[Senate Hearing 109-253]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-253
 
                    NOMINATIONS OF: CHRISTOPHER COX
                  ROEL C. CAMPOS, ANNETTE L. NAZARETH
                   MARTIN J. GRUENBERG, JOHN C. DUGAN
                           AND JOHN M. REICH

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                                   ON

                            nominations of:

         christopher cox, of california, to be chairman of the
                u.s. securities and exchange commission

                               __________

            roel c. campos, of texas, to be a member of the
                u.s. securities and exchange commission

                               __________

           annette l. nazareth, of the district of columbia,
                         to be a member of the
                     u.s. securities and commission

                               __________

            martin j. gruenberg, of maryland, to be a member
                        and vice chairman of the
                 federal deposit insurance corporation

                               __________

          john c. dugan, of maryland, to be comptroller of the
               office of the comptroller of the currency

                               __________

           john m. reich, of virginia, to be director of the
                      office of thrift supervision

                               __________

                             JULY 26, 2005

                               __________

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                                Affairs


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                            senate05sh.html









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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       JON S. CORZINE, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                       Bryan N. Corbett, Counsel
                       Mark F. Oesterle, Counsel
               Peggy R. Kuhn, Senior Financial Economist
                 Dean V. Shahinian, Democratic Counsel
               Patience R. Singleton, Democratic Counsel
                 Lynsey Graham Rea, Democratic Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                       George E. Whittle, Editor

                                  (ii)

















                            C O N T E N T S

                              ----------                              

                         TUESDAY, JULY 26, 2005

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2

    Senator Dole.................................................     4

    Senator Dodd.................................................     5

    Senator Allard...............................................     5

    Senator Carper...............................................     6

    Senator Enzi.................................................     6

    Senator Schumer..............................................     9

    Senator Bunning..............................................    11

        Prepared statement.......................................    50

    Senator Stabenow.............................................    11

        Prepared statement.......................................    50

    Senator Crapo................................................    39

                               WITNESSES

Ted Stevens, a U.S. Senator from the State of Alaska.............     6

    Prepared statement...........................................    51

Dianne Feinstein, a U.S. Senator from the State of California....     7

Barbara Boxer, a U.S. Senator from the State of California.......     8

                                NOMINEES

Christopher Cox, of California, a U.S. Representative in Congress 
  from the

  State of California, to be Chairman of the U.S. Securities and 
    Exchange

  Commission.....................................................    12

    Biographical sketch of nominee...............................    52

    Response to written questions of:

        Senator Carper...........................................   105

        Senator Bunning..........................................   107

        Senator Corzine..........................................   109

Roel C. Campos, of Texas, to be a member of the U.S. Securities 
  and

  Exchange Commission............................................    14

    Biographical sketch of nominee...............................    68

    Response to a written question of Senator Carper.............   105

Annette L. Nazareth, of Texas, to be a Member of the U.S. 
  Securities and

  Exchange Commission............................................    16

    Biographical sketch of nominee...............................    75

    Response to written questions of:

        Senator Carper...........................................   107

        Senator Bunning..........................................   108

Martin J. Gruenberg, to Maryland, to be a Member and Vice 
  Chairman of the Federal Deposit Insurance Corporation..........    34
    Biographical sketch of nominee...............................    83
John C. Dugan, to Maryland, to be Comptroller of the Office of 
  the
  Comptroller of the Currency....................................    35
    Biographical sketch of nominee...............................    88
John M. Reich, of Virginia, to be Director of the Office of 
  Thrift Supervision                                                 36
    Biographical sketch of nominee...............................    95

              Additional Material Supplied for the Record

Letter to Senator Richard C. Shelby from Norma Alexander Hart, 
  President, National Bankers Association........................   112










                            NOMINATIONS OF:

                     CHRISTOPHER COX, OF CALIFORNIA

                         TO BE CHAIRMAN OF THE

                        ROEL C. CAMPOS, OF TEXAS

                         TO BE A MEMBER OF THE

                      ANNETTE L. NAZARETH, OF THE

                          DISTRICT OF COLUMBIA

                         TO BE A MEMBER OF THE

                U.S. SECURITIES AND EXCHANGE COMMISSION;

                    MARTIN J. GRUENBERG, OF MARYLAND

                 TO BE MEMBER AND VICE CHAIRMAN OF THE

                 FEDERAL DEPOSIT INSURANCE CORPORATION

                       JOHN C. DUGAN, OF MARYLAND

                        TO BE COMPTROLLER OF THE

               OFFICE OF THE COMPTROLLER OF THE CURRENCY

                       JOHN M. REICH, OF VIRGINIA

                         TO BE DIRECTOR OF THE

                      OFFICE OF THRIFT SUPERVISION

                              ----------                              


                         TUESDAY, JULY 26, 2005

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    This morning, we will hear from the President's nominees 
for the Securities and Exchange Commission, Congressman 
Christopher Cox, Commissioner Roel Campos, and Annette 
Nazareth. I appreciate the willingness of the nominees to 
appear before the Committee today.
    Congressman Cox has been nominated to serve as the Chairman 
of the Securities and Exchange Commission. Since being elected 
to the House of Representatives in 1988, Congressman Cox has 
established an impressive record as a legislator and leader on 
securities regulation. He currently serves as Chairman of the 
Committee on Homeland Security in the House of Representatives 
and was also a Member of the Energy and Commerce Committee, 
which at the time had jurisdiction over securities law, and the 
Financial Services Committee for 7 years. Prior to his 
election, Congressman Cox served as a senior counsel in the 
Reagan administration and was an attorney in private practice 
specializing in corporate finance and securities. Congressman 
Cox graduated from the University of Southern California and 
received his law degree and MBA from Harvard University. 
Congressman Cox brings a wealth of experience to this position, 
and I believe that the SEC and the securities markets will 
benefit from his leadership. Congressman, I congratulate you on 
your nomination and look forward to seeing you again many times 
before this Committee and probably in the not too distant 
future.
    I would like to also welcome Commissioner Campos back to 
the Committee for his second nomination hearing. He is no 
stranger to this Committee. Commissioner Campos was first 
confirmed as the SEC Commissioner in the summer of 2002. During 
his tenure at the SEC, Commissioner Campos has led efforts to 
promote convergence with respect to international securities 
regulations and has worked to streamline the SEC's 
administrative proceedings process. Prior to joining the 
Commission, Commissioner Campos was one of the two principal 
owners of El Dorado Communications and served as an executive 
with the radio broadcasting company. Commissioner Campos began 
his career as an officer in the U.S. Air Force and has also 
spent significant time as a Federal prosecutor and as a lawyer 
in private practice, focusing on corporate law and litigation. 
Commissioner Campos graduated from the Air Force Academy and 
earned his law degree from Harvard Law School and his MBA from 
UCLA.
    I also welcome Ms. Nazareth back to the Committee. She has 
testified before this Committee on other occasions regarding 
issues pending before the SEC. Since 1999, she has served as 
the Director of the Division of Market Regulation at the 
Securities and Exchange Commission. She has previously served 
as Senior Counsel to Chairman Arthur Levitt and Interim 
Director of the Division of Investment Management. Prior to 
joining the SEC, she was a Managing Director of Salomon Smith 
Barney and a Senior Vice President of Lehman Brothers, Inc. She 
graduated from Brown University and earned her law degree from 
Columbia University.
    I thank each of the nominees for their willingness to 
serve, and I look forward to your testimony here today.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Well, thank you, Mr. Chairman. I know we 
are going to confront a difficult situation this morning. I 
think there are votes scheduled.
    Chairman Shelby. Five, five votes.
    Senator Sarbanes. Five votes.
    Chairman Shelby. Five back to back votes. We are going to 
give them a break.
    Senator Sarbanes. We will have to work around that.
    I want to welcome the nominees before us, Congressman Cox, 
Commissioner Campos and Ms. Nazareth, and I want to express my 
appreciation to the Chairman for moving promptly to schedule 
this hearing once all of the nominees had been sent here to the 
Senate for us to consider for their confirmation.
    Mr. Chairman, I am going to shorten my statement 
considerably, but I do want to make some comments about the 
work of the Commission and its importance to our capital 
markets and the millions of Americans who rely on the integrity 
of those markets. The Commission itself has defined its primary 
mission in succinct and forthright terms: ``To protect 
investors and maintain the integrity of the securities 
markets.'' And the Commission has noted that, ``As more and 
more first-time investors turn to the markets to help secure 
their future, pay for homes, and send their children to 
college, these goals are more compelling than ever.''
    Now, more than one out of every two U.S. households is 
invested directly or indirectly in the markets. The U.S. 
markets play a critical role in the world capital markets. And 
it is the integrity, the transparency and the efficiency of our 
capital markets that have made them the envy of the world.
    In order to carry out its mission, the SEC must provide 
vigorous oversight of the markets, and vigorous enforcement of 
our securities laws. The Chairman, of course, is in a sense 
functions as the chief administrative officer of a rather large 
organization. We are going to put that Harvard Business School 
education of Congressman Cox's to the test here, and the 
Commission has a strategic plan which adheres to the highest 
standards of integrity, fairness, accountability, teamwork, and 
excellence.
    We have passed through a difficult period recently in the 
securities markets. The Wall Street Journal said, ``The scope 
and scale of the corporate transgressions of the late 1990's 
exceeded anything the U.S. has witnessed since the years 
preceding the Great Depression.'' These have involved problems 
of accounting, disclosure, governance, Enron, WorldCom, and 
other major public companies; the issuance by 10 major 
financial institutions of misleading and fraudulent stock 
analysts' reports, which led to the Global Settlement; systemic 
problems of the functioning of the stock exchanges, which has 
led to strong sanctions and reform of exchange regulation; and 
mutual fund scandals involving late trading and market timing 
which has also led to extensive regulatory reform and 
enforcement actions.
    I think the SEC has emerged stronger from this period with 
a stronger regulatory framework, a reinvigorated enforcement 
function, and with the expanded budget resources with which it 
can carry out its responsibilities. In addition, the SEC has 
introduced risk-assessment procedures, to anticipate problems 
before they cause harm, and it has taken steps to raise the 
morale of the staff and reduce the staff turnover that had 
seriously undermined the Commission's ability to carry out its 
responsibilities.
    My own view is that at this time, we need effective 
leadership at the Commission to maintain the momentum which 
Chairman Donaldson and his fellow Commissioners established. 
The challenges ahead are many. The effective implementation and 
oversight Commission actions, registration of hedge fund 
advisers, the administration of Regulation NMS and FASB is 
moving on the expensing of stock options. There are other 
initiatives pending at the Commission: Proposals to give 
shareholders limited access to the proxy solicitation process, 
the question of the credit rating agencies, completion of 
mutual fund reform and evaluation of the self-regulatory 
organizations.
    Mr. Chairman, I look forward to this hearing. We have a 
number of questions to put to the nominees. The Commission will 
be facing a formidable agenda and the resolution of that agenda 
in a positive, constructive, and satisfactory manner is 
fundamental to the effective workings of our economy and the 
protection of our investor citizens.
    Thank you very much.
    Chairman Shelby. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Yes, thank you, Chairman Shelby.
    Today, the Committee has the privilege of considering an 
outstanding nominee to be the next Chairman of the Securities 
and Exchange Commission. Congressman Chris Cox has a stellar 
reputation as a leader on many important issues for consumers 
and the securities industry, and he has a long and impressive 
list of accomplishments from his nearly two decades in the 
Congress. He is known for his intellect. He is known to be 
innovative, diligent, and extremely hardworking--qualities that 
will certainly serve him well as head of the SEC.
    I am also certain that one of Congressman Cox's greatest 
accomplishments was convincing Rebecca to marry him, and I want 
to take this opportunity to recognize her. You see, Rebecca Cox 
played an invaluable role, for which I am deeply appreciative, 
at the Department of Transportation when I served as Secretary 
there; whether it was the new National Airport or the 
renovation of Union Station, the sale of Conrail or safety 
belts and air bags, Rebecca was right there working so very 
hard. Chris is indeed blessed with such an intelligent, 
talented, and devoted wife. And welcome to Charles, Kathryn, 
and Kevin. They have many reasons to be very proud of their 
parents, and I continue to wish them all my very best.
    We are all aware of the considerable challenges that await 
the next Chairman of the SEC. In light of the single-vote 
margins on a number of high profile, controversial decisions 
recently made by the Commission, Congressman Cox is uniquely 
qualified for this position. He has a strong reputation as a 
consensus builder, even on the most sensitive of issues. The 
responsibilities of the next SEC Chairman will be great, and I 
am certain that Chris Cox is the right man for the job.
    I also want to extend a warm welcome to Commissioner Campos 
and Ms. Nazareth. It is my hope that this Committee will 
consider these nominations with due speed and be ready to 
approve them this week.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Well, Mr. Chairman, I will ask unanimous 
consent that some opening comments be included in the record.
    Chairman Shelby. Without objection, so ordered.
    Senator Dodd. I would just like to underscore the comments 
made by Senator Sarbanes. We have three of our colleagues here 
to introduce these witnesses, and I know the clock is going to 
be running, so I will move along and make sure they get an 
opportunity to make their presentations before the votes start.
    I just would note, there is a new SEC building going up, 
Mr. Chairman, as you know, only a few blocks from here. In 
fact, I gather the staff is moving in as we speak. And I guess 
the symbolism here about getting closer to this epicenter of 
politics is something that in my meeting with Chris Cox I 
cautioned about.
    I think it is so important that the Commissioners of the 
SEC not become embroiled in the day-to-day machinations of 
Washington politics. I suppose the symbolism of Union Station, 
where literally millions of people every day transgress here 
back and forth from the transit systems there, those average 
investors that Senator Sarbanes talked about is the critical 
issue.
    And I also would not want to let pass the moment to say 
thank you to Bill Donaldson and to Harvey Goldschmid for the 
tremendous job they have done as Commissioners. We welcome all 
three of you and look forward to working with you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Thank you, Mr. Chairman, and I want to 
express my appreciation for your holding this hearing so that 
we can hear from the three nominees to the Securities and 
Exchange Commission, particularly Congressman Cox, Mr. Campos, 
and Ms. Nazareth.
    I am not that familiar with Mr. Campos and Ms. Nazareth, 
but I have had the opportunity to serve with Congressman Cox in 
the House and more than just served with him, I actually worked 
with him on a number of issues. I would certainly second many 
of the comments that were made by my colleague from North 
Carolina and I am glad to see him before this Committee. I am 
especially pleased that he has been selected to serve as 
Chairman. I am very hopeful that things will go well under his 
leadership at the SEC.
    He brings capability and a lot of leadership qualities that 
are needed during these trying times, and I think that his 17 
years' experience in the House of Representatives will serve 
him very well.
    I feel that the prime role of the Commission is to help 
facilitate a free market system that promotes security and 
safety in our Nation's financial markets. Recent scandals and 
possible future terrorist attacks on our financial industry are 
attempts to break down America's faith and trust in investing 
in our future. At a time when retirement security is a major 
focus, the SEC should assist in instilling confidence in our 
financial investment decisions as best it can.
    So, I look forward to hearing your ideas, and thank you, 
Mr. Chairman.
    Chairman Shelby. Senator Carper, do you have an opening 
statement?

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Not a statement, just to say to all of our 
guests, welcome here this morning. I am withholding my opinion 
on Mr. Cox until I have heard from Senator Boxer and Senator 
Feinstein. We will see what they have to say. And I will decide 
where to go with my old colleague, Mr. Cox.
    Mr. Campos, we appreciate your service, and Ms. Nazareth, 
if you are half as good as I have heard, you are a real 
addition to the SEC.
    Thank you very much.
    Chairman Shelby. Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Mr. Chairman, I want to thank you for holding 
this hearing on these nominees and look to their speedy 
confirmation.
    I would particularly comment that I have been working with 
Mr. Cox since I got to the Congress. He was the foremost expert 
on export administration, and I got to work with him on that 
for years, but my greatest adventures have been working on some 
small business issues with him, and he has a fond heart for 
small business, and I think that he is actually the right 
person at the right time for the right job, and I look forward 
to his confirmation. I ask for my full statement to be included 
in the record.
    Chairman Shelby. Thank you. Without objection, it will be 
ordered.
    Senator Stevens, we will call on you; then, Senator 
Feinstein, Senator Boxer, and then Senator Schumer, our 
colleague, for any introductions you want.

                    STATEMENT OF TED STEVENS

            A U.S. SENATOR FROM THE STATE OF ALASKA

    Senator Stevens. Mr. Chairman and Members of the Committee, 
in view of the upcoming vote, I think I would just ask you to 
put my statement in the record.
    Chairman Shelby. Without objection, it is so ordered.
    Senator Stevens. I will say that Senator Dole has preceded 
me and made the comments I would have made about Rebecca 
Gernhardt Cox and her children. I am sure that the Senators 
here will remember that she was part of the Senate staff and 
really was a very distinguished member of my office when I was 
the Whip for many years.
    But Senator Dodd, you will remember that you cosponsored 
with Chris Cox the 1995 legislation to protect investors from 
fraudulent lawsuits. I think that Congressman Cox, as a 
graduate of Harvard Law School, a former Editor of the Harvard 
Law Review, is, as many of you said, the right man for the 
right job at the right time. I am delighted to have the 
opportunity to be here to tell you that I urge you to bring out 
his name as quickly as possible so we can confirm him and the 
rest of these other members, and they can get about their 
business.
    Thank you very much.
    Chairman Shelby. Thank you, Senator Stevens.
    Senator Feinstein.

