[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]




                               BEFORE THE


                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             FIRST SESSION


                             JULY 14, 2009


       Printed for the use of the Committee on Financial Services

                           Serial No. 111-57

53-237                    WASHINGTON : 2009
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 


                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
WM. LACY CLAY, Missouri                  Virginia
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
JOHN ADLER, New Jersey
JIM HIMES, Connecticut

                            C O N T E N T S

Hearing held on:
    July 14, 2009................................................     1
    July 14, 2009................................................    45

                         Tuesday, July 14, 2009

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission.....................................................    11


Prepared statements:
    Kanjorski, Hon. Paul E.......................................    46
    Garrett, Hon. Scott..........................................    48
    Schapiro, Hon. Mary L........................................    50

              Additional Material Submitted for the Record

Castle, Hon. Michael:
    Op-ed from The Financial Times entitled, ``Protect industry 
      from predatory speculators,'' by Lawrence Mitchell, dated 
      July 8, 2009...............................................    65
Hinojosa, Hon. Ruben:
    Letter to Chairman Barney Frank and Ranking Member Spencer 
      Bachus from various undersigned organizations..............    67
Schapiro, Hon. Mary L.:
    Responses to questions submitted by Representative Biggert...    70
    Responses to questions submitted by Representative Himes.....    71
    Responses to questions submitted by Representative Putnam....    74
    Responses to questions submitted by Representative Sherman...    80

