization and they file. In other
    words, give us a practical view of how your world works, and I
    think it will be a great help to allay the concerns of the
    members that the brokers are not going to be put in an
    untenable position by publishing this on the Internet, as
    opposed to mailing it out or giving a phone call; that the
    processes that you vetted over the past 13 years give ample
    protection, or otherwise we would be getting significant calls
    from brokers, I suspect right now. Is that a fair request?
        Mr. Shulman. I think that is a fair request.
        Chairman Baker. If you could get that back to us at your
    convenience, it would be a great help to us in having the
    committee reach a level of comfort.
        If there are no further questions or comments, I certainly
    appreciate your appearance here today and your support of the
    legislation. We look forward to working with you in the days
    ahead.
        Mr. Shulman. Great. Thank you very much.
        Chairman Baker. We stand adjourned.
        [Whereupon, at 11:24 a.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 March 6, 2003

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