                 STATEMENT OF DIANNE FEINSTEIN

          A U.S. SENATOR FROM THE STATE OF CALIFORNIA

    Senator Feinstein. Thanks very much, Mr. Chairman, Ranking 
Member Sarbanes, and Members of the Committee.
    In response to Senator Carper's comment, I would like to 
make this comment in return: I think the fact that both Senator 
Boxer and I, two Democrats from Chris Cox's home State, are 
here today is in itself testimony to the credentials that he 
brings to this office.
    I think I will not speak on behalf of my colleague. She 
will speak for herself. But I think both of us believe that the 
Securities and Exchange Commission is an extraordinary 
Commission and that Representative Cox has the qualifications 
and the experience necessary to manage regulation and 
enforcement and to improve investor confidence in the Nation's 
securities markets. One of the things that I did not know about 
him was the fact that he is really academically very smart.
    [Laughter.]
    Yes, right. Not only, of course, does he come from 
California, as was pointed out, but he also attended the 
University of Southern California. What was not pointed out was 
that he graduated magna cum laude in just 3 years with a 
bachelor's degree in political science and English. He went on 
to Harvard Business School and Harvard Law School and graduated 
with honors in 1977.
    At Harvard, as was said, he was Editor of the Harvard Law 
Review, and he followed that by clerking for the Hon. Herbert 
Choi, our Nation's first Asian-American Federal judge. He then 
began his career as a private sector securities attorney at a 
California-based international law firm, well-known, Latham and 
Watkins. After 2 years, he was invited to become a lecturer at 
Harvard Business School on business administration.
    In 1986, he entered public service as a Senior Associate 
Counsel to President Reagan. Against a whole host of 
competitors, he then won the seat of California's 48th District 
in Orange County, a district he has well represented for 17 
years. And he recently became the first Chairman of the House 
Committee on Homeland Security.
    Now in the wake of corporate major accounting scandals, his 
nomination comes at an important time for the Securities and 
Exchange Commission. More recently, through the Sarbanes-Oxley 
Act and other enforcement actions, the Securities and Exchange 
Commission has strengthened investor protections and restored 
faith in corporate America by tightening regulation and 
increasing enforcement. The next Chairman will have the 
difficult task of managing these recent changes in the industry 
that will require even more scrutiny.
    In closing, let me say that Representative Cox accomplished 
a major background in academia, in business, in law as well as 
his experience working in Government. This well equips him to 
provide the leadership that is necessary for these new days in 
the SEC. I want to just conclude by quoting Representative 
Cox's statement during the Sarbanes-Oxley hearings. ``Fraud and 
unfair dealing are the enemies of the free enterprise system. 
We have tough laws on the books to deal with all matters of 
crime, including corporate crime. But just as bacteria mutate 
to avoid the latest antibiotics, those who cook the books are 
constantly changing the recipes, and we have to keep our laws 
and our remedies up-to-date.'' We look to him to do just that.
    Thank you very much, Mr. Chairman
    Chairman Shelby. Senator Boxer.

                   STATEMENT OF BARBARA BOXER

          A U.S. SENATOR FROM THE STATE OF CALIFORNIA

    Senator Boxer. Thank you, and it is a pleasure to be here 
with my colleague, Senator Feinstein, and with my colleague, 
Chris Cox and the other Members, and I see Chuck Schumer has 
joined us.
    Because of the press of the clock, I would ask unanimous 
consent that my full statement be placed in the record.
    Chairman Shelby. Without objection, so ordered.
    Senator Boxer. And what I will try to do is just say what 
has not been said before, so we can just get all the facts on 
the table.
    I agree that Chris Cox has represented his district with 
great distinction, and I was fortunate enough to work with 
Chris while I was in the House. I had the privilege of chairing 
the Government Operations Subcommittee on Government Activities 
and Transportation at the same time that Chris was Ranking 
Member, and as you know, Senators Shelby and Sarbanes, the 
importance of these relationships cannot be overstated.
    And we did address very difficult problems. We held a lot 
of oversight hearings, including one on the bombing of Pan Am 
Flight 103. And throughout that particular session of Congress, 
we maintained a very strong and collegial relationship. We 
worked very well together, and we found the common ground. We 
did not agree on everything, but we found the common ground, 
and we moved forward.
    And in the years since, I have gone on to the Senate, I 
have continued to work with Chris on a number of issues. For 
example, we fought for the interests of children when we co-
authored the Child Support Enforcement Act, and we have been 
working together with Senator Feinstein and others to assure a 
more equitable distribution of homeland security grants--an 
issue that I am sure we all have different views depending on 
the size of our States.
    Now, I have found Congressman Cox easy to work with, a 
pleasure to work with. And, you know, we do not agree on some 
very basic issues, and we are very open about that. But we have 
in the past definitely set aside those differences to make 
progress for the people. And now, the rest of my statement will 
be very brief, and I want to address it to you and my 
Democratic colleagues.
    As you review this important nomination to the post of 
Chairman of the SEC, I ask that you keep in mind that this 
position impacts the financial security and well-being of every 
person in the country. Chris and I have talked about this. More 
Americans invest in the stock market either directly or through 
vehicles like their pension or retirement funds than ever 
before.
    In a former life, many years ago, I was a stock broker. And 
I knew what happened when the stock market crashed after the 
assassination of JFK all those many years ago. I will never 
forget the looks on the faces of the clients that I was trying 
to help at that time. They count on us. They will count on 
Chris. So, I think what is very important in the wake of Enron, 
WorldCom, and the Adelphia scandals is that we make sure that 
Congressman Cox takes his considerable talents, and he puts 
them to work on behalf of the people of this country--not the 
special interests but the people of this country.
    Now, he and I have talked about that, and he has told me 
with great, I think, emotion that he will, in fact, do that. 
And since Senator Feinstein had a really important quote, I 
will also quote Chris when he spoke in favor of the Sarbanes-
Oxley Act: ``Fraud and unfair dealings are the enemies of the 
free enterprise system. And as we see from the turmoil in our 
markets, our country is paying a very high price because those 
in power have broken faith with their employees and their 
investors.''
    So, I am looking forward to learning from today's hearings 
how Congressman Cox, as head of the SEC, would achieve three 
goals by using his considerable talents, and keeping that, I 
think, strong statement right in the front of his mind that he 
is, in this position along with our other good colleagues, 
going to protect the interests of the people of this country.
    Thank you very much.
    Chairman Shelby. Thank you, Senator Boxer.
    Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. It is a pleasure 
to be here sitting before my colleagues on this side of the 
table, and I want to welcome----
    Chairman Shelby. We ask you questions now.
    [Laughter.]
    Senator Schumer. You know, when you sit down here, you see 
how high up you guys are, and you are down here, and it is a 
different experience altogether. I think I like it better on 
that side.
    But in any case, I want to thank you for holding this 
hearing, and by the way, Mr. Chairman, the bipartisan group we 
have here is an example of how you and Senator Sarbanes have 
always attempted to run this Committee, and I think it is one 
of the reasons we have had a great record of success as you 
have been Chairman and as well when Senator Sarbanes was 
Chairman.
    I am here to introduce, of course, Annette Nazareth, but I 
wanted to say a few words to welcome first Chris Cox to the 
hearing. I used to joke that Chairman Donaldson visited us so 
often that he became an honorary Member of the Committee. My 
guess is you will be in the same position, and we look forward 
to your many visits here. And let me say, frankly, that I am in 
support of your nomination. And the reason is this. I have 
always described myself as both pro-business and pro-
regulation, and I do not think the two conflict, as the 
statements that Senator Feinstein and Senator Boxer mentioned.
    Strong, good businesses and particularly financial 
businesses have to be sure that there is good regulation so the 
public trusts them. And I do not think there is a conflict. 
Everyone knew when you were nominated that you were pro-
business, but I think an examination of your record and 
certainly our discussions indicate that you are pro-regulation 
as well, and I was heartened to see that you had stated 
publicly what you had told me privately, that there is not 
going to be a big rollback of all of the things that have been 
done; the Sarbanes-Oxley bill, which has done so much good, and 
many of the other things that Chairman Donaldson did. So, I 
really look forward to your being Chairman of the Commission, 
and I think we are going to have a very good time at that.
    I want to thank Commissioner Campos for being here. Your 
record speaks for yourself, sir. You have done a great job on 
the Commission, and that is why I think your renomination is 
going to go through without a hitch.
    And it is my job here to introduce Annette Nazareth to my 
colleagues here on the Senate Banking Committee. Before 
introducing her, I would like to introduce and welcome her 
husband, Roger Ferguson, who has also sat on this side of this 
table. Roger Ferguson is a great public servant. He is now the 
Vice Chairman of the Federal Reserve Board, and I know, Roger, 
you are proud to be here to support your wife, another amazing 
public servant in the financial world. Thank you for being 
here, and I want to welcome your daughter, Caroline. The last 
time I saw Caroline, we just bumped into each other in 
Yellowstone Park, it was. We were on separate family vacations 
and just happened to see each other, and I know your son is 
away, but he wanted to be here today, too.
    Mr. Chairman, I take great pride in submitting the name of 
Annette Nazareth to be a nominee for the Securities and 
Exchange Commission. I have had the pleasure of working closely 
with Annette in her role as Director of Market Regulation for 
the past several years, and if I was allowed only three words 
to describe her today, I would say she is thoughtful, 
pragmatic, and balanced. She understands the need for business 
innovation with a strong regulatory framework to protect U.S. 
investors.
    In short, she is probably much like the description I gave 
to Chris Cox. She is both pro-business and pro-regulation. They 
might have different emphases, but the two will work well 
together.
    Annette Nazareth led the Market Regulation Division since 
1999, supervising and regulating the U.S. securities market by 
establishing priorities and guiding the resolution of a number 
of securities market and broker-dealer issues, including equity 
market structure issues, internalization and fragmentation 
concerns, market data issues, intermarket links, and options 
market issues.
    And let me just say, as we know on this Committee, with new 
technology, these were very, very difficult times. To keep our 
markets preeminent--as a New Yorker, I obviously care about 
that--bring in the new technology but keep the openness and 
depth and liquidity of our markets that we have come to prize. 
And the strong and yet subtle hand of Annette Nazareth was 
behind all of this, and I think one of the reasons that our 
markets can anticipate the 21st century with great success, and 
I think no one doubts that they will continue to lead the 
world, is because of the work that she did while working for 
the Commission.
    And now, as a Commissioner, I think she can do even more. 
She is known on Wall Street and in Washington as being open-
minded and fair. She is always willing to discuss issues in an 
in-depth manner, and frankly, we have had a few differences, 
and she has done as well with those as with the ones where we 
have agreed.
    I think her diverse background will be invaluable to the 
Commission, and I would ask unanimous consent my entire 
statement be read into the record.
    Chairman Shelby. Without objection, your statement will be 
made part of the record
    Senator Schumer. Oh, one other thing, Mr. Chairman. Our 
colleague, Jack Reed, had wished to be here. Annette was raised 
in Rhode Island, attended Brown, and then had her career in New 
York, and he could not be here today but wanted to----
    Chairman Shelby. Any statement he would have will be made 
part of the record.
    Senator Schumer. Thanks.
    Chairman Shelby. Senator Bunning, do you have any comments?

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. I just have an opening statement, and I 
will give it to the record.
    Chairman Shelby. Without objection, so ordered.
    Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman. I would submit 
an opening statement for the record and welcome the nominees.
    Chairman Shelby. Without objection, it is so ordered.
    Congressman Cox, do you have any family? They have been 
introduced. Do you want to introduce them again before we call 
on you? And then, I will call on you? And then, we will call on 
the others, and then, we will start. I know Rebecca is here.
    Representative Cox. Mr. Chairman, I am very pleased that I 
am joined, and I appreciate the Committee's willingness to let 
my family be here, by my wife, Rebecca. Seated immediately to 
her right is my son, Kevin, who is 6 years old; my son, 
Charles, who is 12; and my daughter Katie, who is 11. They are 
a source of continuing support, inspiration, encouragement, and 
advice.
    [Laughter.]
    Chairman Shelby. Mr. Campos, Commissioner Campos, do you 
have any family or any comments you want to make about somebody 
here?
    Mr. Campos. Yes, I do, Senator. Thank you very much for 
offering that. I would like to introduce my wife and life 
partner, Minnie. She is a practicing physician and my son, 
Daniel, who is a sophomore at a local school. And that is all I 
have with me today.
    [Laughter.]
    There are a lot more in Texas and California, but they 
could not be here.
    Chairman Shelby. Ms. Nazareth, do you want to acknowledge 
your husband again? Go ahead.
    Ms. Nazareth. I certainly always like to acknowledge my 
husband.
    Chairman Shelby. He is no stranger to this Committee.
    Ms. Nazareth. I know that, but I will take the opportunity 
to acknowledge my husband, Roger Ferguson, who is also my life 
partner and my inspiration as a public servant and my daughter, 
Caroline Ferguson, who is 10, and like, I guess, the Cox 
children, is a very honest and wise adviser. And our son, Roger 
III, is unable to be here today. He is at camp, but he is 14 
years old.
    Chairman Shelby. Would all three of you stand and raise 
your right hand and be sworn?
    [Witnesses sworn.]
    Chairman Shelby. All of your written testimony will be made 
part of the record. Our votes have been delayed a few minutes, 
so we will start with you, Congressman Cox, any comments you 
want to make with regard to your nomination.

                  STATEMENT OF CHRISTOPHER COX

               A U.S. REPRESENTATIVE IN CONGRESS

                FROM THE STATE OF CALIFORNIA AND

                       CHAIRMAN-DESIGNATE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Representative Cox. Mr. Chairman, Senator Sarbanes, and 
Members of the Committee, it is a pleasure to appear before you 
today. I am deeply honored that President Bush has nominated me 
for the very important task of ensuring the integrity and 
efficiency of the Nation's capital markets. I want particularly 
to thank Senator Boxer, Senator Feinstein, and Senator Stevens 
for their very generous comments and introductions. It has been 
a pleasure to have had the opportunity to work with them over a 
period of very many years. And likewise, thank you, Mr. 
Chairman, Senator Sarbanes, and each of the Members of this 
Committee, for the time and the advice that you have given me 
during the course of this confirmation process.
    It is a special honor to be nominated to follow in the 
footsteps of Bill Donaldson. His advice and guidance over the 
past 2 months have been invaluable as well. He has served the 
Securities and Exchange Commission, and our country, with honor 
and distinction. Today, I am very pleased to be sharing this 
hearing with Commissioner Roel Campos and Commissioner-
designate Annette Nazareth, both of whom have played such 
important and distinguished roles at the Commission.
    With your permission, Mr. Chairman, I would like to just 
briefly describe some of the priorities that I would address as 
Chairman if confirmed by this Committee.
    I want to begin by noting that this Congress--and in 
particular this Committee--plays the defining role in charting 
the course and the overall mission of the Securities and 
Exchange Commission. As you noted, Mr. Chairman, through my 
years of service on the Energy and Commerce Committee and the 
Financial Services Committee, I have had the privilege of 
working with Members of this Committee and the staff of this 
Committee to give the SEC the tools that it needs to ensure the 
integrity of America's capital markets. Our most recent 
accomplishment was the historic Sarbanes-Oxley Act, which was 
absolutely necessary to bolster confidence in the integrity of 
our markets. Sarbanes-Oxley is now a pillar of our securities 
regulatory charter.
    Mr. Chairman, this is only a brief statement. But I think 
it is important, in these opening comments, to describe some of 
the priorities that, if I am confirmed, would be the focus of 
my service as Chairman of the Securities and Exchange 
Commission.
    First, my top priority will be the vigorous enforcement of 
our securities laws. The Commission must be vigilant on behalf 
of investors, and stalwart against fraud and unfair dealing. 
This Committee and the Congress have given the Commission the 
legal tools that it needs to protect investors and the health 
of our financial markets. If confirmed, I will carry out that 
mandate, through the aggressive use of the tools that Congress 
has provided.
    Second, I will cultivate respect for the rule of law in our 
capital markets. There is no better means to this end than 
continuity, clarity, and consistency in the Commission's 
rulemaking and enforcement.
    Third, I will strongly support the Commission's ongoing 
work to ensure that the rules governing our financial markets 
keep pace with advancing technology. The rapid globalization of 
securities markets, and the amazing development of the Internet 
as a medium for commerce and information have occurred at the 
same time that the number of Americans who are directly 
invested in securities has reached record levels. These 
developments offer both investors and issuers extraordinary new 
opportunities, but they also bring unprecedented risks. As a 
result, the work of the SEC is now more important than ever.
    Fourth and finally, I will work to ensure the continuity of 
critical operations in the financial sector in the event of 
another terrorist attack. As the Chairman of the Homeland 
Security Committee, I know how much work has already been done 
in this area, but as the tragic events of this July in London 
have shown, the threat of terrorism has not abated, and the 
September 11 attacks on Wall Street have put us on fair notice.
    If I am confirmed as Chairman, the SEC will continue to 
play a key role in the President's Working Group on Financial 
Markets, and the SEC will continue to work closely with the 
Department of the Treasury, the Justice Department, the 
intelligence community, State and local law enforcement, and 
our partners around the world to see to it that the American 
men and women whose savings and jobs depend on the security of 
our capital markets are as safe and as protected as they can 
be.
    Chairman Shelby, Senator Sarbanes, and Members, I am 
grateful for the opportunity to serve as Chairman of what 
Senator Sarbanes has rightly called the crown jewel of Federal 
regulatory agencies. From my early days as a securities 
practitioner to my most recent years in Congress, I have been 
consistently impressed by the high caliber of professionals at 
the Securities and Exchange Commission. For 70 years, the SEC 
has set the standard of regulatory excellence for the Federal 
Government and for governments around the world. It will be an 
honor, if confirmed, to join this exceptional team.
    In closing, may I say that it has been an equally profound 
honor to work for nearly two decades with each of you as 
colleagues in this Congress, and if you confirm me, it will, of 
course, mark the end of that extraordinary experience. But I 
welcome the opportunity to continue to work with each of you 
for the protection of investors and the efficiency of our 
financial markets.
    Mr. Chairman, I would be happy to answer any questions you 
may have.
    Chairman Shelby. Thank you.
    Mr. Campos.