                      SEC OVERSIGHT: CURRENT STATE

                               AND AGENDA


                         Tuesday, July 14, 2009

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Ackerman, 
Capuano, Hinojosa, McCarthy of New York, Baca, Lynch, Maloney, 
Klein, Perlmutter, Donnelly, Carson, Speier, Adler, Kosmas, 
Himes, Peters; Garrett, Castle, Manzullo, Royce, Biggert, 
Capito, Hensarling, Putnam, Bachmann, McCarthy of California, 
Posey, and Jenkins.
    Ex officio present: Representative Bachus.
    Also present: Representatives Gutierrez, Moore of Kansas, 
Ellison, and Miller of California.
    Chairman Kanjorski. This hearing will come to order.
    Pursuant to the committee rules, each side will have 15 
minutes for opening statements.
    Without objection, all members' opening statements will be 
made a part of the record.
    I want to recognize Mr. Gutierrez and Mr. Ellison, members 
of the full committee participating in today's hearing who are 
not members of the subcommittee.
    Without objection, it is so ordered.
    We meet today to focus on the work of the U.S. Securities 
and Exchange Commission. Although she is no stranger to us, 
this hearing also represents the first time that Mary Schapiro 
will testify in her new capacity as the head of the Commission.
    Chairman Schapiro has, of course, taken over the helm of a 
much beleaguered agency. In recent months, many have criticized 
the Commission for its lack of diligent enforcement. The 
Commission showed particular ineffectiveness when, despite 
numerous warnings, it failed to uncover the Madoff scandal. 
This $65 billion fraud has caused extreme hardship if not ruin 
for far too many individuals, pension funds, and charitable 
    Our panel has already examined the Madoff affair in great 
detail, using an unfortunate episode as a case study to examine 
the gaps in our existing regulatory structure and to identify 
solutions to fill these holes. The recent public assessments of 
Harry Markopoulos and the Government Accountability Office show 
an agency in distress. To restore investor confidence in our 
markets, the Commission must expeditiously change the way it 
does business.
    Since her return to the Commission as Chairman, Mary 
Schapiro has moved aggressively to focus the agency on 
fulfilling its key mission: protecting the investors. She has 
beefed-up the importance of the enforcement unit, pursued 
significantly more enforcement actions than her immediate 
predecessor, and removed unnecessary hurdles that slowed 
progress in enforcement cases. In less than 6 months, she has 
also replaced nearly all of the agency senior officials.
    In nominating Mary Schapiro, President Obama remarked, 
``Mary is known as a regulator who is both smart and tough, so 
much so that she has been criticized by the same industry 
insiders whom we need to get tough on. . . I know that Mary 
will provide the new ideas, new reforms, and new spirit of 
accountability that the SEC desperately needs so that fraud 
like the Madoff scandal doesn't happen again.''
    Without question, I wholeheartedly concur with the 
President's assessment. In her short tenure, Chairman Schapiro 
has displayed a commitment to implementing the reforms needed 
to change the internal culture of external perceptions of the 
    The Commission, however, must continue to take bold and 
assertive action as it moves forward to bring enforcement 
actions against wrongdoers and to rewrite the rules governing 
the industry to better protect investors. Without further 
action to finalize regulatory proposals on proxy access, the 
custody of client assets, and short-sale restrictions, 
investors will lack the real protections that they need. The 
hard work on these matters therefore lies ahead.
    As the Commission works to put in place new rules, Congress 
must also work to update our securities laws. In this regard, 
Chairman Schapiro has already transmitted an ambitious set of 
42 legislative proposals. The Commission's Inspector General 
has also offered us some ideas. And the Obama Administration 
has, of course, already relayed general concepts and specific 
legislative proposals. I am now developing a bill based on 
these useful recommendations.
    Of the many suggestions already proposed, one important one 
stands out. We ought to put in place new standards that reward 
whistleblowers when their tips lead to catching fraudsters. By 
encouraging whistleblowers to come forward when they know of 
wrongdoing, we will leverage the Commission's limited resources 
and increase the number of cops on the beat.
    Improving the Commission's overall operation and 
performance will additionally require a significant increase in 
its budget. Chairman Schapiro has noted that the agency lacks 
the resources required to match increasingly sophisticated 
markets. Fortunately, the House will soon consider a bill 
providing for a modest increase of 8 percent in the 
Commission's 2010 budget.
    But, we must do even more to remedy these constraints. The 
financial crisis shows what happens when unbridled capitalism 
lacks a strong regulatory check. We must therefore seriously 
consider the Commission's request to raise its 2011 budget 
