[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) 512ï¿½091800  
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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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