                  STATEMENT OF ROEL C. CAMPOS

                        MEMBER-DESIGNATE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Mr. Campos. Thank you very much, Mr. Chairman.
    I again am very appreciative of being here for the second 
time, and I greatly value and appreciate the opportunity I have 
had to work with this particular Committee and various Members 
at various times regarding the issues with securities 
regulation over the last 3 years.
    Mr. Chairman, almost exactly 3 years ago, I had the 
privilege of coming before this Committee for confirmation 
hearings as today to be a member of the Securities and Exchange 
Commission. At that time, I shared with this Committee that my 
life's journey had begun in a humble household of Mexican-
American parents in the southernmost part of Texas. I explained 
that my father served in World War II, was wounded in action in 
Germany, and worked many jobs during his working life to 
support my mother and five children.
    Three years ago, my father, a retiree, and millions of 
other Americans were dismayed and outraged as they learned of 
one corporate fraud after another. These words have become 
household names: Enron, Adelphia, Tyco, and WorldCom. In 
response to the concerns of investors and retirees like my 
father, who wondered whether their investments were safe and 
whether they should have confidence in the American markets, 
Congress guided by this Committee led by then-Chairman 
Sarbanes, did the Nation a historic service by passing the 
Sarbanes-Oxley Act of 2002.
    In the 3 years of my service, the Commission has fulfilled 
Congress' mandate, met the deadlines, and implemented, through 
often complicated rulemakings, the requirements of Sarbanes-
Oxley. Unfortunately, in those 3 years, many other threats to 
investor confidence and the stability of the markets have 
erupted. Securities analysts were discovered to be recommending 
companies that they believed were ``dogs,'' in their own words, 
to promote banking business. A disturbing number of mutual fund 
executives were found to be placing self interest above 
fiduciary duties and were found to have allowed market timing 
and late trading privileges to large customers at the expense 
of fund investors. Significant trading violations were found to 
have occurred on the floors of our major exchanges. Full and 
accurate financial disclosures by listed companies continued to 
be a problem, and many schemes were revealed that were 
inflating financial numbers.
    With these challenges, the SEC found itself in the busiest 
and most crucial time since its creation, when Congress first 
dealt with massive fraud and flight from the markets following 
the Great Depression. In the 3 years of my service, the Agency 
has conducted over 200 rulemakings, interpretations, proposals, 
and the like. In that time frame, the Agency has brought nearly 
2,000 enforcement proceedings. In fiscal year 2003, over $1.1 
billion and in fiscal year 2004 over $1.21 billion in 
disgorgement and penalties were assessed to help restore 
investor losses from securities fraud.
    I continue to believe that in America, the vast majority of 
businesspersons, broker-dealers, investment advisers, and 
professionals are honest and scrupulous. However, my days as a 
Federal prosecutor and businessman teach me that a significant 
few will succumb to temptation and thereby cheat. It is true 
that no amount of regulation will ever totally prevent fraud. 
However, wise regulation and proper sanctions will deter and 
reduce the odds of success and reduce the damage that occurs 
before the discovery of fraud in the marketplace. The challenge 
of all regulation is to protect fully investors and their 
capital without unduly burdening the conduct of business. The 
sad fact is that a few cheaters can cause capital to stampede 
to the sidelines, cause huge reputation damage to an industry, 
and diminish the liquidity of our markets.
    During the past 3 years, I believe that the SEC has 
contributed mightily with Congress in helping restore much of 
the lost confidence of investors in our markets. There is still 
a long way to go. Most of the rules involving Sarbanes-Oxley 
have been in effect less than 2 years, and their positive 
impact is just beginning to be evident. While nothing in life 
is perfect, I believe that the SEC has implemented Sarbanes-
Oxley and other rules in a very moderate and practical matter, 
allowing honest business and the regulated financial community 
to flourish and has protected investors. I believe that an 
important key to the future is that the Agency continue to 
listen to industry and, where appropriate, smooth out the 
``rough edges'' of regulation. However, wise and fundamental 
principles, such as those in Sarbanes-Oxley and those that seek 
greater transparency and the elimination of conflicts must 
never be compromised.
    Recently, I have supported and been privileged to be active 
in the Agency's effort to understand and apply industry 
suggestions in the areas of hedge fund adviser registration, 
the application of Section 404, involving the attestation of 
internal controls of public companies, and the constant 
improvement of our examination process. The SEC's enforcement 
program must continue to be vigorous and act in real time to 
protect investors' capital and minimize losses. Where egregious 
violations of securities laws occur, strong sanctions must be 
imposed to create deterrence and provide appropriate 
punishment. On the other hand, where possible, the Agency must 
continue to reduce and eliminate antiquated rules, such as with 
the Securities Act Reform, which will simplify and greatly 
reduce the cost of raising capital in America.
    If the Senate grants me this huge honor of confirming me a 
second time as a Member of this Commission, I vow to continue 
to bring all of my energies to work diligently with my fellow 
Commissioners and Chairman to continue to accomplish the noble 
mission that Congress has given this Agency: to protect 
investors, as Senator Sarbanes said, and to maintain the 
integrity of the markets.
    Thank you for your kind attention.
    Chairman Shelby. Thank you.
    Ms. Nazareth.