authorization by an additional 20 percent. Alternatively, we 
might decide to put the Commission on the same independent 
footing as other financial regulators by moving the agency 
outside of the appropriations process.
    In closing, I look forward to Chairman Schapiro's testimony 
today. Her comments will help us as we embark on overhauling 
financial services regulation. I would like to recognize 
Ranking Member Garrett for 3 minutes for his opening statement.
    Mr. Garrett. I thank the chairman.
    I welcome you here today and I appreciated the opportunity 
to meet with you on Friday to chat about some of these issues 
as well before today's hearing.
    You know there are so many fronts on which the SEC is 
actively engaged, it is a little daunting to know exactly where 
to start. You certainly have your hands full as a new chairman 
of the agency, and I think it is fair to say it is under a lot 
of scrutiny right now for the events that have taken place over 
the last several months and years.
    One place to start is with the SEC's budget. In the House 
Financial Services appropriations bill recently passed out of 
the committee, for the first time ever, the SEC will be funded 
at more than $1 billion. In a recent letter I just received 
from one of Bernie Madoff's group of victims, they asked why, 
given the SEC's recent investment protection and enforcement 
track record, is Congress seriously considering giving the SEC 
even more money and more authority to regulate financial 
services? I think similar questions are on a lot of people's 
minds, and I look forward to addressing that issue.
    And the policy areas on your plate, one of the areas I have 
been increasingly engaged in, is the area of over-the-counter 
derivatives. As I said a number of times in the past, 94 
percent of the 500 largest global companies use derivatives to 
manage risk. Policymakers therefore need to tread very 
carefully as we regulate options for these markets. The 
overregulation or improper regulations might sound good 
politically, I am sure, but there is a lot of major unintended 
negative consequences that can come about, not just for the 
financial markets but for the broader economy as well.
    It is my understanding that the SEC and the CFTC along with 
the Administration have engaged in discussions over the OTC 
derivative regulation, including discussions regarding which 
agency should have jurisdiction over particular pieces of the 
market. So I will be interested to hear about particular 
discussions and any, maybe, disagreements that the SEC has with 
the CFTC on derivative regulation.
    I am also interested to hear if there are any areas of 
current CFTC jurisdiction where you feel they are better suited 
for the SEC.
    On another front, the Administration last week released 
draft legislation seeking to establish consistent standards for 
broker/dealers and investment advisors that would give the SEC 
powers to ban certain forms of compensation that are, quote, 
not in an investors' best interest. This comes on the heels, of 
course, of the Administration's proposals of a so-called 
Consumer Financial Protection Agency. When you think about it, 
both proposals sort of reflect a government-knows-best 
mentality that will likely restrict consumer choice and may be 
embraced by trial lawyers for unnecessary litigation. So I will 
be interested to hear from the Chairman regarding the SEC's 
input on those proposals and to what extent you are comfortable 
with dictating how a firm should compensate employees.
    And finally, I mentioned at the beginning of my statement 
that there are a whole host of other issues that you are 
currently examining, and I will be interested to hear an update 
on your proposed rules to restrict short selling, as well as 
your thoughts on different ideas to reform credit rating 
agencies that we talked about, which I know the chairman is 
also very interested in pursuing as well. So I welcome the 
chairwoman being with us today, and I look forward to your 
discussion. Thank you.
    Chairman Kanjorski. Thank you, Mr. Garrett.
    Now we will hear from the gentleman from New York, Mr. 
    Mr. Ackerman. Thank you, Mr. Chairman.
    Welcome, Chairman Schapiro. There are an awful lot of 
people watching this hearing who aren't too interested in 
regulatory reform. They are not too concerned about resolution 
authority or the clearing of derivatives, and they aren't too 
worried about whether Congress complies with your request to 
increase funding for the SEC's Enforcement Division.
    Madam Chairman, thousands of now penniless victims of 
Bernard Madoff's Ponzi scheme are interested in just one thing: 
making sure their government lives up to its word.
    As you know, the Securities Investor Protection 
Corporation, that is investor protection indicating that it has 
something to do with protecting the investor, SIPC provides 
insurance of up to $500,000 to securities investors in the 
event that a broker/dealer fails. It has been 7 months now 
since the collapse of Mr. Madoff's fraud, and to date, of the 
over 15,400 claims that have been submitted, only 450 victims 
have received even a portion of their SIPC insurance. Part of 
the delay stems from the confusion over the eligibility 