                STATEMENT OF ANNETTE L. NAZARETH

                        MEMBER-DESIGNATE

            U.S. SECURITIES AND EXCHANGE COMMISSION

    Ms. Nazareth. Thank you, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee.
    I am deeply honored to appear before this Committee today, 
and I am deeply grateful to President Bush for nominating me to 
serve on the Securities and Exchange Commission.
    I am a passionate believer in the United States capital 
markets and the benefits to our Nation and its citizens that 
come from a well functioning, appropriately regulated financial 
system.
    I have spent all of my professional life working in, for, 
and with the financial services sector. My career has been 
primarily based in the securities industry, where for 12 years, 
I worked in various investment banks and commercial bank 
affiliates. I have hands on experience helping businesses 
navigate the legal and regulatory requirements that industry 
faces. I have also gained an appreciation of the issues and 
challenges facing the securities markets and those who 
participate in them, whether they are brokerage firms, 
professional traders, or retail investors. I believe that this 
first-hand experience helps me identify sensible and pragmatic 
selections to issues. I am keenly aware of the cost of 
regulation and the importance of balancing these costs with the 
benefits that regulation seeks to achieve. Most recently, I 
have served as Director of the Division of Market Regulation at 
the SEC, and I have had the opportunity to work closely with 
Members of this Committee and the House Financial Services 
Committee on a multitude of securities related issues. I have 
also represented the Commission as a member of the Financial 
Stability Forum, which is comprised of central banks, finance 
ministry officials, and other regulatory authorities. The 
Financial Stability Forum has the mandate to assess 
vulnerabilities affecting the global financial system and 
identify actions to address those vulnerabilities.
    Finally, I must share with you the reverence that I have 
for the Commission and its Chairman. As William O. Douglas so 
aptly put it, we are the investors' advocate. In the United 
States, we have the deepest and most liquid securities markets 
in the world. We also have the highest level of retail investor 
participation in the world. We are indeed an ownership society, 
and this is due in no small part to the confidence that 
investors rightly place in our markets. Integrity and 
transparency are the hallmarks of our financial system. I 
believe that working together in a thoughtful manner, we can 
continue to maintain this preeminence and meet new challenges. 
I look forward to working with Chairman Cox, and I would hope 
to help forge consensus on many of the issues that the 
Commission will face. I would be honored if you would permit me 
to be a Commissioner of the Securities and Exchange Commission.
    Thank you.
    Chairman Shelby. Thank you.
    I will ask each one of you this question, and I will ask 
you to respond to this question. Some of us on the Committee 
remain troubled by the recent trend of split votes at the SEC. 
The SEC's quick reconsideration of the independent chairman 
requirement for mutual funds following the recent DC Circuit 
ruling adds additional hesitation. I think some Members of the 
Committee are concerned that the lack of consensus on 
fundamental policy changes to some extent perhaps undermines 
the SEC's credibility and established an unfortunate precedent.
    Are any of you troubled by the lack of consensus on major 
regulation here, and what does this mean for the SEC going 
forward. I know you cannot always agree on everything; that is 
common sense, but Commissioner Cox?
    Representative Cox. Thank you very much, Mr. Chairman.
    Let me begin by noting that as a Chairman in the House of 
Representatives--I have been given the gavel three times--and 
in each case, all of the legislation and all of the official 
reports produced by the Committees that I have chaired have 
been unanimous and bipartisan.
    I have been a Member of a number of Committees in Congress, 
and I know that unanimity and bipartisanship is not always 
possible, because people genuinely disagree. By statute, as you 
know, no more than three Members of the Securities and Exchange 
Commission can be of one political party. So by design, 
Congress has ensured that there be different points of view 
represented on the Commission.
    I will undertake, Mr. Chairman, if you confirm me as 
Chairman of the Securities and Exchange Commission, to do my 
level best to seek the common ground, build bipartisanship and, 
in fact, strip partisanship of any kind from all of the 
deliberations and decisions of the Securities and Exchange 
Commission, because I agree with the premise of your question 
that wherever possible, unanimity of purpose, of rulemaking, 
speaking with one voice strengthens the Commission and 
strengthens its role in the capital markets.
    Chairman Shelby. Commissioner Campos, of course, you have 
been on the Commission.
    Mr. Campos. I have been part of those split decisions.
    Chairman Shelby. Sure.
    Mr. Campos. I do believe, as Congressman Cox has indicated, 
that it is desirable to try to reach consensus in all of the 
work that is attendant to that, all of the background work and 
discussions and understanding the views of the different 
Commissioners and the staff should be taken into account.
    However, in life, I think we all know, difficult decisions 
and honest brokers and honest and reasonable minds will differ, 
and I think that with the numbers of tough issues that the 
Commission has had to deal with, it is not terribly surprising 
that there have been split decisions.
    And I, for one, do not believe it takes away from the 
credibility of the Commission so long as the Commission has 
done its utmost to reach consensus and to get there, and I 
believe that our process must continue to be very open, in 
which all of our deliberations are out there for the public; 
the various considerations that went into each particular 
Commissioner's decision when the final vote is out there and 
available.
    And when that happens, I believe that the public, the 
professionals, and Congress can see that the process was 
appropriate and was proper, and there was nothing illegitimate 
about it. After all, the Supreme Court splits 5-4 very 
regularly, and no one says that their particular decisions are 
illegitimate because they have a split decision.
    Chairman Shelby. Ms. Nazareth.
    Ms. Nazareth. I agree with much of what has been said. 
Obviously, consensus is highly preferable, and I think as in 
many situations, there are a number of ways to skin a cat, a 
number of means to achieve the desired goals, and it should 
certainly be our strong preference to find a path that we can 
all agree on for the maximum number of issues.
    Chairman Shelby. Congressman Cox, several months ago, the 
SEC issued guidance on stock option expensing and provided 
issuers with additional time to comply with the new FASB rule. 
I support FASB's rule and the SEC's efforts to provide issuers 
with technical guidance on valuation. In light of your prior 
position on this issue, what assurances can you give this 
Committee that you will continue to support the SEC's efforts 
in this area?
    Representative Cox. Mr. Chairman, both the FASB 
deliberations and the SEC guidance have essentially concluded 
at this point. That process is going forward. Issuers are 
expected in the next fiscal year to comply with this rule. In 
my view, as a result, these questions have been asked, 
answered, and deliberated upon. What is most important going 
forward is that we have clarity.
    This has been an issue of some discussion legislatively. 
That is highly unusual. In my view, the independence of FASB is 
of vital importance, as is the independence of the Securities 
and Exchange Commission. The interests of Congress are 
different than the interests of the FASB and of the SEC, and 
Congress, of course, is concerned with big picture questions of 
the economy and so on.
    All of those issues, to my way of thinking, have been 
addressed. The process has gone forward, and if you confirm me 
as Chairman of the Securities and Exchange Commission, I will 
ensure that the Securities and Exchange Commission builds upon 
the record already established and that the rule is implemented 
as the markets expect.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    First of all, let me say I strongly associate myself with 
the Chairman's, the question he has just asked with respect to 
the issue of expensing of stock options, and I appreciate your 
response, which obviously reflects, I think, an appropriate 
sensitivity to the necessity of having independence in the 
standardsetters. That is how FASB was established, and that is 
the precedent we have tried to stick to, although on occasion, 
it is difficult.
    I will just tell you this story, which underscores what you 
said. When the Committee did Sarbanes-Oxley, there were Members 
who wanted to include in it statutorily a provision that stock 
options should be expensed. I opposed that amendment not on the 
substance but because it was my view that FASB had been set up 
to make this decision, and therefore, it should be left to FASB 
to decide.
    A number of my colleagues agreed with that in opposing that 
amendment. They said no, we do not want to pass this amendment. 
This is a decision for FASB. Subsequently, after considerable 
study, hearings, proposed rules, modified rules, and so forth, 
FASB put out that the options should be expensed, which, of 
course, is the treatment that is taking place in Europe, for 
example, in the EU and has been advocated by many observers for 
many years.
    Some of these colleagues who earlier had said well, no, no, 
this should be left to FASB at that point decided no, no, now, 
we have to interfere with FASB's independent judgment and try 
to enact legislation. Fortunately, that did not take place, but 
it does underscore the question of the role of FASB and how the 
SEC relates to that role.
    Now, the SEC has, as it were, a supervisory role, but it 
seems to me it traditionally and in my view should continue to 
recognize FASB's preeminent role as the standardsetter and the 
necessity of taking those standards, those very complex 
accounting issues out of the political context and putting them 
more into a context in which careful analysis and expert 
decisionmaking takes place.
    Is it fair to say you perceive the relationship the same? I 
ask that, actually, of all three of the nominees. Do you see 
the relationship that way?
    Representative Cox. Senator Sarbanes, the answer to that 
question is ``yes.'' I know that this issue is of great 
importance to you, and I have had the opportunity to discuss it 
previously before this hearing. I do not think that there is 
any question but that the Securities and Exchange Commission's 
role in supervising the FASB is designed to ensure such general 
and important, ``big picture'' things as the protection of 
investors, ensure the integrity of the process, and ensure that 
all of the issues are taken into account.
    But in terms of accounting expertise and technical 
questions, the judgment of the FASB is to be respected. That is 
what it is there for. I also agree with your sense that 
standardsetting on accounting matters in the Congress is 
unwise. The very rare occasions where bills have been 
introduced have been, in my view, legislative efforts to make 
sure that issues are taken into account as much as there have 
been very serious efforts to actually write the standards in 
the Congress, which I think would be a mistake.
    Chairman Shelby. Mr. Campos.
    Mr. Campos. Senator, I strongly believe in the principle of 
independent standardsetters, which the FASB situation 
symbolizes. The SEC has a very specific statutory role to 
oversee the FASB, and we have to handle that very carefully, 
where we do not take away their autonomy and their independent 
judgments.
    But it is important for us at times to make sure that the 
process seems open and that business interests are heard but 
that the independence, above all, is protected. And I think 
keeping politics and political bodies away from standardsetting 
is a very wise course, and that is being followed all over the 
world, I might add.
    Senator Sarbanes. Ms. Nazareth.
    Ms. Nazareth. I agree with you very much, Senator Sarbanes. 
I support the independent role of FASB, and I think it is 
vitally important that we defer to their expertise on 
standardsetting.
    Senator Sarbanes. The same issue arises, to some extent, 
with respect to the Public Company Accounting Oversight Board, 
and I have been struck by the ability of the SEC and Chairman 
McDonough of the PCAOB to work out that relationship in a very, 
I think, positive and constructive way. And once again, I would 
ask how sensitive each one of you is to the necessity of 
preserving the appropriate role for the PCAOB as it carries out 
the functions it has been charged with under the recently 
enacted legislation.
    Why do we not just go right across again real quickly?
    Representative Cox. Thank you, Senator Sarbanes. The 
Sarbanes-Oxley Act vests the Securities and Exchange Commission 
with responsibility for oversight of the PCAOB and creates this 
very important body. Its Chairman, Bill McDonough, in my view, 
has done an outstanding job. I have recently met with him and 
look very much forward to working with him in a collaborative 
and cooperative way. I think that is the appropriate way for 
the SEC and the PCAOB to work going forward.
    Mr. Campos. Senator Sarbanes, I agree as well, and we have 
been learning as we go but being very respectful of, I think, 
the PCAOB and its leadership, certainly, under Chairman 
McDonough. And I foresee that continuing, and we will discharge 
our oversight but in a way that obviously allows the PCAOB to 
promote its autonomy and its standardsetting.
    Ms. Nazareth. In my current role, I have not had too many 
dealings with the PCAOB. But I certainly have a lot of 
experience dealing with self regulatory organizations, which is 
really what the PCAOB is akin to for the accounting industry, 
and I strongly support the role that they provide.
    Chairman Shelby. Senator Carper, do you have--do you want 
to briefly----
    Senator Carper. Yes, I will make it real short.
    Mr. Campos, when we look back at this series of 3-2 votes 
that we are talking about, we are going to have a new swing 
vote here, I think, in all likelihood, and this is a question I 
guess as much for Mr. Cox as it is for you, maybe more for Mr. 
Cox than it is for you, but how would the SEC be different if 
you had been sitting in the Chairman's seat, Congressman Cox, 
for the last 2 years than where you have been sitting as these 
3-2 votes came along on these key issues?
    Representative Cox. Senator, I do not know. It is an 
excellent question. It is one I have certainly given a lot of 
thought to, but Mr. Campos and Ms. Nazareth have actually been 
part of these deliberations.
    I have no reason to think that Chairman Donaldson and each 
of the Commissioners did not give their level best to try to 
achieve consensus and tackled some very, very difficult issues 
that, in my view, needed tackling because of the circumstances. 
So, I cannot say that things would have turned out differently 
had I been at the Commission. I do not know.
    What I can say is going forward, I agree with the 
statements made earlier by Ms. Nazareth and Mr. Campos in 
response to earlier questions. I will give my level best to 
working collegially with the other Commissioners and seeking 
common ground and seeking consensus if it is possible to 
achieve. If consensus means that each of the Commissioners must 
compromise their important principles or do something that in 
their view would injure investors and investor protections in 
America, then, you cannot very well expect them to change their 
votes.
    Senator Carper. I am going to interrupt you. I do not mean 
to be rude, but we have a vote underway, and you know how that 
works.
    Representative Cox. Yes, I hope you understand----
    Senator Carper. You have had a chance to talk with Chairman 
Donaldson, and I expect you have a good relationship with him. 
What are some areas where--I know there are a lot of areas 
where you agree with them. What might be some areas where you 
think you might disagree?
    Representative Cox. I have not known Chairman Donaldson 
before President Bush nominated me for this position, but I 
have gotten to know him over the past 2 months. I have found 
his guidance to be extraordinarily helpful, and in my view, he 
has been a very standup guy in some very tough times.
    I think that jumping into the breach, as he did, when 
markets were lacking in confidence, when investors were reeling 
from all of the news and the financial dislocation of these 
huge scandals reflects great credit upon him but most 
importantly, he brought great credit to not only the SEC but 
also to the enterprise of building confidence in our markets.
    And so, I look at his record as one of great achievement, 
and I would hope to build on that and extend it if I am 
confirmed as Chairman of the SEC.
    Senator Carper. A question I am going to ask each of the 
witnesses to answer for the record, if you would, not at this 
moment, but we have all heard assertions of problems with the 
so-called Section 404 rules of Sarbanes-Oxley, and as you know, 
that Section is designed to require the SEC to develop and 
adopt rules that require companies to report to the management 
of the companies' internal controls of their financial 
reporting. And some of us have heard, I am sure we have all 
heard from time-to-time, that these reporting requirements are 
cumbersome and that the audits are expensive, at least the 
initial ones are.
    I would just like to ask each of our nominees to comment on 
this issue and to give us a sense of whether you think there is 
a problem or not and what the steps are you think should be 
taken as we go forward so that we can have robust, vibrant 
markets and also strong investor protections.
    Chairman Shelby. For the record.
    Senator Carper. On a lighter note, ask one last question of 
the Chairman, because at Southern California University, were 
you a member of a fraternity?
    Representative Cox. Yes, I think it is the same well-known 
organization of which you, Senator, are a member.
    Senator Carper. Keeping in mind that Congressman Cox----
    Chairman Shelby. Is that a----
    Senator Carper. No, it is not. Congressman Cox's wife and 
his children are sitting behind him, if your fraternity 
brothers were sitting here right before us today to speak on 
your behalf, maybe we could get them to answer for the record 
what they, too, would say.
    [Laughter.]
    So that is a question for another day.
    [Laughter.]
    Chairman Shelby. Thank you, Senator.
    We are having our first vote. Our time is up. We have four 
more consecutive votes. We are going to recess, I will say, for 
about 45 or 50 minutes, give you a chance for a long coffee 
break. We will be back.
    We are in recess.
    Senator Sarbanes. Mr. Chairman.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Since we have to respond to the vote, and 
that shows you how we lead our lives here, both in the Senate 
and in the House, of course, I just am curious whether Charlie, 
Kathryn, and Kevin, Congressman Cox's children, are aware that 
if he is the Chairman of the Commission, he can set the times 
the Commission meets.
    [Laughter.]
    And therefore, if there is a Little League game or 
something of that sort, the Chairman should be able to make 
provision for it. I just want to note that for the record.
    [Laughter.]
    Chairman Shelby. If any of you want to take a break for 
your children for the rest of the day, we are in recess.
    [Recess.]
    Chairman Shelby. The hearing will finally come back to 
order. We are sorry. One hour became two.
    Congressman Cox, several press accounts have described your 
involvement in a lawsuit arising from your time when you were 
in the private practice of law. I think the outcome, if I 
recall, of that lawsuit was in your favor. But would you just 
for the record clarify your role in that litigation, how it was 
resolved, and so forth?
    Representative Cox. Thank you, Senator. I appreciate the 
opportunity to discuss this matter.
    Chairman Shelby. Sure.
    Representative Cox. Ten years ago, when I had already been 
a Member of Congress for 10 years, I was added to a class 
action lawsuit in California State court. The purported basis 
of including me as a defendant was work that I and my law firm 
did for a man who 10 years thereafter was exposed as a 
criminal.
    I did preliminary work on a small SEC-registered public 
offering. However, that public offering was not the basis for 
the criminal indictment and ultimate guilty plea and conviction 
of this individual.
    Chairman Shelby. You had been in the Congress 10 years, had 
you not?
    Representative Cox. That is correct.
    Chairman Shelby. Okay.
    Representative Cox. But I also did not work at the law firm 
at the time that the one small limited partnership offering, 
which was not the subject of the fraud indictment, took place. 
And for those reasons, the Court dismissed all of the counts 
against me.
    Chairman Shelby. Well, basically it was terminated in your 
favor; is that the bottom line?
    Representative Cox. Yes, I had the entirety of the 
complaint dismissed against me. And there was no settlement of 
the claim, either. I prevailed in court.
    Chairman Shelby. Thank you.
    Commissioner Campos, I have been particularly interested in 
the ongoing convergence efforts by our international 
counterparts with respect to financial reporting and corporate 
governance. Senator Sarbanes and I have followed this. We have 
traveled and met with a lot of the regulators, as you well 
know.
    During your tenure at the Commission, you have played a 
significant role in promoting this process. Would you take a 
few minutes and highlight some of the important accomplishments 
and remaining challenges relating to the convergence process? 
In other words, where are we and where do we need to go? What 
are the impediments?
    Mr. Campos. Senator, thank you for bringing that up. It is 
a very important process in that several things are in play 
here. We believe at the Agency that the U.S. markets should 
welcome outside capital when it seeks to come into the U.S. 
markets, and so, there is an ongoing dialogue about how, 
consistent with protecting investors, we can also attract and 
keep foreign companies coming to the United States, enlisting 
in our markets.
    The convergence process is very interesting in that what I 
have seen in my representation of the Agency is that other 
jurisdictions in Europe and in Asia are coming toward the 
principles of Sarbanes-Oxley, the principles that we use in the 
United States, and the convergence is occurring at a high 
level.
    What this means is that over time, there will not be the 
ability for companies to essentially play one jurisdiction off 
the other and seek the lowest denominator of regulation, which 
is not a good thing. And so, in other words, there will not be 
what we call a regulatory arbitrage, because the other 
regulators in the world see the importance of having markets 
that are safe, that protect capital, and that the rule of law 
applies.
    Those jurisdictions that do not protect capital are not 
going to be attracting companies and investments over time, so 
we have all of this working together in the world of 
globalization to converge standards. One of those things that 
is ongoing right now is the idea of the reporting standards 
being IFRS, International Financial Reporting Standards, which 
are based on international accounting standards.
    Europe will require their companies to use IFRS this next 
year. At some point in the near future, we at the Agency and 
through our chief accountant are interested in reaching the 
point where it will no longer be necessary for those companies 
that use IFRS to reconcile to U.S. GAAP. That will promote 
transatlantic commerce and industry.
    But we want to make very sure that occurs when the 
convergence is sufficient, and an investor here in the United 
States, then, could look at a company that is based on U.S. 
GAAP, whose financials are based on U.S. GAAP and look at a 
company in Europe whose financials are based on IFRS and have 
comparability and understand where they want to make their 
investment. But those are the things that are going on in that 
area.
    Chairman Shelby. Thank you.
    Ms. Nazareth, with the adoption of Regulation NMS and the 
recently announced transactions involving the NYSE and Nasdaq, 
our national equity markets are at a crossroads. After the 
mergers are finalized, there will essentially be two dominant 
players in the equities markets controlling most of the 
liquidity.
    How do you think the changing regulatory environments and 
the announced transactions would impact investors and broader 
markets? What does it mean for the self-regulatory function 
here?
    Ms. Nazareth. You raise an excellent question about the 
self-regulatory function. As you know, our current self-
regulatory structure has been in place almost since the 
inception of our markets.
    Chairman Shelby. That is right.
    Ms. Nazareth. Indeed, the structure precedes the Securities 
and Exchange Commission itself, and it certainly is an 
opportune time, an important time, to analyze, whether it is 
the most effective structure, particularly in light of the 
changes that are occurring today in our markets.
    And we are at the relatively early stages at the Commission 
of analyzing those issues, and I look forward to considering 
those issues with my fellow Commissioners. The Commission today 
has outstanding two different proposals. One is a proposal to 
enhance the governance and transparency of our SRO operations, 
and that is a pending rule proposal the Commission will need to 
consider, and another is a concept release that raises broader 
questions about self-regulatory structure, and again, it is a 
very important issue for our markets. The integrity of the 
markets is absolutely key, and I look forward to analyzing 
those issues with others.
    Chairman Shelby. Congressman Cox, in light of the Global 
Settlement, mutual fund investigation, and recent 
investigations into accounting and the insurance industry, many 
people have questioned the appropriate role of our State 
attorneys general in the area of securities regulations, in 
other words, the State role.
    It seems that State attorneys general often initially 
discover financial wrongdoing. Would you comment on the 
appropriate role, from your perspective, of the State and 
Federal regulators in securities regulation and enforcement?
    Representative Cox. Thank you, Senator.
    Of course, the blue sky regimes of our 50 States antedate 
the Securities and Exchange Commission. There is a substantial 
and vital role played by the blue sky laws, the antifraud laws, 
and the investor protection laws of the 50 States, our 
territories, and jurisdictions.
    The enforcement and the regulatory regimes of the State and 
Federal jurisdictions should be complementary. One hopes that 
the work is in no way jealous or competitive; that there are no 
turf competitions, but rather, there is a constructive effort 
to work together. In important respects, there are different 
spheres and responsibilities, but in other respects, they are 
overlapping, so it is also important to ensure that there is 
not a waste of resources or doubling up or tripling up on the 
same thing to the neglect of other priorities.
    Chairman Shelby. Okay.
    Senator Sarbanes, do you have any other questions?
    Senator Sarbanes. Yes; thank you very much, Mr. Chairman.
    The SEC has considerable power, both formal and informal, 
over our corporate governance system, and investors depend on 
that system to make sure that companies are run in the 
interests of their investors and that the public is given full, 
fair, accurate disclosure about their companies. I want to ask 
each of you whether investors can count on you to maintain the 
rights investors enjoy today, including the rights to 
communicate with fellow investors, to bring proposals before 
annual meetings, and to withhold votes from directors who are 
not performing up to their expectations.
    I see you all have rearranged yourself at the table.
    [Laughter.]
    It shows the imprint of----
    Chairman Shelby. They are already working together.
    Representative Cox. Senator Sarbanes, I will be pleased to 
answer your question first, and of course, the considerable 
expertise of Ms. Nazareth and Mr. Campos is something that I 
can benefit from as well.
    Shareholders are owners, and the rights of owners and the 
rights of investors have to be protected in our system if our 
markets are going to work.
    Senator Sarbanes. I have heard Chairman Shelby say that 
often, that it is the shareholders who own the company.
    Chairman Shelby. I thought the shareholders did own the 
company.
    Senator Sarbanes. They do in fact.
    Chairman Shelby. I think we may get Senator Sarbanes to 
stipulate that.
    [Laughter.]
    Representative Cox. Protecting shareholder rights as owners 
is, I think, a derivative way of protecting the liquidity of 
the markets, enhancing the value of share ownership, and so, of 
course, I would strongly support enforcement and protection of 
all of the rights of shareholders that they presently have, and 
I would also be more than willing to look at ways of using, for 
example, new technology to expand the opportunities that 
shareholders have to learn about and benefit from information 
about and participate in using such information about the 
company.
    Chairman Shelby. Mr. Campos.
    Mr. Campos. Senator, I certainly support protecting the 
existing rights of shareholders, and the SEC, of course, has 
the Federal mandate, the Federal laws, and we have been 
studying, as you all know, the proxy system as to whether the 
proxies should allow shareholders with certain percentages the 
right to put a minority slate on their slates. And we studied 
that issue very hard and unfortunately did not come to a 
consensus on it or even a majority on it, and it was not 
brought to a vote.
    And I think it is an area that is going to need fresh 
looking and is important to protect the rights of shareholders. 
The value of stock does depend on it. And I think there are 
other entities besides institutional investors, who do most of 
the lobbying for this, who will be interested in this area as 
well.
    Capital is forming together in pools and funds, and they 
are interested in making improvements to performance, also to 
governance. So, I believe we will be looking at these issues 
quite a bit over the next short period of time, and I support 
maintaining those. We have to be careful with the States. 
Delaware is a jealous regulator, as well they should be, but I 
think we can do all that very well.
    Senator Sarbanes. Ms. Nazareth.
    Ms. Nazareth. I agree. I certainly support protecting the 
rights of shareholders and welcome the opportunity to continue 
to review these issues. We must ensure that we do achieve the 
proper balance between shareholders rights--ensuring that the 
corporate governance improvements that have been achieved 
largely through Sarbanes-Oxley and other initiatives are 
effective by virtue of shareholders being able to voice their--
--
    Senator Sarbanes. Well, now, I realize it is a complicated 
issue, and the Commission was not able to reach a consensus, 
but it does seem to me the issue of how shareholders can impact 
on the board of directors, particularly if there is a 
substantial dissident group, is an important issue.
    And Congressman Cox, do you think that is an issue worth 
exploring and for the Commission to examine?
    Representative Cox. Yes, indeed, Senator. I am well aware 
that this issue has been under study by the professional staff 
of the Securities and Exchange Commission and the subject of 
deliberations by the Commission itself over a period of time 
and that at least thusfar, the Commission has been unable to 
forward a proposal that is acceptable to a majority.
    Nonetheless, these issues are fundamental, and there is no 
reason that we cannot constantly improve opportunities that 
shareholders have to participate through better disclosure and 
I believe by taking advantage of technologies which are making 
the distribution of, in and communication among large numbers 
of people much less expensive.
    Senator Sarbanes. I am interested in, as the New York Stock 
Exchange moves toward becoming a for-profit institution, what 
are your respective views on separating the regulatory function 
from the business of the stock market itself, along the lines 
of the NASD and the Nasdaq split?
    Representative Cox. Senator, again, I should begin by 
deferring to the considerable expertise of the two individuals 
seated at my right and left. Ms. Nazareth, in particular, has 
spent a great deal of time and study on this in her current 
capacity, and Mr. Campos, as a Commissioner, has worked very 
carefully with the rest of the Commission to forward new rules 
by which these issues are going to be addressed in the future.
    In the event that we have for profit entities operating 
markets, it is vitally important that the regulation of those 
markets remain arms length. Assuring that that is so is going 
to be one of the abiding interests of the Securities and 
Exchange Commission if you approve me as Chairman.
    Senator Sarbanes. Mr. Campos.
    Mr. Campos. Senator, that is a very important issue, and 
certainly, we have not had a great experience in terms of some 
of the enforcement and some of the regulations in our 
particular markets. The proposal right now, as you know, from 
the NYSE, for one, would have a parent company, and they would 
have some separation, but they would ultimately report to that 
parent company.
    And I have raised this issue with the NYSE and with our 
staff as to whether we should not have a complete separation. 
For one thing, it would certainly help the optics, and we have 
a lot to be able to do to satisfy the public that regulation is 
strong, and regulation will not be influenced by the profit 
motive and the commercial motive.
    And I am going to look at that issue as a very serious 
issue and one in which, you know, we need to look at the input 
from all the players to make sure that we get it right. But as 
a fundamental matter, the separation is a question that needs 
to be answered as to why not.
    Ms. Nazareth. I know this is a topic of great interest to 
you, Senator, and it is something that I have spent a lot of 
time thinking about. Having said that, I am still not quite 
sure that I have the silver bullet on this issue. I think that 
it is absolutely an appropriate time to consider whether the 
current model is the optimal model for self regulation, 
particularly as the markets are moving more toward for-profit 
exchanges and away from the mutual model that they previously 
operated under.
    As you know, in the concept release that the Commission 
issued, there were a number of alternative models that were 
discussed, each of which has benefits and costs associated with 
them, and I do think that we will have to spend a good deal 
more time analyzing the issue to determine what the optimal 
model would be, and if as a Commission we determine that the 
model should be changed, the Commission, may have to come to 
Congress and ask for legislation to effect those changes.
    Senator Sarbanes. Of course, the other model, NASD and 
Nasdaq, is different, but that does raise right off the bat a 
question as the stock exchange moves toward a for-profit 
mentality, and I do think it is an issue that the Commission 
needs to examine very carefully.
    The Chairman is the one who comes to Congress or goes to 
the Executive to try to get the budget for the Agency. And I am 
interested in how you, Congressman Cox, perceive the adequacy 
of the current funding for the SEC, what more you think is 
needed and what, if, as yet, you have any views on this, what 
needs to be done internally to improve recruiting, improve 
retention, and boost the morale of the employees at the SEC, if 
you have had any chance to form some views on that, and I guess 
they would all be interested in hearing----
    [Laughter.]
    --how strong a champion you intend to be on budget 
questions.
    Representative Cox. Senator, I know that this issue is 
important to you, because you and I have discussed it. I have a 
good deal of familiarity with the overall budget picture at the 
Securities and Exchange Commission as a Member of the Congress. 
What I am not prepared, as you might imagine, to do today is to 
present you with a budget request, since I appear before you as 
a nominee, but if confirmed as Chairman, I assure you that I 
will fight for all of the resources that the SEC needs in order 
to discharge its mission, and you have heard me say here today 
and on other occasions that I am enormously impressed with the 
professional caliber of the men and women who work at the 
Securities and Exchange Commission and that I would be very 
honored to join that team.
    Ensuring that such professionals can be recruited on a 
continuing basis and want to stay at the SEC and make their 
career there is one of the important jobs of the Chairman, and 
obviously, issues such as pay parity play into that. That is 
not the only reason, of course, that people are in public 
service and work at the SEC. These are in the main people who 
are public servants with public spirit animating them more than 
anything else.
    But at the same time, there are very strong competitive 
pressures for the Federal Government, as we have recognized 
when we created, in Sarbanes-Oxley, the PCAOB. And so, fighting 
for both the people, the men and women who work at the SEC and 
the overall needs of the Commission in order for it to 
discharge its enforcement and regulatory responsibilities will 
be a top priority for me as Chairman.
    Senator Sarbanes. Let me just elaborate on the phrase you 
used, pay parity. Pay and benefits parity; and what happened 
is, of course, the SEC first in the pay area and then perhaps 
even more importantly in the benefits area did not have parity 
with the other regulatory agencies. We know they are not going 
to have parity with the private sector given the way our system 
works, but they did not even have it with the other agencies 
and were losing people to the other financial regulatory 
agencies, and they moved pretty well on that. I am not certain 
yet whether all of the benefit package has been worked out on a 
parity basis, and you would hope that the Commission would 
address that in the near future.
    But we received correspondence from a number of groups 
raising the issue of executive compensation. What changes, if 
any, do you believe are warranted to the current disclosure 
rules for executive pay?
    Representative Cox. Senator, the touchstone of disclosure 
when it comes to executive compensation should be transparency, 
clarity. This has to be understandable to investors. Executive 
compensation is a moving target. There are compensation 
experts, a lot of different ways to track and retain people, 
just as we were discussing in the context of the SEC, and rules 
have to keep up with that.
    More importantly, once there is compliance with the 
disclosure rules, it has to be presented in a format that 
people can appreciate and understand so that if things are out 
of line, they can do something about it. I do believe that 
market pressures on compensation that is out of line can be 
very effective and powerful, but only if that information is 
there, clearly, understandably presented in the first place.
    Senator Sarbanes. I gather that the Chairman asked you a 
question on this subject before I was able to get back to 
hearing, but it has gotten so much press coverage that I think 
I should address it to you again, and that involves the lawsuit 
when you were in private practice at Latham and Watkins that 
accused you and the firm and two former colleagues of 
misleading regulators and investors with respect to filings at 
the California Department of Corporations. This involved the 
First Pension Corporation back in the mid-1980's, who I think 
was a client of your firm. Could you recount for us that 
situation and how it was resolved?
    Representative Cox. Indeed, Senator, and as I just 
described a moment ago, it was 10 years ago when I had been a 
Member of Congress already for 10 years that I was added as a 
defendant in a large securities class action in State court in 
California.
    The basis for adding me as a defendant is work that I and 
the law firm did on behalf of a client who, 10 years later, was 
exposed as a criminal. The law firm's work on behalf of this 
client and the work that I was involved with concerned a single 
SEC registered public offering. That public offering was not 
the basis for this individual's indictment, guilty plea, and 
fraud conviction.
    Furthermore, I did not work at the law firm at the time 
that the one offering that they handled actually took place. I 
had left a year and a half before that. And as a result, the 
Court dismissed all of the claims against me in that lawsuit.
    Senator Sarbanes. We have received a letter from the 
Council of Institutional Investors, which I think each of you 
have received, dated July 21, setting out a number of their 
concerns, and given what has happened on us in terms of these 
constant interruptions, I have touched on some of them. I am 
not going to be able to touch on all of them.
    I want to ask a process question, though, of each of you, 
and that is what is your attitude in terms of engaging in a 
continuous dialogue or interchange with such organizations as 
the Council of Institutional Investors, which, after all, 
represents well over 100 public, corporate, and union pension 
funds and, you know, well over 100 money managers and 
investment and securities professionals.
    I want to get some sense of how open and accessible and 
transparent you think the Chairman and the Members of the 
Commission should be in listening to people and engaging in a 
dialogue, and of course, they are not the only such group or 
organization that exists.
    I will take Mr. Cox and then go to the others.
    Representative Cox. Senator, with respect to stakeholders 
such as the Council of Institutional Investors and many others, 
I look forward to the opportunity to hearing, formally and 
informally, their views, suggestions, opinions, concerns, and 
comments. It has been a little bit unnatural for me, as a 
Member of Congress, simultaneously a nominee of the President 
preparing to appear before your Committee, to essentially be 
monklike and out of touch for well-known procedural reasons--
with people who otherwise I would be communicating with 
routinely, including, I might add, the press.
    I understand the reasons for these rules and these 
constraints, but to the maximum extent possible, both the 
Chairman and the other Commissioners, it seems to me, should 
operate in the light of day as transparently as possible. The 
Sunshine Act, which applies to the Commission, has this purpose 
in mind.
    At the same time, I want to add that I am well aware of 
concerns that have been raised in the past about inappropriate 
meetings, and as a result, I would take great care to follow, 
at all times, the ethical guidance of the professional staff 
and the General Counsel at the Securities and Exchange 
Commission concerning with whom and under what circumstances it 
is possible for the Chairman to meet.
    Senator Sarbanes. Mr. Campos.
    Mr. Campos. Senator, I agree with you that Commissioners 
should make themselves available I believe to as wide a group 
of interests as possible. With the CII in particular, I 
recently met with Anne Yerger, and, you know, before her, Sara 
Teslik, who used to lead that particular organization, and I 
make it a point to, if they have not come to see me, I 
generally call them: The SIA, the STA, and the various industry 
groups. I want to know their issues and what it is they are 
lobbying the Agency for, and I think that is appropriate.
    Obviously, there are things ethically, investigations, 
ongoing things that are verboten, but we have procedures to 
make sure that we keep everybody out of trouble, and in those 
areas, usually, our counsel attends. And in listening to the 
issues, we learn what the industry is worried about, what 
investors are worried about, and how our rules may be made 
better, and that is important to do.
    Ms. Nazareth. I think the Commissioners and the Commission 
staff has had a long history of an open door policy with 
interested groups, and I think that the input that we receive 
is invaluable in being able to do our jobs effectively. So, I 
would certainly be in favor of continuing that process.
    Senator Sarbanes. Mr. Cox, I wanted to see how you square 
your statement today about being an investor's advocate and the 
importance of that in terms of the Chairman of the Commission 
with all of these comments that greeted your nomination, 
suggesting just the contrary, and I have, you know, pages of 
them here. I mean, everyone knew what you thought, I guess, or 
seemed to think they knew, seemed to think what you thought and 
wasted no time in placing on your nomination a certain 
interpretation that there was going to be a marked diminution 
in regulation; the pendulum is swinging back, quotes the U.S. 
Chamber of Commerce Chair. I will not state her name just for 
the sake of gentleness here and similar quotes of that sort.
    Now, were they all anticipating something we need to know? 
Are they reading the tea leaves improperly? Or I go back to the 
admonition, you know, that the Commission from the beginning 
has had its charge to be the investors' advocate, so how do we 
reconcile those two things?
    Representative Cox. Senator, I appreciate the opportunity 
not only to answer this question but actually to speak to some 
of these things.
    Senator Sarbanes. Even had some of your colleagues in the 
House who figured out everything you were going to do. I 
noticed that.
    Representative Cox. I actually appreciate the support of so 
many of my colleagues in the House, in particular the Ranking 
Members on the Committees that I have chaired and chaired as 
recently as yesterday and the support that they have offered to 
this nomination. I think at least to that extent, there is not 
much question that I will bring not only a bipartisan spirit 
but I also hope a nonpartisan spirit to this enterprise.
    I think that the reason that there has been so much surmise 
is that, unlike Ms. Nazareth and unlike Mr. Campos, I have not 
been on the Commission or working in the securities industry, 
and so, there is a lot of inference and extrapolation and 
interpolation on the basis of things that might or might not 
even be relevant in my view.
    There has been, I think, stated opposition by some groups 
to legislation that I was a moving force behind in 1995, and I 
view that legislation today, as I did then, and as Senator 
Stevens described it in his introduction of me, as a vital part 
of an overall regime of shareholder protection. It is just as 
important to protect shareholders from shakedowns by 
extortionate lawsuits as it is to protect them from other kinds 
of fraud. But there are different views about that, as you 
know.
    At the same time, I think that some people's guesses of 
what I might do as Chairman which I have read in the newspaper 
are just wrong, particularly to the extent that they have a 
view that somehow I would be in any way lax when it comes to 
enforcement or that I would in any way not pursue appropriate 
regulation, because I have a deregulatory mentality or that I 
am for free enterprise to such a degree that I would want to 
miss an opportunity to use the tools that Congress has provided 
to the SEC to accomplish the mission of building integrity and 
confidence in the markets.
    Those will be my aims, and I look forward to that 
opportunity should you grant it to me.
    Senator Sarbanes. In comments on the House floor, when the 
House dealt with the conference report on the Sarbanes-Oxley 
Act, you stated, ``As we raise the legal standard here today, 
we should bear in mind our obligations to do still more to 
raise ethical standards so that the best and the brightest will 
continue to want to join the accounting profession so that our 
most experienced citizens possessed of good just are willing to 
undertake the significant oversight responsibilities on 
corporate boards of directors.''
    Bill Donaldson, in his speech at the National Press Club, 
spoke about the necessity for corporate management, as he put 
it, to just do the right thing and that this message would then 
be passed right down the line to all of the people who work for 
the company. He says it needs to be put right into the DNA of 
the company. And I was struck by your reference in that comment 
about the obligation to raise ethical standards, because that, 
of course, goes beyond legal standards. Legal standards do not 
usually catch up to the ethical standards.
    How important a part do you see that, if you were to be 
confirmed as Chairman of the Commission in terms of carrying 
out your responsibilities?
    Representative Cox. A big part, Senator. I was impressed 
with, and in strong agreement with, remarks made earlier by Mr. 
Campos.
    It is true that no amount of regulation will stop all 
fraud. I mean, people that are intent on lying and cheating 
their fellow citizens will presumably still find reason to 
undertake it from time to time, but there is a great deal, 
first, through the formal regulation of the SEC that the 
Government can do to deter and certainly to punish this kind of 
behavior and thus to increase investor confidence in the 
markets.
    But it is also possible for public figures to constantly 
talk about the importance of ethics and solid values, treating 
employees, customers, and all other stakeholders properly. That 
is the American way. And so, the Securities and Exchange 
Commission has that leadership role to play as well.
    I think that business schools have found this to be the 
case, and they are trying to put it into the early training now 
of potential managers and companies and managers in the 
financial services industry, and certainly, this is not 
something that the Government should abjure; rather, this 
should be our bread and butter. We constantly talk about this. 
Both are necessary. Both the law, the regulation, the 
enforcement, and the constant appeal to what is right and what 
is good so that we do not have more Enrons.
    And with regard to Enron, I saw in hearings in the 
Financial Services Committee and in the Energy and Commerce 
Committee, that there were constantly areas where people would 
punctiliously follow a rule and claim to have gotten away with 
something, but they were missing the big picture, which is that 
it was wrong.
    And so, Senator, I could not agree more strongly with the 
premise behind your question.
    Senator Sarbanes. Good. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Shelby. I want to thank all of you for your 
appearance here today, and I apologize again for something we 
could not stop, and that is the interruption of the hearing. We 
will have a Committee hearing Thursday. I am sure we will have 
a quorum then. We will try to move all three of you out, and 
hopefully, we can get you to work as soon as possible. Thank 
you for your appearance.
    The hearing is in recess until 2:30.
    [Whereupon, at 1:42 p.m., the hearing stood in recess until 
2:31 p.m.]
    Chairman Shelby. The hearing will come to order.
    This afternoon, the Committee is considering the nominees 
for three very important positions at the bank and thrift 
regulatory agencies. The nominees are John Dugan, to be 
Comptroller of the Currency; John Reich, to be Director of the 
Office of Thrift Supervision; and Martin Gruenberg to be a 
Member and Vice Chairman of the Federal Deposit Insurance 
Corporation.
    The Comptroller of the Currency, the Director of the Office 
of Thrift Supervision and the Vice Chairman of the Federal 
Deposit Insurance Corporation all play very important roles in 
overseeing the safe and sound operation of our banking system 
and ensuring that the institutions within their jurisdiction 
maintain compliance with money laundering, consumer protection, 
and a whole host of other important laws. Each of these 
individuals will also have an important role to play in 
protecting the integrity of the Bank Insurance Fund and the 
Savings Association Insurance Fund.
    Additionally, these positions are responsible for a diverse 
group of institutions which have a broad range and size and all 
of whom operate in a global marketplace where the pace of 
change grows faster everyday.
    In light of these considerable challenges, I commend the 
President for nominating these three highly qualified 
individuals for these positions. Each has a longstanding record 
of distinguished service in the financial services sector. 
Each, I might also add, served in staff positions in one form 
or another right here in the Senate. Mr. Dugan and Mr. 
Gruenberg worked directly for this Committee. Mr. Reich worked 
for Senator Mack, a very important former Member of this 
Committee.
    I would also like to take a moment to specifically 
recognize the contributions of Marty Gruenberg. Marty has 
worked here for my colleague, Senator Sarbanes, for nearly 20 
years. He has been part of the consideration of every major 
piece of legislation that has come before the Committee during 
my tenure in the Senate. His loyalty, dedication, and able 
service are to be commended. And Marty, I offer you all my best 
regards and hope to move your nomination along with the others 
as soon as possible.
    I look forward to hearing from the witnesses, and do any of 
you have some family you would like to recognize at this time? 
Do you want to start with you, Marty?
    Mr. Gruenberg. Thank you, Mr. Chairman. My wife, Donna, is 
here, and my son, Paul.
    Chairman Shelby. Okay.
    Mr. Gruenberg. And also, my cousin, Matthew Gruenberg, and 
my cousin, Arnold Schwarzbard, and his wife, Marilinda.
    Chairman Shelby. Mr. Dugan, do you have any members that 
you want to recognize?
    Mr. Dugan. I sure do. My wife, Beth, is here, and my son, 
Jack, and my mother, Frances Dugan, who, by the way, is a 55-
year resident of the State of Maryland. I know Senator Sarbanes 
is not here, but I wanted to make sure----
    [Laughter.]
    --I got that in. My brother, Chris, is here, and my cousin, 
John Michael, is here as well.
    Chairman Shelby. Great.
    Mr. Reich.
    Mr. Reich. My family is watching on the Internet from a 
cabin in the Smoky Mountains.
    Chairman Shelby. Pretty smart.
    [Laughter.]
    Mr. Reich. On vacation this week.
    Chairman Shelby. When are you going to join them?
    Mr. Reich. I will be rejoining them this evening.
    Chairman Shelby. Rejoining them. That is good.
    At this time, would all of you stand and raise your right 
hand and be sworn?
    [Witnesses sworn.]
    Chairman Shelby. Marty, we will start with you. Your 
written testimony, all of yours, will be made a part of the 
hearing record, and if you will sum up briefly what you want to 
say, we will try to move the Committee.

                STATEMENT OF MARTIN J. GRUENBERG

               MEMBER AND VICE CHAIRMAN-DESIGNATE

             FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Gruenberg. Thank you, Mr. Chairman.
    Chairman Shelby, Ranking Member Sarbanes, and Members of 
the Committee, it is my great honor to appear before the 
Committee today as the nominee to be a Member and Vice Chairman 
of the Board of Directors of the Federal Deposit Insurance 
Corporation.
    I would like to begin by thanking President Bush for 
nominating me and Senate Democratic Leader Harry Reid for 
recommending me for this position. I would also like to thank 
Chairman Shelby for scheduling this hearing so expeditiously, 
and Senator Sarbanes for his guidance and unfailing support. I 
would also like to thank the staff of the Banking Committee for 
their friendship and for the very high professional standard 
they set under the exceptional leadership of the Committee 
Staff Director, Kathy Casey and the Democratic Staff Director, 
Steve Harris.
    I have been a member of the staff of the Senate Committee 
on Banking, Housing, and Urban Affairs since 1987. I have 
served as both Staff Director of the Subcommittee on 
International Finance and Monetary Policy and Senior Democratic 
Counsel. In those capacities, as Chairman Shelby pointed out, I 
have had the opportunity to work on all of the major financial 
services legislation enacted by the Banking Committee during 
that period. In the course of working on those pieces of 
legislation, I have had the chance to interact with the 
leadership and staff of the Federal financial services 
regulatory agencies, administrations of both political parties, 
the financial services industry groups, and the consumer and 
community advocacy organizations. That experience has given me 
a valuable perspective on the safety and soundness, national 
security, and consumer protection issues confronting the FDIC. 
It has also given me a familiarity with the FDIC as an 
institution, an appreciation of its relationship with the other 
financial services regulators, and an understanding of the 
industry and consumer groups with which it works. I believe I 
would come well prepared to make a constructive contribution to 
the work of the FDIC.
    The FDIC was established by Congress in 1933 in response to 
the banking crisis brought on by the Depression. The purpose 
was to restore confidence in the banking system and provide 
protection to depositors.
    The FDIC has been remarkably effective in maintaining 
public confidence in our banking system, even during difficult 
economic times. As one who worked on the staff of the Banking 
Committee during the savings and loan crisis in the 1980's, I 
am acutely aware of the critical role the FDIC plays in 
preserving the safety and soundness of our banking system, and 
of the enormous costs that can be imposed on taxpayers and our 
economy when unsafe and unsound practices take place. 
Protection of depositors and the preservation of the safety and 
soundness of our banking system is clearly the central mission 
for which the FDIC was created.
    I was also working on the staff of the Banking Committee on 
September 11, 2001, and during the following weeks when this 
Committee drafted and enacted the antimoney laundering title of 
the USA PATRIOT Act. It is clear that Federal financial 
regulators today have a responsibility not envisioned when our 
Federal regulatory agencies were created--to prevent the use of 
our financial system to finance acts of terror. It is a 
responsibility equal to or even exceeding the responsibility to 
preserve the safety and soundness of our financial system, and 
one to which I will give my full attention if confirmed by the 
Senate.
    Finally, I come from an immigrant family. My parents came 
to the United States in 1951 after having survived the 
Holocaust in Europe. I keenly appreciate the economic 
opportunities this country makes possible for its citizens, as 
well as the challenge to taking advantage of those 
opportunities for those who are outside of the financial 
mainstream. Several studies have indicated that as many as 10 
million American families do not have an account with a 
federally insured financial institution. The FDIC, as well as 
the other Federal bank regulatory agencies, have an important 
role to play in expanding access to the financial mainstream to 
all Americans, and ensuring that all Americans are treated 
fairly in our increasingly complex financial system. That is 
another area to which I would hope to devote attention if 
confirmed by the Senate.
    Mr. Chairman, let me conclude by thanking you and Senator 
Sarbanes again for the privilege of working on the 
extraordinary staff of this Committee, where I have spent most 
of my professional life. It has been a remarkably satisfying 
and rewarding experience. I believe that it has prepared me 
well to carry out the responsibilities of FDIC Board Member and 
Vice Chairman if confirmed by the Senate.
    Thank you, and I look forward to answering any questions.
    Chairman Shelby. Thank you. Mr. Dugan.

                   STATEMENT OF JOHN C. DUGAN

                     COMPTROLLER-DESIGNATE

           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Dugan. Mr. Chairman, Senator Sarbanes, Senator Crapo, 
and Members of the Committee, thank you for the opportunity to 
appear before you today. I am honored that President Bush has 
nominated me to serve as Comptroller of the Currency, and I am 
grateful to Treasury Secretary Snow for his confidence and 
support. As a former staff member, I am especially proud to be 
here before this Committee and in this room. I have spent many 
hours here with able colleagues and good friends on some of the 
most important issues confronting the banking industry over the 
last 20 years.
    I have already mentioned my family. I did want to add that 
my daughter is out of town. She would be very unhappy if I did 
not mention her today. She is at camp, but she is with me in 
spirit.
    Chairman Shelby. Maybe she is watching on TV.
    Mr. Dugan. That is exactly right.
    Chairman Shelby. You might want to call her name.
    [Laughter.]
    Mr. Dugan. Claire.
    [Laughter.]
    The Comptroller of the Currency supervises about 1,900 
national banks and about 50 Federal branches and agencies of 
foreign banks in the United States, comprising more than half 
of the assets of the commercial banking system. The Comptroller 
also serves as a Director of the Federal Deposit Insurance 
Corporation, the Federal Financial Institutions Examination 
Council, the Basel Committee on Banking Supervision, and the 
Neighborhood Reinvestment Corporation. In these roles, the 
Comptroller addresses a broad range of issues that are 
fundamentally important to the banking system, and, if 
confirmed for this post, I would look forward to working on 
them with this Committee and with Congress as a whole.
    For the last 20 years, my career in both the Government and 
private practice has focused primarily on banking issues. As 
Minority General Counsel for this Committee during the late 
1980's, which was a very active period, as you remember, I 
worked extensively on legislative and regulatory proposals 
involving bank powers, bank failures, safety and soundness 
supervision, and consumer protection, among many others. As 
Assistant Secretary and Deputy Assistant Secretary of Treasury 
during the Administration of the first President Bush, that 
work expanded into financial modernization, interstate banking 
and branching, deposit insurance reform, regulatory burden 
relief, oversight of OCC regulations and legislative proposals, 
and many other related issues. During my 12 years of private 
law practice at Covington and Burling, I have continued to work 
and advise on a wide range of banking matters, including the 
Gramm-Leach-Bliley Act, financial privacy and amendments to the 
Fair Credit Reporting Act, financial derivatives regulation, 
enforcement matters, and national bank powers generally.
    At many points in my career, I have worked closely with 
many of the officials and staff of the OCC. I believe that I 
have developed a strong understanding of the key challenges 
that confront the Agency. I have also had frequent contact with 
officials and staff at the Federal Reserve, the Federal Deposit 
Insurance Corporation, the Office of Thrift Supervision, the 
Securities and Exchange Commission, the Treasury Department, 
the National Economic Council, and the Office of Management and 
Budget. These are virtually all the Executive Branch agencies 
that have a significant impact on regulatory and policy issues 
affecting banks. Given our unique, some would say peculiar, 
banking system with its many overlapping functions, I believe 
the Comptroller must have a fundamental understanding of how 
different regulators approach their jobs and work best 
together, and I believe my experience has helped provide that 
understanding.
    In sum, I believe that my experience and education are a 
strong foundation for this position. If confirmed by the 
Senate, I would be honored to serve as the 29th Comptroller of 
the Currency. I would be pleased to answer any questions you 
may have.
    Chairman Shelby. Thank you.
    Mr. Reich.