requirements of SIPC coverage.
    If you believe the law as interpreted by SIPC's general 
counsel, Josephine Wang, SIPC is obligated to provide up to 
$500,000 per account for securities to any investor who 
believes that they owned securities in Madoff's investment 
    But if you believe Irving Picard, the court-appointed 
trustee in the Madoff case based on a judicial precedent from 
the 1920's, SIPC is obligated to ensure only the funds that 
Madoff victims initially invested, minus any withdrawals. 
According to Mr. Picard's interpretation, many Madoff victims 
are not entitled to their insurance payments.
    Madam Chairman, that Madoff was able to conduct his fraud 
unmolested by the SEC for decades and despite the repeated red 
flags raised by Harry Markopoulos is tragic. That the court-
appointed trustee in the Madoff case is seeking to delay and 
ultimately deny the insurance payments due to Madoff's victims 
is absolutely shameful.
    Many of Madoff's victims are in complete financial ruin. 
Many have lost their homes and have moved in with their 
children or friends. The lucky ones don't know how to make 
their next mortgage payment. At a minimum, they deserve the 
insurance they believe and to which the law says they are 
entitled. I hope that you can put an end to the confusion today 
by clarifying SIPC's eligibility requirements.
    And I yield back the balance of my time.
    Chairman Kanjorski. Thank you Mr. Ackerman.
    Mr. Bachus is recognized for 3 minutes.
    Mr. Bachus. Thank you, Chairman Schapiro.
    As Chairman Kanjorski said, this is your first appearance 
before the Financial Services Committee since you have been 
sworn in. And I want to compliment you; in your short tenure as 
the agency's chief executive, you have embarked on an ambitious 
regulatory agenda and an equally important review of the SEC's 
internal operations. And I have been impressed in a very 
favorable way over the way you have conducted the affairs of 
the agency.
    Madam Chairman, there is a strong need for regulatory 
reform. I think we all agree on that. You certainly do. 
However, I am very concerned that the guiding principle of much 
of the Administration's proposals, whether it is health care, 
energy or financial services, is what could be a heavy-handed 
intervention into what has traditionally been the private 
market on private choices and private affairs.
    In each of these areas, the key thing seems to be rationing 
or permitting certain conducts, but determining others are not 
appropriate. The Administration wants to create, as you know, a 
government health insurance option. And my fear is that if it 
is like those in other countries, it will result in rationing 
of health care, limiting choice, and erosion of quality.
    The cap and tax plan, I think, is another example where 
they will significantly ration energy use, the use of coal and 
other things to discourage it.
    And with financial services, it appears in many cases the 
Administration wants to ration credit to consumers and 
businesses to make determinations on whether certain 
transactions are appropriate, and to do so, I think, in a very 
intervening way.
    Let me just give you one example as it relates to the SEC. 
With the Consumer Financial Products Agency, and this is not 
the example, it appears to me that they could function as a 
contract approval and a credit-rationing agency. That is a 
    But now, as far as the SEC, last Friday, and I am sure you 
heard Treasury Secretary Geithner say that the government will 
be looking at every private derivative transaction that isn't 
clear to determine if they were spuriously customized to avoid 
a clearinghouse. How can the government possibly look at tens 
of thousands of daily derivative transactions to determine if 
the intention is to avoid clearing? If a derivative trade is 
ruled invalid and has to be unwound, what happens to the 
contractual rights of the parties? I worry that we are asking 
regulators to function as a behavioral psychologist.
    Let me conclude by saying if the SEC has no one who could 
understand the Bernie Madoff trading strategy, how are they 
possibly going to be able to understand a private corporation 
and its counterparty's decision to mitigate business risk? What 
the Administration is doing is turning the SEC into an IRS 
where fear of second-guessing causes decisions to be made based 
on fear, fear of excessive punishment, and fear of having to 
prove the unprovable rather than basing decisions on sound 
business judgment.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you.
    Mr. Capuano will be recognized for 2 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Madam Chairman, welcome.
    Over the last couple of years, I honestly wouldn't waste my 
time coming to a hearing with the SEC Chair because I didn't 
like anything that they were not doing, because they weren't 
doing anything, so therefore it wasn't I didn't like what they 
were doing; they weren't doing anything. And it was a waste of 
time because everybody there believed, do nothing, let the 
market flow, what, no big deal. Now we are where we are.
    Today, to some level, it is a little early, but on some 
levels, it is almost I am not sure I want to stick around too 