                   STATEMENT OF JOHN M. REICH

        DIRECTOR-DESIGNATE, OFFICE OF THRIFT SUPERVISION

    Mr. Reich. Thank you very much, Mr. Chairman. I want to 
thank you for scheduling this hearing. I know that time is 
limited before the August recess. Chairman Shelby, Ranking 
Member Sarbanes, Senator Crapo, I am honored by the President's 
nomination and the support of the Secretary of the Treasury to 
be the Director of the Office of Thrift Supervision. I am 
privileged to be sitting at this table with these gentlemen.
    In the almost four and a half years that I have served as a 
member of the FDIC Board of Directors, we have witnessed 
significant change in the economy and the banking industry. In 
fact, Mr. Chairman and Senator Sarbanes, you may recall that I 
was about to testify at this very table on September 11, 2001, 
on the failure of Superior Bank when the events of that day 
stopped the hearing and triggered a number of challenges and 
changes to our country's financial system that no one could 
have foreseen.
    My nearly 25 years of experience as a community banker 
before I came to Washington to work with my good friend, former 
Senator Connie Mack, have given me a perspective that 
recognizes the vital role banks and thrifts, and their 
customers play in the economic success of their communities. 
Before my life in Washington, I was active for many years in a 
variety of community service organizations, and the effect of 
all of these private, nonprofit and public service experiences 
causes me to evaluate issues in a manner that balances the 
issues of financial institutions, consumers, and our economy.
    Under the leadership of Chairman Donald Powell, the FDIC 
has been, and is, at the forefront of many of the issues facing 
the financial industry today. We have brought together leading 
thinkers on such key issues as corporate transparency, 
financial institutions disclosure, and risk management and, of 
course, our work on deposit insurance reform. We have launched 
a major financial literacy effort called Money Smart, with the 
stated goal of establishing partnerships with 1,000 
organizations and institutions, in all 50 States, to distribute 
100,000 copies of Money Smart in three languages and expose a 
million consumers to our financial literacy program over the 
next few years.
    In addition, I have been privileged to lead a major 
interagency effort to reduce unnecessary regulatory burden and 
to tap the tremendous potential of technology to streamline 
bank supervision, while not sacrificing our primary goals of 
ensuring safety and soundness and consumer compliance with the 
banking system.
    While the FDIC has been aggressively moving forward on 
these developing issues, we have not neglected our primary 
mission of protecting depositors in the event of bank failures. 
In fact, I believe that the lessons that I learned in the 
failure of a large savings bank provide me with a unique 
credential to serve as the Director of the Office of Thrift 
Supervision.
    Following the resignation of former FDIC Chairman Donna 
Tanoue in July 2001, I was serving as the Acting Chairman of 
the FDIC when Superior Bank, FSB, failed on July 27, 2001. It 
was not just the size of the failure, more than $2 billion in 
assets, that was instructive. As this Committee knows from its 
oversight, this failure raised a number of issues, ranging from 
subprime lending, residuals and accounting opinions, to 
regulator cooperation and access, and management liability 
which challenged the leadership and staff of the FDIC to modify 
established methods of handling bank failures and to create 
some innovative new approaches.
    This experience, along with other experiences gained during 
the nearly 4 and a half years that I have served on the board, 
3 years as Vice Chairman, combined with my duties chairing all 
of the standing committees of the FDIC Board should help to 
enable me to effectively serve as the Director of the OTS.
    Mr. Chairman, as the primary Federal regulator of all 
savings associations and savings and loan holding companies, 
the OTS oversees a vital segment of the American economy. As of 
mid-May 2005, there were 886 savings associations with 
approximately $1.4 trillion in assets. As of the end of 2004, 
there were 492 savings and loan holding company structures with 
consolidated assets of approximately $6.9 trillion. Savings 
associations originated over $600 billion in single-family 
mortgages last year, or approximately one out of every four 
mortgages made in the United States. The industry serviced $1.3 
trillion in loans for others. Savings associations operate over 
9,000 branches throughout the United States and employed 
217,000 people as of the end of 2004.
    Mr. Chairman, if I am confirmed, my main goals as Director 
of OTS would be to assure the continued safety and soundness of 
the industry, faithful adherence to consumer protection laws 
and the most efficient operation of OTS as an organization.
    I am honored that the President nominated me to this 
important position. I look forward to the challenges that lie 
ahead. I look forward to working with this Committee, and I 
wish to thank you again for holding the hearing.
    I will be happy to address any questions.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I am pleased to welcome our three nominees before us this 
afternoon. They are all well known to the Committee, either 
having served on the Committee staff or on the staff of the 
Committee. All are extremely well qualified for the positions 
for which they are being considered.
    John Dugan was, of course, the Republican Counsel and then 
General Counsel of the Banking Committee and served with great 
distinction, including the period when we were addressing, 
among other issues, the savings and loan crisis. Subsequently, 
he went to the Treasury, where he served first as Deputy 
Assistant Secretary for Financial Institutions Policy and later 
Assistant Secretary for Domestic Finance at the Treasury. And 
since leaving Treasury, he has had a very distinguished career 
at Covington & Burling, where he is currently a partner. He has 
appeared here many times before the Committee in his public 
capacity representing the Treasury and in his private capacity 
representing a variety of clients.
    John Reich worked in the Senate for over 10 years, from 
1989 to 2000. Four of those years, he was Chief of Staff to 
Senator Connie Mack, a very distinguished Member of this 
Committee. He came to this work from 23 years in the banking 
industry, including President and Chief Executive Officer of 
the National Bank of Sarasota, and since January of 2001, Mr. 
Reich has served as Vice Chairman of the Board of Directors of 
the Federal Deposit Insurance Corporation.
    Marty Gruenberg, who has been nominated to serve as a 
member and Vice Chairman of the Federal Deposit Insurance 
Corporation, has been a member of the Committee's staff since 
1987, after working for several years on banking issues in the 
House. I must say, Mr. Chairman, it is an odd feeling to see 
him at the witness table there when we have worked so closely 
together for nearly two decades. I am accustomed to turning 
around and getting his counsel.
    Marty has been involved in virtually every issue that the 
Committee has dealt with in those years. Indeed, he has played 
a major role in every banking bill that has been enacted into 
law since 1987, and I could go through the list, but for the 
sake of time, I will ask that they be included in the record, 
but every major bill on banking that has come out of this 
Committee, he has been part of that process.
    His experience and expertise are hardly limited to matters 
involving financial services. His work is equally impressive in 
other areas of the Committee's jurisdiction, notably monetary 
policy, export, and foreign trade promotion, export controls 
and defense production.
    It is not only his background and experience that make 
Marty Gruenberg so well qualified to serve at the FDIC. On the 
strength of having worked closely with him for nearly 20 years, 
I personally know him to be superbly qualified by virtue of his 
intellectual capacity, and his personal integrity and 
character. Of course, we shall all miss him greatly, but I know 
Marty to be a dedicated public servant who, in his new 
position, will work to the same high standards that he has 
always brought to his responsibilities at the Committee.
    Mr. Chairman, I very much appreciate your holding this 
hearing, and I hope we can move these nominees expeditiously.
    Chairman Shelby. Senator Crapo, do you have an opening 
statement?

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. No, I just have a question or two when we 
have a chance.
    Chairman Shelby. Senator Dodd, do you have an opening 
statement?
    Senator Dodd. Well, very briefly; I do not have a prepared 
statement, Mr. Chairman, but let me first of all congratulate 
our three nominees. John Dugan, of course, we have known for 
many, many years here; worked together on this Committee a long 
time, so we congratulate you, John, on your nomination.
    Mr. Dugan. Thank you, Senator.
    Senator Dodd. And Marty, this is a bittersweet moment for 
those of us who have worked with you up here for so long. I was 
teasing this morning and turning around to our friends right 
behind Senator Sarbanes, and I said where is Marty this 
morning? He should be here to help us with these questions. And 
they said you are out preparing for your grueling grilling this 
afternoon, not that I expect a grilling.
    And on a personal note, I just got off the phone with my 
wife on the phone, and Jackie worked with Marty for almost 20 
years on this Committee and other matters as well and wanted me 
to express----
    Chairman Shelby. And she worked on this side of the aisle.
    Senator Dodd. She did. She worked on that side of the 
aisle.
    [Laughter.]
    Converts make the best Catholics.
    [Laughter.]
    Not that she has converted yet. We are working on it. But 
Marty, she wishes you well, and I do, as well. We are going to 
miss you terribly up here, and we wish you the same kind of 
success that John has had, going off and doing good things. And 
so, we thank you. Thank you for accepting this position. I have 
great confidence you are going to bring great expertise, 
stability, and dignity to the FDIC as well and John at the 
Comptroller of the Currency. Mr. Reich, we wish you our best 
wishes, too, in all of this.
    So congratulations to you. We look forward to working with 
you for many years to come as well, but we will miss you up 
here. You have done a great job for this Committee. You have 
served all of us tremendously well, and this Committee's 
success over the years is a tribute not only to the Chairman 
and the Ranking Member but also to the people who sit behind us 
up here, who help us prepare every single day. You do not get 
to make the statements; your names do not necessarily appear in 
the press, but to the extent we are successful up here in 
getting the job done, on most occasions, I think all of us 
would say it is because of the quality of the people who sit 
behind us.
    And Marty, you have been behind us for years up here, and 
to the extent that we have done good things, in no small 
measure, it has been because of your contribution. So thank you 
immensely for that.
    Mr. Gruenberg. Thank you, Senator.
    Chairman Shelby. I think we would all associate ourselves 
with the remarks of Senator Dodd in that--regarding the staff 
and what you contribute.
    Mr. Dugan, the OCC's Quality Management Division has 
finally released its long awaited review of the Office of the 
Comptroller of the Currency's Bank Secrecy Act and the 
antimoney laundering supervision that went with it. The review 
is highly critical of OCC's performance, a conclusion that came 
as no surprise to a lot of us here familiar with the Riggs and 
the Arab Bank cases.
    I know you are not over there yet, but outline for the 
Committee briefly the concrete steps that you would intend to 
make to rectify the shortcomings at OCC's supervision of the 
Bank Secrecy Act. We think that is very important.
    Mr. Dugan. That is very important, Mr. Chairman. I do not 
think you can look at the history of what has happened here 
without acknowledging, as the Agency has, that there have been 
real lapses in the Bank Secrecy Act area. As you have said, I 
have not had the benefit of access to the information that is 
nonpublic. Of course, I have been dutifully reading up on all 
the public information. And so, I think the first task is to 
determine what the situation is.
    I was both concerned and somewhat encouraged by the report 
that came out last week. It was quite critical. But at the same 
time, it did acknowledge that there had been improvements made 
and that the Agency was at least moving in the right direction. 
The report laid out a number of concrete steps to continue in 
the right direction, particularly in the area of large bank 
supervision, which seemed to require the most attention. Those 
are the areas that I most certainly will focus on.
    I want to emphasize that I think this is a quite difficult 
area because like some of the other problems that this 
Committee has dealt with, it is easy to go too far and to do 
things that have counterproductive consequences. We have seen 
some of those issues in the case of money transmitters and of 
defensive suspicious activity report filings. It reminds me a 
little bit of the credit crunch issue that we dealt with many 
years ago where there were quite lax lending standards at one 
point, and then standards were tightened to the point where 
people were very much worried about whether banks were 
performing their job. Striking that right balance of cleaning 
up and improving Bank Secrecy Act supervision but doing it in a 
way that calibrates the measures taken, I think, is quite 
important. That will be my number one priority.
    Chairman Shelby. Mr. Dugan, as troubling as the Riggs case 
is to those of us on the Committee concerned about money 
laundering and terror financing issues, the Arab Bank case 
seems to be more troubling. At least with Riggs, there was a 
history of admonishments with respect to that institution's 
repeated failures to comply with the Bank Secrecy Act.
    But in the case of the New York branch of the Arab Bank, we 
do not even have that. We have an institution that had 
repeatedly received the highest grades, only to precipitously 
become the recipient of a consent order that effectively shut 
it down. Equally troubling is the fact that most of what became 
known about Arab Bank's New York branch was due to civil suits 
against the bank and the publication on the Internet of 
documents seized by the Israeli Army when it raided West Bank 
branches of the bank, not by the supervisor's regulators.
    I understand none of this happened on your watch, and I 
would not expect it to happen on your watch, you know? But I 
further understand that this remains a pending enforcement 
matter that is also under criminal investigation by the Justice 
Department. Could you provide the Committee, if you could, your 
assessment of the severity of the Arab Bank case and assure us 
that a meaningful review of that case will occur on your watch 
if you are confirmed, which you will be? And what are the 
implications of this case for one of the largest banks in the 
Arab world? How important is this?
    Mr. Dugan. Mr. Chairman, I would like to, but I am not sure 
I can answer the first part of your question because----
    Chairman Shelby. No, no, you cannot get into everything.
    Mr. Dugan. There is quite a lot of confidential information 
in this ongoing matter.
    Chairman Shelby. We understand that.
    Mr. Dugan. I only have what is in the public record.
    I can commit, however, to the second part of your question, 
to assess the situation to learn why it occurred, and to try to 
figure out the best way possible to correct it so it does not 
happen again.
    Chairman Shelby. Mr. Dugan, there are a number of recent 
stories in the press concerning the OCC's supervision of Wells 
Fargo. And for the record, I want to state again, you have not 
been in the OCC yet.
    Mr. Dugan. Right.
    Chairman Shelby. A number of disturbing accusations have 
been levied against the OCC, including preferential treatment 
of big bank CEO's, slow follow up on cited bank program 
weaknesses, even the loss of the examiner's in charge computer.
    Very rarely is the public privy to a national banking 
regulator's recommendations on the selection of an enforcement 
action against a bank with antimoney laundering and Bank 
Secrecy Act deficiencies. Two sets of questions come to my 
mind: What lessons can you take away or would you take away 
from this disclosure of the Comptroller's regulatory review 
process, and of that process itself, does anything need to be 
changed, in your opinion, or would you wait until you get over 
there and see what is really going on?
    Mr. Dugan. Mr. Chairman, really, the latter. The 
enforcement process is always one that invovles discretion. I 
do not know the facts in this instance. There is an ongoing 
investigation by the IG. I would like to be in a position to 
tell you more. I certainly will follow up and assess this very 
carefully.
    Chairman Shelby. We believe you will.
    Mr. Dugan. But, at this point, I just do not know enough to 
comment on it.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Mr. Reich, I wanted to ask a couple of questions. The total 
assets in the thrift industry at the end of March of this year 
stood at $1.3 trillion. It is my understanding that the largest 
thrift has over $300 billion in assets. And the OTS is funded 
by assessments on the thrifts it regulates. Some have raised 
the question of the ability of the regulator that is so 
dependent upon one institution's assessments to be completely 
objective in carrying out its responsibilities. What is your 
take on that?
    Mr. Reich. For one, I have every intention of being 
objective, Senator Sarbanes, but I am very concerned about the 
point that you raise. I think there is every reason to be 
concerned about the method of funding, in my opinion, for both 
the OCC and the Office of Thrift Supervision. I think it is a 
subject that needs attention, needs to be addressed, and a 
resolution found for a different method of funding.
    I have been willing, as a member of the Board of the FDIC, 
to engage in conversation about creative funding possibilities, 
and I look forward to the possibility of engaging in that 
dialogue with my colleagues on the Board of the FDIC and the 
other Federal regulators.
    Senator Sarbanes. The prior Director of the OTS embarked on 
a reduction in force to significantly reduce the number of 
personnel in the field offices of the OTS. There is 
considerable concern because a very large percentage of the OTS 
examination staff is approaching retirement age in the next few 
years. Furthermore, since its creation over 15 years ago, the 
OTS has been consistently reducing the number of its employees 
and has taken several internal administrative reorganizations. 
This has placed significant stress on the OTS staff who have 
remained, as each employee has taken on more areas of 
responsibility and faces an uncertain future in the 
organization.
    Of course, many of these employees have a significant 
amount of expertise and institutional history important to the 
mission of the Agency. What is your view on these questions of 
staff morale at the OTS, and how do we get more stability at 
the Agency?
    Mr. Reich. I think what the OTS has gone through over the 
last few years is not unlike what the FDIC has also 
experienced. Ten years ago, the FDIC was the primary supervisor 
of almost 9,000 State-chartered banks. Today, the FDIC is the 
primary supervisor of about 5,000 State-chartered banks. And, 
over the years, as that reduction in the number of institutions 
that they supervise has taken place, it has, I think, caused 
the members of the Board of the FDIC to feel a fiduciary 
responsibility to be financially responsible in managing our 
resources, and as the industry has downsized, both the FDIC and 
the Office of Thrift Supervision have downsized along with it. 
I am concerned about staff morale in any organization, and I 
will do the best I can to address the issues which staff is 
concerned about.
    Senator Sarbanes. I hope you well. I think you have a staff 
problem over there, and I am encouraged by your indication of 
your intention to address it.
    Mr. Dugan, I want to ask you about preemption. We talked 
about it when we met. The OCC's action in preempting the 
application of State laws to national banks and their State-
chartered operating subsidiaries as well has drawn a tremendous 
amount of criticism. The National Governors Association, all 50 
State attorneys general, the National Conference of State Bank 
Supervisors, and there is a perception that we are 
fundamentally altering the Federal-State enforcement 
relationship.
    And it is a departure from where we were before. I mean, 
there was some tension on occasion, but essentially, a 
relationship had been worked out, and State governments were 
able to, you know, seek to protect their citizens from abusive 
lending practices and other areas of consumer protection. Many 
of us here feel that it is really contrary to previous 
governing practice.
    In the Riegel-Neal Act, we stated that host State laws 
regarding community reinvestment, consumer protection, and fair 
lending apply to national banks unless those laws discriminate 
against the national bank or are preempted, and we are quite 
concerned about what appears to be a wholesale carve-out from 
State law for national banks and for their operating 
subsidiaries. What is your view on this question?
    Mr. Dugan. Senator, as we discussed in your office, I do 
not personally believe it is a wholesale departure. I know that 
the OCC has received a great deal of criticism, in part because 
many of the practices that had been going on were codified in a 
very visible regulation.
    But to me, the issue gets down to this: What did Congress 
intend when it established a national banking system with a 
Federal charter subject to a uniform set of laws? If you look 
at the cases, and there have been over 50 cases over 100 years, 
many of them in the Supreme Court and some of them decided 
quite recently, the clear consensus rule is that if a State law 
interferes with or significantly regulates a banking activity 
of a national bank, it is preempted.
    That is the general rule. There are exceptions, and 
Congress can change that rule, but that is the premise that 
national banks have been operating under for a very long time. 
In the last 10 years or so since the Riegle-Neal Act, in 
particular, with a great deal of consolidation in the industry 
and much more in the way of interstate banking and branching, 
nationally chartered institutions operating in many different 
States have bumped into more and more State laws. Once that 
situation started engendering more and more requests for 
preemption opinions, the OCC codified their practice in their 
regulation. It was not too dissimilar from what the OTS had 
done a number of years back.
    It prompted a great deal of criticism, and I understand 
that. I think more can be done to share information with the 
States on a timely basis, but I think the basic rule about 
State laws being preempted if they interfere with a national 
bank power is what the law is.
    Senator Sarbanes. The Barnett Bank standard we think is a 
higher threshold for preemption than the one that the OCC is 
using now. That is the problem.
    Mr. Dugan. Senator, I do not think that the OCC has tried 
in any way to say that the Barnett standard is not the right 
standard. I think there is a difference of opinion on what that 
standard means in practice. There are various words in that 
case. People have focused on the ``prevent or significantly 
interfere'' language as one formulation, but there are 
citations to a number of other cases and standards in that very 
same paragraph where the Court talks about that particular 
test. I think the question is, in the end, whether a State law 
creates the Constitutional conflict where it obstructs the 
basic purpose that Congress had in mind in setting up the 
national banking system.
    Senator Sarbanes. Are you prepared to meet with the State 
banking and enforcement officials in order to enter into an 
intense dialogue with them on this issue?
    Mr. Dugan. I would be happy to meet with the State 
officials to discuss this issue at great length.
    Senator Sarbanes. All right; let me ask one final question.
    I wanted to follow up on the Chairman's questions about the 
Bank Secrecy Act. Assuming you are confirmed and take office in 
the very near future, what do you think is a reasonable period 
of time for you to have to address these problems at the OCC 
that were identified by the study with respect to improvements 
in how it does business? When would it be reasonable for the 
Committee----
    [Laughter.]
    --to bring you back in for an oversight hearing in terms of 
what has been done about enforcement of the Bank Secrecy Act at 
the OCC?
    Mr. Dugan. That, of course, is in the Committee's 
discretion. It is a little bit hard for me to say without 
actually having gotten over there. I will say a couple of 
things. Regarding the part of the report that focused on the 
lack of adequate policy guidance, I think a tremendous step was 
made on June 30 when the agencies collectively released quite 
detailed policy guidance on what is expected in this area. At 
the other end of the spectrum, the report's focus on hiring and 
maintaining the right staff, particularly for large bank 
supervision, is going to take some time to address. But I would 
be happy to come back to the Committee to give you an 
assessment of where things stand before the end of the year, if 
that makes sense.
    Senator Sarbanes. It is my understanding that the four 
largest dealers of the $37 trillion interest rate swaps market 
account for over 40 percent of the supply in that market, and 
the concentration of the dealers is even greater in the 
interest rate options market. What priority do you think the 
OCC should put on monitoring and supervising the national banks 
that are the most significant dealers in the over-the-counter 
derivatives market, and do you believe the agency has all the 
resources it needs to adequately monitor and supervise the 
derivative dealer community?
    Mr. Dugan. Senator, I think the kinds of risks that you are 
talking about in the derivatives market are not just interest 
rate risk but credit risk, as well, which is why the market has 
ended up in the larger banks. I think supervision in this area 
has been a tremendous focus of the OCC and the other bank 
regulators, but particularly for the OCC in the wake of the 
derivatives issues that this Committee focused on, quite 
rightly, in the 1990's and in the wake of a number of other 
significant issues that arose at that time.
    My sense is that the Agency does have the resources and 
does focus quite a bit of effort in the derivatives area. I 
think part of the whole Basel process is trying to reinforce 
that and to capture some of the risks that have not been as 
well captured in the past. But that will be an area of concern 
when I get there, if and when confirmed.
    Chairman Shelby. In the near future, the banking 
regulators, as all of you know, are supposed to issue a final 
rule that is intended to implement the changes contained in the 
Basel II proposal. We intend to hold a hearing on the progress 
of the Basel II proposal in September when we get back.
    I recognize that more testing of these new standards is 
scheduled and that there may still be changes made to the 
rules. That said, I am not yet fully confident that the so-
called ``right standards'' have been proposed. What are you 
going to do after you are confirmed to make sure that prior to 
the finalization of the new rules we have developed the best 
rules to make it work? Because there are still some outstanding 
questions there.
    Mr. Gruenberg, we will start with you.
    Mr. Gruenberg. Mr. Chairman, I think there is good reason 
to proceed cautiously with the implementation of the Basel 
agreement. The most recent quantitative impact study that was 
released indicated that on the banks that would participate, 
half of them would have a 26 percent or more reduction of 
capital. In fact, one of those institutions would have a 50 
percent reduction of capital.
    Chairman Shelby. Is that a concern for you?
    Mr. Gruenberg. Yes, it is a serious concern, Senator. And I 
think there was a great effort to bring this agreement about, 
and there was a lot of investment of effort in it, but I think 
until we are truly satisfied about is consequences for the 
banking system, it is very important for the regulatory 
agencies to move very cautiously and frankly be in no rush to 
bring it to a conclusion until they are quite confident about 
its impact.
    Chairman Shelby. But as a new member, will be, of a very 
important banking regulatory agency that is charged with safety 
and soundness, this should, in your background here, be a 
double concern for you.
    Mr. Gruenberg. Very much so, Senator, and the FDIC, to its 
credit, I think, under Chairman Powell has been very forceful--
--
    Chairman Shelby. Outspoken right here at the Committee.
    --among the regulatory agencies on this issue, both on the 
overall reduction of capital and also preserving the minimum 
capital requirement, and that would certainly be a very 
significant priority for me if confirmed by the Senate.
    Chairman Shelby. Senator Sarbanes, when he was Chairman, 
even before he was Chairman of the Committee, he has always 
voiced a strong feeling that the capitalization, the strong 
banks, whether they are large or small, are the ones that stick 
around and do not visit you and visit the taxpayers.
    Mr. Dugan, do you have any comments on this? This will be 
right in your lap, too. I want to comment that Comptroller 
Hawke, right here at this table, he has some concerns, as you 
probably know, about Basel II, the implementation, what it 
would do and so forth.
    Mr. Dugan. Yes, Mr. Chairman. I agree largely with 
everything Marty just said. This is a situation where there has 
yet to be a proposed rule, and I think it is very important to 
have the full notice and comment process to take comments from 
a lot of different sources about this before we move forward to 
any kind of final rule. There has to be a better understanding 
of the quantitative effects on capital, and I do not think 
anybody who has read about the results from the QIS-4 study 
would not be concerned about it. I think we have to proceed 
with conservatism as we move forward for that very reason.
    I will say I do think it is important to try to move away 
from the existing Basel standard and try to move down a path to 
something that is more risk-sensitive. I support the Basel 
process, but for the reasons I have outlined, I think we have 
to be very careful in what we do.
    Chairman Shelby. Mr. Reich.
    Mr. Reich. I am supportive of the Basel process, too, but I 
think that it is too complicated. The results are disappointing 
and of concern. I have listened to former Comptroller Hawke for 
2 or 3 years talk about how complex it was and how complex it 
was going to be to implement. I am concerned about its 
implementation, and I think that it should be deferred until we 
are confident that it is pretty accurate.
    Further, I am concerned about any change that would have a 
material reduction in bank capital.
    Chairman Shelby. Thank you.
    Mr. Reich, as you may be aware, this Committee was very 
critical over the several years of the failure of the 
regulatory agencies to properly examine for Bank Secrecy Act 
deficiencies with the same zeal with which safety and soundness 
exams have been conducted. Can you give the Committee your 
assurance that under your directorship, after you are 
confirmed, that the Office of Thrift Supervision would treat 
BSA compliance with the level of diligence this Committee and 
the Congress expects?
    Mr. Reich. Yes, Mr. Chairman, I commit to do that. As Mr. 
Dugan indicated, the Federal banking agencies joined together 
on June 30 to issue joint guidance to all of our Federal 
banking examiners. We should all be on the same page in our 
examination processes. All examiners will each be receiving 
identical information about the processes that they are to 
follow. We have set a schedule of joint examiner training for 
our agencies and joint banker education of the new guidelines 
as of June 30, and I will do all that I can to see that OTS 
implements these guidelines and places a high priority on the 
BSA examination process.
    Chairman Shelby. I want to direct this to all three of you. 
Over the last year or so, there have been numerous incidents 
involving the unauthorized disclosure of sensitive personal 
financial information. In some but not all of these situations, 
financial institutions have been involved. The Committee held a 
hearing earlier this year to review the framework of GLB and 
the new ID theft provision recently added to FCRA.
    Could you comment on what additional measures you feel may 
be necessary to complement the banking agencies' guidance on 
breach of notification? Mr. Dugan, do you want to start, Marty? 
Go ahead, Mr. Dugan.
    Mr. Gruenberg. Sure.
    Mr. Dugan. Mr. Chairman, I would say that financial 
institutions already have a structure in place. I do think it 
should be kept separate. I do not think this is an area where 
they should be treated like other institutions. There are 
different concerns; they hold information; they hold, in some 
cases, quite sensitive information.
    Chairman Shelby. But they should protect that information, 
should they not?
    Mr. Dugan. Sure, absolutely, and that is why, the Gramm-
Leach-Bliley Act--and you and Senator Sarbanes were both great 
proponents of this--imposed standards for maintaining security 
and imposing safeguards for customer information, and why the 
bank regulators have issued guidance on security breaches.
    Whether that needs to be tweaked somewhat to take account 
of some more particular issues that have come up with some of 
the types of information is, I think, worthy of consideration 
by the Committee. It could be done either directly through 
legislation or some combination of legislation and having the 
regulators reexamine their existing authority and take measures 
with the authority they already have.
    Chairman Shelby. Marty. Excuse me; Mr. Gruenberg.
    Mr. Gruenberg. Mr. Chairman, it is clear that there is a 
very serious problem here that is not being fully addressed. We 
established in the Gramm-Leach-Bliley Act the obligation on 
financial institutions to protect non-public personally 
identifiable information, and with the number of problems we 
have had with a variety of institutions, it would appear that 
either the guidance being provided is not sufficient, or the 
compliance is not sufficient.
    I would not presume at this point to say which, but I think 
there is a very serious concern, and I also think there is a 
very serious issue as relates to the nonbank institutions that 
are trusted with a lot of personal information of people, and 
that seems to me great attention needs to be paid to that area 
as well, and it may require additional legislation to address 
some of the concerns here.
    Chairman Shelby. In light of the participation of 
nonfinancial institutions in the payment system, what else 
might be necessary to address the protection of financial 
information as it moves through the entirety of the payment 
system? Mr. Dugan, do you have any comments on that? In other 
words, we have nonfinancial institutions involved in the 
payment system.
    Mr. Dugan. Mr. Chairman, the Gramm-Leach-Bliley Act, 
applies technically to something called nonpublic personal 
information, which is basically customer information of the 
banks.
    Chairman Shelby. Right.
    Mr. Dugan. But in some cases, the institutions handle 
personally identifiable information of noncustomers. I think 
making sure that information is protected, because it has some 
of the same kind of sensitivity issues as some of the other 
information they handle, is something that would be worth the 
Committee looking at.
    Chairman Shelby. Mr. Reich, do you have any comment?
    Mr. Reich. There is a joint working group of all of our 
Federal banking agencies addressing identity security, and 
hopefully, we will be coming out with substantive guidance that 
will address these issues. At the FDIC, we have been working 
with our IT examiners to help banks address the problem on two 
fronts, dealing with it in the aftermath when breaches do take 
place and then trying to help them set up systems and processes 
to prevent it from happening to begin with, which is what the 
joint working group is addressing.
    Chairman Shelby. Mr. Dugan, what balance can we bring 
between enforcement and latitude? For example, the recently 
released internal review states that OCC's initial supervisory 
actions have not always been severe enough to ensure timely 
correction of BSA/MAML program deficiencies, and the subsequent 
follow-up actions have not always been timely or effective.
    Is it possible to have criteria that would provide 
sufficient guidance for examiners and higher level 
decisionmakers within the Office of the Comptroller of the 
Currency to determine when stricter supervisory actions are 
warranted that would not eliminate whatever level of discretion 
is needed for the system to function properly? You know, there 
is a balance there. Both Riggs and the Arab Bank involved high 
risk accounts, and in the case of the latter, the Arab Bank, a 
bank serving in a very high risk region through which funds 
were flowing to the West Bank.
    Should these types of banks be supervised differently from 
banks with lower inherent levels of risk? In other words, is 
that a judgment call, or what? How would you handle it?
    Mr. Dugan. Mr. Chairman, I think the Agency has to be 
committed to devoting more resources to institutions that are 
perceived as riskier in particular areas, and I think that has 
been at least the stated philosophy of the Agency for a long 
period of time.
    There are quite a number of tools that the bank regulators 
have at their disposal from examiner criticism and informal 
enforcement actions all the way through very formal enforcement 
actions, even removal and prohibition, civil money penalties, 
and the like. There is a spectrum of remedies and there are 
well-articulated procedures that are supposed to be adhered to 
to try to get balance into the process.
    There will always be discretion in the enforcement process. 
I think the important thing is to make sure that the process is 
the right kind of process, so that different views are being 
aired. I know what the processes are. Obviously, there have 
been some lapses, and looking at that is one of the very areas 
that I plan to devote a considerable amount of time to if and 
when I get to the Agency.
    Chairman Shelby. Senator Sarbanes, do you have anything 
other questions?
    Senator Sarbanes. Mr. Chairman, I would like to have 
formally included in the record a letter that we received from 
the National Bankers Association supporting the nomination of 
John Reich to be the Director of the OTS.
    Chairman Shelby. Without objection, so ordered.
    Senator Sarbanes. In the course of which, they say that 
they have worked with him in his current capacity at the FDIC. 
During his tenure with that agency, Mr. Reich and the FDIC 
Chairman, Donald Powell, have shown recognition for the unique 
status of women and minority-owned banks, and they go on to say 
that the NBA in the past has expressed some disappointment in 
the inaction of the OTS in its regulatory oversight of such 
matters but that they are optimistic that under the new 
leadership of Mr. Reich, the OTS will administer meaningful 
policies and regulations that strengthen the capacity and 
foster the number of minority-owned banks, and they are looking 
forward to working with Mr. Reich and the other nominees at 
this hearing to develop a Government-wide, coordinated banking 
policy that protects the diversity of the Nation's financial 
system.
    Chairman Shelby. It will be made part of the record without 
objection.
    Senator Sarbanes. And I commend that objective to our two 
nominees as well.
    Thank you very much.
    Chairman Shelby. Anything else?
    Senator Sarbanes. No.
    Chairman Shelby. Gentlemen, I thank you for your appearance 
here today. We believe that you are all well-qualified for your 
positions, and we are going to try to move your nominations 
Thursday.
    Thank you. The hearing is adjourned.
    [Whereupon, at 3:29 p.m., the hearing was adjourned.]
    [Prepared statements, biographical sketches of the 
nominees, response to written questions, and additional 
material supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR JIM BUNNING
    Thank you, Mr. Chairman, for holding this hearing today, and I 
would like to thank all of our nominees for coming before us today.
    I would especially like to thank my good friend, Chris Cox, for 
coming before us today and agreeing to be the President's nominee for 
the Chairman ofthe Securities and Exchange Commission.
    Its no secret that I have disagreed with some of the decisions the 
SEC has made under the last Chairman. Though I appreciate his service 
and think he should be commend for righting the SEC's ship, I believe 
he made of number of policy mistakes. It seemed that he was ignoring 
his commissioners on a number of major issues. Also I think he was not 
open to advice from this Committee. I believe Chris Cox will listen to 
all of his commissioners and take the advice of Congress.
    There are many major issues facing the SEC. In particular, I am 
concerned about the independent chairman rule that was overturned by a 
Federal court, then rammed through again by the former Chairman and 
Regulation B, whose implementation has been delayed until September. I 
believe with Chris Cox's leadership, we can come up with a solution 
that everyone can live with.
    I have known Chris for a long time. He has served his country well 
as a White House Counsel to President Reagan, as a U.S. Representative 
and I believe he will serve his Nation well as Chairman of the SEC. I 
urge all of my colleagues to support the nomination of Chris Cox as 
Chairman of the Securities and Exchange Commission.
                               ----------
             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
    Thank you, Chairman Shelby. Welcome Congressman Cox, Ms. Nazareth, 
and Commissioner Campos.
    These are busy times for the SEC and I want to commend the ongoing 
efforts of the SEC and specifically Chairman Donaldson. Whether in 
handling the melt down of Enron or the mutual fund industry scandals, 
the SEC is restoring public trust in the markets--and I believe we 
should vigorously continue down that road. The job that the Commission 
performs is absolutely vital to maintaining a robust and vibrant 
economy, and providing working men and women the piece of mind they 
need to become investors in the American Dream. So, hearings such as 
this are important.
    I appreciated the time that Congressman Cox set aside to come by my 
office last month. I left that meeting feeling that as Chairman he 
would not seek wholesale change in the approach that the current 
Commission is taking with regard to oversight of our financial markets. 
Also, that he would work with the other commission as a whole to 
generate a consensus on the difficult issues that the SEC will face in 
the future. I look forward to hearing more about how he and the other 
nominees will approach their roles as SEC Commissioners.
    That being said, I would like to renew my concerns with the SEC's 
proposed Regulation B, implementing Title II of the Gramm-Leach-Bliley 
Act. As the witnesses testify today, I will listen especially close to 
comments on Regulation B, the so-called ``Pushout'' rule.
    I am worried that too little is being done to revise the rule in 
order to have it comport with Congress' intent that certain traditional 
bank activities--such as trust and custodial activities may continue to 
be conducted in the bank rather than being ``pushed out'' into an SEC 
registered broker/dealer affiliate.
    The small and medium-sized banks in my home State of Michigan are 
very concerned about the costs and consequences of having to implement 
a regulation that they feel runs counter to the intentions of the 
Gramm-Leach-Bliley Act.
    Between now and the end of September, I look forward to working 
with the Commission on providing a common sense approach to the issue 
of securities activities inside our small and medium-sized commercial 
banks.
    Also, I am interested in hearing the witnesses comment on how we 
can better secure our financial markets and make them fair for the 
common investor. As we continue moving toward a future where more and 
more households are invested in the market, we must do all we can to 
ensure that the average investor--the investor who does not have access 
to levers of power on Wall Street--can invest without fear that the 
mutual fund they are investing in, or the brokerage house that they 
hired, are covertly working against them by gaming the system.
    We saw the vivid results of this type of malfeasance in 2003 and I 
am glad to see that the SEC is making a concerted effort to address 
many of these problems. If we are to help our constituents secure their 
retirement future and encourage the American public to save, then we 
must give them the piece of mind that the playing field is level and 
they are not at a disadvantage when putting their money into the 
market.
    I look forward to the testimony.
    Thank you, Mr. Chairman.
                               ----------
                   PREPARED STATEMENT OF TED STEVENS
                A U.S. Senator from the State of Alaska
                             July 26, 2005
    I am pleased to join the Senators from California in recommending 
Chris Cox as the next Chairman of the Securities and Exchange 
Commission.
    Chris graduated from Harvard Law School where he was editor of the 
Law Review and also received an MBA. Chris has represented Orange 
County in Congress for 17 years. A bipartisan consensus builder, every 
bill and report from the three Congressional Committees he has chaired 
during his House career was unanimous and bipartisan--No exceptions.
    His 1995 legislation to protect investors from fraudulent lawsuits, 
and from extortion by unethical lawyers, was approved in both the House 
and the Senate with overwhelming support. Its principal co-author in 
the Senate was Chris Dodd.
    This landmark legislation, which passed with a bipartisan majority 
in both the House and the Senate, imposed new responsibilities on 
accountants to discover fraud, and put an end to the ethical abuse of 
professional plaintiffs in class actions. Now, court-appointed 
representatives in securities class actions are seeing to it that more 
of the recoveries go to shareholders, who were harmed instead of their 
lawyers.
    Through a long and distinguished public career over two decades in 
the White House and in Congress, Chris Cox has shown that he is 
independent, tough-minded, fair, and bipartisan. He is committed to 
enforcing the rules of the marketplace for the benefit of every 
investor, and to upholding the integrity of our capital markets.
    While this Committee will review Chris' qualifications carefully, 
he has already gone through an even tougher confirmation process. He 
had to convince his wife, my good friend and one of the smartest 
lawyers I know, Becky Gernhardt, to marry him. Many of you know Becky 
from her public service in the Assistant Majority Leader's Office, the 
Reagan White House, and of course, the Base Closure Commission.
    I urge this Committee to act quickly on this nomination and to 
report it to the full Senate for consideration.





       RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER 
                      FROM CHRISTOPHER COX

Q.1. We have all heard assertions about the problems with the 
rules under Section 404 of Sarbanes-Oxley. As you know, that 
Section requires the SEC to develop and adopt rules that 
require companies to report on the management of companies' 
internal controls over their financial reporting. As some of us 
have heard, these reporting requirements are cumbersome and the 
audits are expensive, at least the initial ones. I would just 
like to ask each of our nominees to comment on this issue, to 
give us a sense of whether you think there is a problem or not, 
and what steps should be taken as we go forward so that we can 
have robust, vibrant markets and also strong investor 
protections.

A.1. I strongly believe it is possible to have both robust, 
vibrant markets free of unduly cumbersome and expensive 
regulatory requirements, and strong investor protections. I 
continue to strongly support the Sarbanes-Oxley Act, and was 
proud to serve on the House-Senate Conference Committee that 
wrote the law. I believe it was then, and remains now, an 
important and necessary response to the high-profile scandals 
that shook corporate America and to the subsequent crisis in 
investor confidence. In particular, the internal control 
reporting provisions of the Sarbanes-Oxley Act have the 
potential to provide significant long-term improvements in 
financial reporting. But it is important to both investors and 
public companies that the Commission ``get it right.'' As we go 
forward, the Commission and the PCAOB must offer increasingly 
clear, refined, and useable guidance in order to achieve the 
twin objectives of robust markets and strong investor 
protections.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER 
                      FROM ROEL C. CAMPOS

Q.1. We have all heard assertions of the problems with the so-
called Section 404 rules of Sarbanes-Oxley, and as you know, 
that Section is designed to require the SEC to develop and 
adopt rules that require companies to report to the management 
of the companies' internal controls of their financial 
reporting. And some of us have heard, I am sure we have all 
heard from time-to-time, that these reporting requirements are 
cumbersome and that the audits are expensive, at least the 
initial ones are.
    I would just like to ask each of our nominees to comment on 
this issue and to give us a sense of whether you think there is 
a problem or not and what the steps are you think should be 
taken as we go forward so that we can have robust, vibrant 
market and also strong investor protections.

A.1. Given the need for U.S. investors to have confidence in 
the internal controls of companies in which they invest and to 
see that an independent auditor has attested to those internal 
controls, Section 404 may be compromised if an important 
segment of issuers is not subject to the same disclosure 
standards as apply to the majority of issuers. This was a 
fundamental piece of the Sarbanes-Oxley Act and to give the 
foreign issuers or small issuers an out may not be in the best 
interest of investors. Yet, both of these classes of issuers 
must be analyzed separately. Section 404 of Sarbanes-Oxley 
specifically focuses on mitigating the risk of improper conduct 
in the areas of accounting and financial reporting by ensuring 
that companies' internal controls over accounting and financial 
reporting are strong enough to create a safety net. Section 
404's mechanism for doing this is to require an audit of 
internal controls in conjunction with the audit of financials 
and an attestation by corporate management and independent 
auditors on the effectiveness of internal controls.
    The first season of the internal control audits is coming 
to a close and we are seeing that 404 was an important tool in 
mitigating risk. While many have complained about the costs of 
compliance with 404, I believe that, in time, renewed investor 
confidence in companies' reports will pay off. One must also 
remember that many of the most significant costs are one-time 
costs that likely will not be repeated in subsequent years. As 
former Chairman Donaldson stated in a Congressional Hearing 
before the House Finance Services Committee, ``the time, 
energy, and expense that companies are now investing in their 
internal controls, will earn a handsome return in the years to 
come.''
    With respect to foreign issuers, I believe it is unlikely 
that we will see an exodus of foreign issuers from the U.S. 
markets. There are many reasons why we expect a continuing and 
strong presence of foreign issuers in the United States. 
Nowhere in the world can foreign issuers raise as much capital 
as quickly as they can in the United States. In addition, the 
Commission historically has lightened the foreign issuers' 
disclosure burdens. Foreign issuers' financial statements can 
be prepared in accordance with home country accounting 
standards, provided the registration statement discusses and 
any material variations from U.S. GAAP. Foreign issuers also 
have certain options not to disclose certain categories of 
information that are mandatory for all U.S. issuers, such as 
breaking down revenues and earnings by lines of business and 
pension obligations. Foreign issuers have much lower burdens of 
disclosure regarding management compensation and related party 
transactions than customarily apply to U.S. issuers by virtue 
of Items 402-404 of Reg. S-K. Plus, further accommodations to 
foreign issuers were made when the SEC amended Form 20-F so 
that it more closely mirrors the disclosure standards 
established by IOSCO.
    With respect to small issuers, the need for confidence, 
comfort, and comparability is no less but the analysis differs 
because of the particular barriers faced by new and small 
issuers. I am eagerly awaiting any recommendations of the 
Smaller Public Company Advisory Committee tasked with examining 
this issue. I also understand the Commission on Fraudulent 
Financial Reporting, at the staff 's suggestion, is working to 
provide additional guidance for smaller companies. Any changes 
to Section 404, whether for small or foreign issuers, must 
follow a careful risk analysis before the Commission can 
conclude that such accommodations will still afford investors 
the necessary protections and maintain their confidence in the 
markets.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR CARPER 
                    FROM ANNETTE L. NAZARETH

Q.1. We have all heard assertions of the problems with the so-
called Section 404 rules of Sarbanes-Oxley, and as you know, 
that Section is designed to require the SEC to develop and 
adopt rules that require companies to report to the management 
of the companies' internal controls of their financial 
reporting. And some of us have heard, I am sure we have all 
heard from time-to-time, that these reporting requirements are 
cumbersome and that the audits are expensive, at least the 
initial ones are.
    I would just like to ask each of our nominees to comment on 
this issue and to give us a sense of whether you think there is 
a problem or not and what the steps are you think should be 
taken as we go forward so that we can have robust, vibrant 
market and also strong investor protections.

A.1. I believe Section 404 of the Sarbanes-Oxley Act is 
fundamentally sound and an important tool for improving the 
accountability of issuers. That having been said, I am also 
sensitive to the costs issuers have incurred in the first year 
of implementation. Earlier this year, the Commission and PCAOB 
board members hosted a roundtable on implementation of the 
internal control reporting provisions under Section 404. During 
this dialogue, the Commission learned about the benefits 
issuers experienced, including improved focus on internal 
controls and the prospect of improvements in investor 
confidence, transparency, and financial statement quality. The 
Commission also explored the reasons for the significant costs 
to issuers of implementation, some of which were one-time, and 
others of which were based on interpretive concerns, such as 
auditors undertaking a very conservative scope of testing or 
duplicative testing by management and auditors. The staff has 
since issued interpretive guidance to focus management and 
auditors on implementing a risk-based approach to the rules. It 
is our hope such an approach will reduce the time and expense 
of compliance with Section 404. I also understand the Smaller 
Public Company Advisory Committee is studying possible 
improvements regarding implementation for small businesses and 
may make recommendations. I will encourage the Commission staff 
to continue to request feedback on progress, monitor costs, and 
consider further opportunities for improved implementation. I 
will also support identifying and developing best practices in 
this area.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 
                      FROM CHRISTOPHER COX

Q.1. As you know, the SEC has proposed a new Regulation B to 
Section II of the Gramm-Leach-Bliley Act. The Fed, along with 
the FDIC, the OTS, and the OCC wrote a very strong letter to 
the SEC opposing their proposed regulation. The SEC has delayed 
the implementation of the rule, but it is due for review in 
September. Will you consider the opinions of the banking 
regulators while reviewing Regulation B?

A.1. Yes. As you might imagine, given our service together in 
1999 as Members of the House-Senate Conference Committee that 
wrote the Gramm-Leach-Bliley Act, I well appreciate your 
abiding interest in the question of how best to ensure 
functional regulation of securities activities conducted by 
banks. I will work diligently to gain a full understanding of 
the issues surrounding the Commission's proposed Regulation B, 
including listening carefully to the opinions of banking 
regulators, those in the banking industry, investors, and other 
stakeholders.

Q.2. As you know, the Independent Chairman rule proposed by the 
SEC was overturned by a Federal court. It was then revoted out 
by the SEC. This proposed rule was very controversial and was 
fought by Commissioners Glassman and Atkins as well as many 
Members of this Committee. Will you be reviewing the 
Independent Chairman rule if confirmed?

A.2. Because the Commission's mutual fund governance rule is 
again before the court, it is likely that the Commission will 
receive additional, and legally binding, guidance. I will 
review the issues surrounding the rule in detail, and in 
particular will abide by the decision of the court in both 
letter and spirit.

Q.3. As you may know, the TVA has agreed to voluntarily 
register with the SEC. The TVA has over $25 billion in publicly 
traded bonds, many of which are held by seniors in the 
Tennessee Valley. I would ask you to watch over this process 
carefully and make sure these bondholders have the safety and 
security that other investors have enjoyed for a long time. 
Would you do that as Chairman?

A.3. Yes. I will ensure that the Commission carefully reviews 
the TVA's filings to ensure its disclosure to the public and to 
bondholders is full and transparent.
    Since its creation in 1933, the Tennessee Valley Authority 
has been considered an agency and instrumentality of the United 
States, but the debt TVA issues is only an obligation of TVA 
and is not guaranteed by the United States. Last year, the 
Congress enacted a law requiring TVA to file with the SEC 
annual, quarterly, and current reports with the Commission 
beginning with its fiscal 2006 annual report.
    While the law does not require TVA to register its 
securities with the SEC, the SEC's Division of Corporate 
Finance will be responsible for reviewing TVA's filings for 
compliance with the disclosure requirements of the securities 
laws and regulations. I can assure you that I will indeed watch 
over this process with great care to ensure full and fair 
disclosure as required by the securities laws.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR BUNNING 
                    FROM ANNETTE L. NAZARETH

Q.1. You have testified before this Committee before on the 
Nasdaq exchange application. As you know, this application has 
yet to be approved or rejected. Can you tell me why it has 
taken so long to come to a decision?
    Do you think 4 1/2 years is too long to wait?

A.1. The Commission should always endeavor to respond to 
matters, including exchange applications, as expeditiously as 
possible. Nasdaq's application to register as a national 
securities exchange has been pending with the Commission for 
several years. A number of difficult policy issues were raised 
by the application, many of which required significant effort 
by Nasdaq to resolve. For example, Nasdaq currently lacks price 
priority rules that all of the other exchanges have. The lack 
of price priority rules raises profound market structure issues 
that could have implications for all of our registered 
exchanges and, ultimately, investors. In an effort to move its 
application forward, Nasdaq and NASD recently agreed upon a new 
structure, which would separate Nasdaq's internalization 
business into an entity under the regulatory control of NASD. 
Also, Nasdaq has proposed to modify its rules so trades 
executed on its proposed exchange would be pursuant to price/
time priority rules. The Commission has published both of these 
proposals for public comment. Nasdaq will amend its Form 1 
application for registration as a national securities exchange 
to reflect this new structure. I expect the amended Form 1 to 
be published for public comment shortly after its filing by 
Nasdaq with the Commission.

       RESPONSE TO WRITTEN QUESTIONS OF SENATOR CORZINE 
                      FROM CHRISTOPHER COX

Q.1. The recent attacks in London are a horrible reminder that 
the threat of terrorism is still with us nearly 4 years after 
the attacks of September 11, 2001, and is likely to remain for 
some time. As you know, given your background as Chairman of 
the House Homeland Security Committee, ensuring the stability 
of our economy and the continuity of markets and business 
operations is an essential component of our homeland security 
strategy. The SEC, along with other financial regulators, plays 
a vital role in this mission. In the wake of September 11, one 
of the lessons we learned was the importance of reinforcing the 
telecommunications infrastructure that supports our financial 
markets. But the cost building in redun-dancies and backup 
capabilities can be high. Nearly everyone agrees that the 
Federal Government must play some role in bearing a share of 
the cost. Do you think we have done enough relative to ensuring 
continuity in the event of a terrorist attack, and what further 
actions would you recommend? For example, would you recommend 
that the President exercise his authority under the Defense 
Production Act, which allows him to order economic activity for 
national security purposes, such as the manufacture of more 
bullets during a time of shortage, now that it includes 
critical infrastructure?

A.1. Since September 11, 2001, much has been done to ensure 
continuity in the event of a terrorist attack, but much more 
remains to be done. Ensuring the continuity of critical 
operations in the financial sector in the event of another 
terrorist attack will remain a top priority for the Securities 
and Exchange Commission. The threat of terrorism, including 
terrorism directed against the financial sector, has not 
abated. I will work closely with the other Commissioners, 
Commission staff, other Federal and State agencies, law 
enforcement, self-regulatory organizations, and private sector 
stakeholders to see to it that market resiliency safeguards are 
implemented effectively and completely. With respect to the 
Defense Production Act, I would concur with the premise of your 
question that, despite its enactment over a half century ago in 
very different circumstances, this Act is highly relevant to 
the war on terrorism in the 21st century. Already, the law has 
enabled the Homeland Security Department to expedite the 
production of communications systems for airports. To the 
extent that the President and Congress wish to extend the use 
of this authority to the Nation's financial markets and 
associated infrastructure, the SEC will energetically cooperate 
and offer its expertise.

Q.2. In light of the New York Stock Exchange's proposed merger 
with Archipelago--which will necessitate a number of structural 
changes to the NYSE's regulatory structure--do you agree that 
this would be an opportune time to go a step further and adopt 
a new approach to the regulation of broker-dealers through 
consolidation? It is my understanding that the securities 
industry supports combining the functional regulation of 
broker-dealers, which is currently duplicated by both the NASD 
and the New York Stock 
Exchange, into a ``hybrid'' SRO, while allowing each 
marketplace to regulate its own trading activities and set its 
own listing standards? In a related area, SRO's impose market 
data fees to fund self-regulation. Do you think it is 
appropriate public policy for market data to generate revenues 
for SRO's to subsidize their regulatory obligations or to fund 
competitive business activities?

A.2. The suggestion that broker-dealer regulation currently 
conducted by both the NASD and the NYSE be combined in a 
``hybrid'' SRO is one that should be evaluated in the context 
of an ongoing appraisal of the role that self-regulatory 
organizations play in our securities markets as standard-
setters for listed companies, operators of trading markets, and 
front-line regulators of securities firms. An abiding goal of 
the SEC must be to see to it that SRO's, which can face 
conflicts of interest when they operate a market, remain 
unbiased when at the same time they fulfill their 
responsibility to regulate their members who trade in that 
market.
    The Commission's proposed minimum governance standards and 
greater transparency of SRO regulatory programs are intended as 
a first step to address such competitive and regulatory 
concerns. I will carefully evaluate the Commission's proposals 
on these matters, together with the comments received by the 
Commission, before reaching conclusions on how the Commission 
should proceed.
    With regard to your further question, market data fees have 
played an important role in funding the regulatory obligations 
of the SRO's. In Regulation NMS, the Commission amended the 
formulas in the Market Data Plans that allocate revenues from 
consolidated data to the various SRO's. The amendments were 
designed to promote the wide availability of market data and to 
allocate revenues to SRO's that produce the most useful data to 
investors. I agree with the implication in your question that 
the use of market data fees to subsidize competitive business 
activities may raise serious public policy concerns that merit 
the continuing attention of the Commission.

Q.3. In a recent GAO report entitled ``Environmental 
Disclosure: SEC Should Explore Ways to Improve Tracking and 
Transparency of Information'' that I, along with other 
Senators, commissioned, one of the GAO's recommendations was 
that the Chairman of the SEC work with the Administrator of the 
EPA ``to explore opportunities to take better advantage of EPA 
data that may be relevant to environmental disclosure and 
examine ways to improve its usefulness.'' Knowing your interest 
in ensuring the transparency of 
financial reports, what steps will you take as SEC Chairman to 
implement this and other GAO recommendations to ensure and even 
improve proper enforcement of environmental reporting 
requirements, such as those under SEC Regulation S-K, requiring 
companies to report all material financial and nonfinancial 
information related to their environmental activities, 
liabilities, trends, and uncertainties?

A.3. I will follow the GAO recommendations with a view to 
ensuring and improving the full and fair disclosure of material 
information. Specifically, with regard to environmental 
disclosure, I will work to improve compliance with current 
requirements mandating that public companies disclose material 
information relating to environmental litigation, remediation, 
regulatory compliance, and other environmental issues. In 
addition to enforcing compliance with these disclosure rules 
through its disclosure review program, the Commission will, 
under my leadership, build upon the open and cordial 
relationship that has existed between the SEC and the 
Environmental Protection Agency for some time. It is my 
understanding that, in response to this GAO recommendation, the 
staff of the SEC and the EPA has already met to discuss how 
they can more effectively share information.
    The GAO included two other recommendations in its report; I 
understand that each of these recommendations has already been 
implemented.



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