long because everything you are doing I like. Now, that doesn't 
mean I am going to like every detail, I am going to like the 
final results, and will nitpick here and there.
    But, in general, I think you are going exactly in the right 
direction. And I will tell you that I encourage you to continue 
doing it. I know that you are working with the committee to try 
to get some legislative relief on some items that you need. I 
think that as--well, not an investor, but an indirect investor 
through 401(k)s and the like, and as a person who has some 
responsibility for overseeing the current system, I am much 
more satisfied and happy that we finally have an SEC that is 
awake and understands that there is a role to play to keep the 
system within the bounds of propriety, to keep the system so it 
won't break again and balancing that, obviously, with the 
desire and the benefits of a strong market and a strong system, 
with an innovative system that brings risk with it.
    There is nothing wrong with risk. The question is, how much 
and who pays for that risk? And in general, the things you are 
talking about with credit rating agencies, the things you are 
talking about with the uptick rule, I think you are headed in 
the right direction. And again, I am going to stick around for 
your testimony just to make sure that I haven't missed 
something. But other than that, if I leave before I get to ask 
you any questions, it is not because I am not interested; it is 
because on some levels, I think this hearing is a little 
premature. Not really, but on some levels it is because a lot 
of these things I know they are in the works; we are in the 
works trying to deal with the regulatory system. And until we 
know where all that goes, I think some of those questions will 
have to wait.
    But I just want to say thank you, thank you for beginning 
to restore--my faith in the system that we have created.
    Chairman Kanjorski. Thank you, Mr. Capuano.
    Now the gentleman from California, Mr. Royce, for 3 
    Mr. Royce. Thank you.
    Thank you, Mr. Chairman, for holding this hearing.
    I think it is interesting that we are talking about a 16-
year timeframe that the SEC was in the process of examining or 
had an opportunity to examine Bernie Madoff. And I think one of 
the most troubling hearings that we had here was the hearing 
where we heard from Mr. Markopoulos about the Madoff case.
    And prior to that, I had an opportunity to talk to some of 
the investigators for the SEC about that particular case 
because it was absolutely astounding what Mr. Markopoulos was 
telling us. What he laid out was the world's biggest Ponzi 
scheme and how, over a period of years, he repeatedly attempted 
to reach the SEC and actually found an individual at the Boston 
branch, Mr. Ed Manion, who was not like, as he described, the 
over-lawyered SEC, the over-lawyered SEC that for years had 
failed in this endeavor. And he finally found a guy who had 
experience as a portfolio manager who actually knew what he was 
doing, who had experience as a trader. And when he looked at 
this data, he instantly saw the same thing, the same reality 
that Mr. Markopoulos saw.
    But Mr. Manion was silenced internally in the organization. 
Why? He wasn't a lawyer. He was not part of the over-lawyered 
offices in New York and Washington, and they saw to it that 
went nowhere.
    Now, on several occasions, Mr. Markopoulos attempted on his 
own to go in to explain to SEC officials in detail why Mr. 
Madoff's returns were simply not possible given the investment 
strategy. And he noted, and this was the astounding aspect that 
I explained--the SEC investigators explained this to us, they 
affirmed this--there was just a lack of understanding within 
the SEC of the more intricate aspects of our financial markets 
which they just didn't understand. So what Mr. Markopoulos 
describes is a combination of a lack of market experience and 
knowledge by the over-lawyered SEC, combined with an 
investigative ineptitude, which we are well aware of, that 
aspect has to be addressed.
    And to have somebody examined 8 times by the SEC and other 
institutions in 16 years and have this not found when people 
were calling attention to it shows a structural flaw. And I 
think rather than a lack of resources, this structural flaw is 
the heart of this problem. Why? Because it just didn't happen 
here. We also had this problem in Brittain, as described to us 
by some of the British investigators, where they were over-
lawyered as well.
    What is the proposed solution? Well, many have offered the 
idea of having retired people with market experience brought in 
so that you just don't have, in the words of Mr. Markopoulos, 
20-something-year-old lawyers, so that you have people with 
real life experience who can spot a Ponzi scheme in a New York 
minute in a position of responsibility, where they can't be 
shut down by 20-year-old lawyers.
    And so I offer that up simply because he was quite 
insistent on that structural change in the organization. And we 
are appreciative of anything you can do to reset those 
priorities so that you actually have people, retired, with the 
kind of experience with the industry and the market and who 
understand these schemes.
    Thank you very much, Madam Chairwoman.
    Chairman Kanjorski. Thank you very much Mr. Royce.
    And now we will hear from the gentleman from Texas, Mr. 
Hinojosa, for 1 minute.
    Mr. Hinojosa. Thank you. Thank you, Mr. Chairman.
    Welcome, Madam Chair Schapiro. I want to thank Chairman 
Kanjorski and Ranking Member Garrett for calling and holding 
this important and timely hearing today. This hearing will help 
us understand more comprehensively the role that the SEC plays 
in protecting investors, maintaining fair, orderly, and 
efficient markets, and facilitating capital information. It is 
yet another step to help reassure our constituents that Members 
of Congress and the regulatory agencies are taking the steps 
necessary to address one of the causes of the global economic 
crisis and prevent another one from recurring.
    We need to provide the SEC with a considerable amount of 
funding, such as that included in President Obama's proposed 
2010 budget. In fact, we need to increase it beyond his 
proposed funding to ensure that the SEC not only is able to 
hire staff to fill the void at the SEC, but also increase the 
salary level of its employees to ensure continuity of 
institutional knowledge at the SEC.
    Again, I want to thank you, Mr. Chairman for holding 
today's hearing. I look forward to the testimony of SEC Chair 
Mary Schapiro.
    I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Hinojosa.
    And now we will hear from the gentleman from Texas, Mr. 
Hensarling, for 3 minutes.
    Mr. Hensarling. I thank you, Mr. Chairman.
    And clearly this hearing is being held against the backdrop 
of the Administration's financial markets reform legislation. 
It is a piece of legislation of which many of us are concerned.
    First of all, it certainly would seem to enshrine us as a 
bailout nation. But yet as history as our guide, I know of no 
nation that has been able to bail out, borrow, and spin its way 
into prosperity.
    By designating certain firms as systemically risky, we 
almost guarantee that there will be more Fannie Maes and 
Freddie Macs, which ultimately will prove to be the mother of 
all bailouts, I am sure costing the American taxpayers hundreds 
of billions of dollars.
    In addition, this Office of Consumer Financial Products, we 
would call it financial product polit bureau that ultimately 
will decide whether Americans can have credit cards, which home 
mortgages they can hold, whether or not they can even have 
access to ATM machines is regulatory overkill in the nanny 
state at its worse.
    The underlying assumption is that our economic turmoil has 
somehow been caused by lack of regulation. It wasn't lack of 
regulation. It was dumb regulation versus smart regulation. If 
you come up with the wrong diagnosis, you are likely to get the 
wrong remedy. For example, look at the derivatives issue that 
was discussed just last week in a joint hearing between our 
committee and the Agriculture Committee.
    Again, we know that the most high-profile meltdown in this 
area happened at AIG with their credit default swaps. Yet in 
sworn testimony, sworn testimony before this committee, the 
head of the OTS, AIG's regulators, said, do you know what? We 
had the expertise. We had the resources. We had the manpower, 
and we had the regulatory authority. We just missed it; we made 
a mistake.
    It is another data point that it is not always more 
regulation that counts; it is perhaps smarter regulators and 
smarter regulation.
    Now, others have spoken about the Madoff scandal. Clearly, 
again, the SEC had the tools, seemingly they had the expertise, 
seemingly had the manpower and, in many cases, were notified, 
but for whatever reason, they just missed it, and all the 
suffering and the setbacks to the economy have occurred.
    We look at the matter of the rating agency oligopolies. And 
I certainly believe that some good work is being done in this 
area by the SEC. But for the SEC to essentially have the NRSRO 
rule that created an oligopoly in rating agencies contributed 
mightily to our economic turmoil that we see.
    Again, I have a number of reservations about the 
Administration's plan. There are a number of areas that we can 
talk with the Chairman of the SEC. I appreciate her appearance 
today. I look forward to the testimony.
    I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Hensarling.
    Now we will hear from the gentleman from Florida for 2 
minutes, Mr. Klein.
    Mr. Klein. Thank you, Mr. Chairman.
    And good morning. Nice to see you again. I appreciate you 
taking on this important responsibility as chairman of the 
    You have heard from a number of our members about the 
concerns of what has happened in the past. And I would probably 
respectfully disagree with some of my members. Some of this was 
not just a question of lack of regulation or overregulation or 
quality personnel. We have talked about the fact that I think 
that there has been a, whether it is intentional or otherwise, 
it seems like there has been an effort over the years by some 
of the Members of Congress and others to say we need less. It 
is not a question of less in quantity, but we don't need the 
smarter kind of oversight that is necessary.
    And in my background, I was a securities lawyer years ago. 
I worked with the SEC. I understand what some of the 
shortcomings were and some of the strengths. But overall, I 
think there has been almost a deliberate attempt over the years 
to not compensate people at a fair level and losing some of the 
talent, and some of the members have recognized that.
    I think as we move forward, it is not just a question of 
more or less; it is a question of the right type of oversight 
that can help investors understand what they are buying, what 
they are selling, and companies understand what their 
responsibilities are. It is not that complicated.
    And I think a little common sense would go a long way here 
instead of sort of political posturing. This is the right thing 
to do at this moment.
    I also want to touch briefly on the Madoff situation 
because there is a lot of concern. I am from Florida. A lot of 
people from Florida unfortunately lost a lot in this situation. 
And the SIPC, at least in my impression so far, has not been 
moving very quickly, and the trustee has not been moving as 
quickly as necessary to get these people made whole.
    Some of these people lost everything. Some people lost part 
of their assets, and they are not getting responses from the 
SIPC. And I believe there is a responsibility of the SEC to 
provide statutory oversight of the SIPC. And I would ask that 
you with your staff take a greater role in helping resolve this 
as quickly as possible. We don't want to have to spend millions 
and millions of dollars for these people in court with lawyers. 
We want to get them whole, to the extent that they are 
permitted to be whole, with the Securities Investor Protection 
Act backing them up.
    So I would just like to ask for that and I look forward to 
working with your staff and working on some new oversight 
regulations that will help our investors and the United States 
establish confidence. Thank you.
    Chairman Kanjorski. Thank you, Mr. Klein.
    Now we will hear from the gentleman from California for 3 
minutes, Mr. McCarthy.
    Mr. McCarthy of California. Thank you, Mr. Chairman.
    Thank you for scheduling this hearing today so we can hear 
from the new SEC Chair, Mary Schapiro, about your agenda. The 
last time this committee heard from the SEC was to discuss the 
Bernie Madoff scandal prior to your tenure. And I will tell 
you, I was frustrated with the responses that the Members 
received regarding the SEC handling of the Madoff Ponzi scheme. 
It seemed as if the right hand didn't know what the left hand 
was doing.
    To try to fix this, I introduced legislation to restructure 
the SEC to return inspections and examination functions to 
their original location within the Division of Investment 
Management, Trading and Markets. This change would streamline 
operations at the SEC and reduce their current stovepipe 
structure where those charged with inspecting and examining 
organizations are entirely separate from those who set the 
    With that said, I do appreciate you coming, and I look 
forward to a new direction and a new restructuring.
    I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. McCarthy.
    And now we will hear from the gentleman from Michigan, Mr. 
Peters, for 2 minutes.
    Mr. Peters. Thank you, Mr. Chairman.
    And thank you, Chairman Schapiro, for testifying today. The 
current financial crisis, of course, has numerous causes. But, 
in my view, one of the principal concerns that must be 
addressed is the way in which corporations have stopped serving 
the interest of their shareholders.
    Too often we have seen large companies run for the benefit 
of management and corporate boards that no longer answer to the 
shareholders who actually own the company. I would like to hear 
more today about the efforts that the SEC has undertaken 
pursuant to its statutory authority to empower shareholders to 
have more control over board elections, executive compensation 
packages, and other major corporate decisions.
    I am also interested in hearing your thoughts about other 
steps that may need to be taken by Congress to supplement the 
efforts that the SEC is taking. This committee is currently 
working on comprehensive regulatory reform legislation that 
will give the SEC and other agencies the resources they need to 
look after shareholder interest.
    I believe, in addition to empowering regulators with new 
and improved authority to watch over our Nation's financial 
health, we should also empower the owners of these companies to 
have more control and to align management interest with long-
term shareholder value.
    I look forward to your testimony today and having an 
opportunity to hear your thoughts on these very important 
    Chairman Kanjorski. Thank you very much, Mr. Peters.
    That concludes our opening statements.
    So I now with great pride introduce and welcome as our only 
witness at today's hearing, Mary Schapiro, Chairman of the 
Securities and Exchange Commission.
    Without objection, your statement, Ms. Schapiro, will be 
made a part of the record. You are recognized for 5 minutes for 
a summary of your testimony. And then I suspect you should be 
prepared for a barrage of questions.


    Ms. Schapiro. Thank you very much, Chairman Kanjorski, and 
thank you for your lovely introduction.
    Chairman Kanjorski, Ranking Member Garrett, members of the 
subcommittee, thank you for the opportunity to testify today on 
behalf of the Securities and Exchange Commission.
    In my 5 months at the SEC, we have been singularly focused 
on rebuilding investor confidence in the capital markets and in 
the SEC itself. To that end, we have begun implementing many 
changes designed to better serve and protect investors and 
promote investor confidence. Indeed, there is an invigorating 
sense of urgency among the staff of the agency to demonstrate 
that we are up to the job.
    Since I returned to the agency, we have been working to 
fill regulatory gaps exposed by the financial crisis; seeking 
to strengthen the protections for investors against crimes, 
such as those perpetrated by Madoff and other operators of 
Ponzi schemes; enhancing corporate governance to hold boards 
more accountable to shareholders; improving our risk-assessment 
capabilities; bolstering our ability to respond to enforcement 
more quickly and effectively; and bringing on new leadership 
and new skill sets throughout the agency.
    As I conveyed to you in February, the Madoff fraud is one 
that the agency tragically did not detect, and not a day goes 
by that we do not regret that. In a few weeks, our Inspector 
General will be issuing his report outlining why he believes 
the SEC missed the Madoff fraud. But I understood when I 
arrived that we could not wait to begin making significant 
changes. And that is why we have been implementing many new 
investor protections, some of which I would like to highlight.
    First, we are reinvigorating the SEC's Enforcement Division 
by streamlining our procedures. Within days of becoming 
chairman, we changed our procedures so that enforcement staff 
can issue subpoenas and negotiate corporate penalties without 
first getting full Commission approval. And our enforcement 
focus has squarely shifted to higher-impact cases brought in a 
timely way.
    Additionally, our new enforcement director, Rob Khuzami, is 
reducing bureaucracy by streamlining management within the 
Enforcement Division, putting many more talented investigators 
directly to work on cases. He is also creating specialized 
units which will help to concentrate staff expertise and better 
coordinate investigations.
    Since the end of January, as compared to the same period 
last year, we have filed 3 times as many emergency restraining 
orders, opened up more than 40 additional investigations, and 
issued over 100 more formal orders of investigation.
    In terms of cases, we have brought fraud charges against 
operators of the Reserve Primary Fund, which broke the buck 
last fall unsetting the money markets; pursued high-profile 
figures in connection with an alleged kickback scheme involving 
New York's largest pension fund; brought the first ever hedge 
fund insider trading case involving credit default swaps; 
charged the former Countrywide CEO and other former executives 
with securities law violations; and expanded our case involving 
Allen Stanford to include the former head of Antigua's 
financial regulatory commission, who allegedly received bribes 
and helped Stanford to thwart various inquiries.
    This is just a small slice. There are many more 
investigations in the pipeline.
    Second, we are strengthening our examination program. And 
we are doing that by recruiting more professionals with new 
skill sets and expertise in complex financial instruments, 
trading, financial analysis, risk management and valuation. 
Significantly enhanced training in fraud detection is also 
being provided to our examination staff.
    Further, because we have only 425 examiners for the more 
than 11,000 regulated investment advisors and 8,000 mutual 
funds, we are improving our risk-based methodologies for 
detecting and focusing on potentially fraudulent firms and 
activities to maximize our ability to protect investors.
    Third, we have proposed rules to substantially strengthen 
the controls of our custody of client assets held by investment 
advisors or their affiliates. Among other things, these custody 
safeguards would encourage investment firms to place their 
clients' assets in the care of truly independent custodians. 
Under the proposal, firms that do not do so would have to 
obtain a special custody controls report from an independent 
audit firm, and in addition, all advisors with control of 
client assets would be required to undergo annual surprise 
exams by independent auditors to verify client assets.
    Enhancing custody controls is just one of the many 
rulemakings we have undertaken at the SEC. We have also sought 
comment on several proposals to restrict short selling. We have 
proposed a series of rules to empower shareholders through 
proxy access as well as through provision of better information 
in the proxy. We have sought comment on a series of money 
market fund reforms to tighten credit quality, maturity and 
liquidity standards. We have been actively considering ways to 
strengthen the integrity of the credit ratings process, and we 
have been reconsidering a decade-old proposal to challenge the 
so-called pay-to-play practices by investment advisors to 
public pension funds. And finally, tomorrow we will be 
considering a proposal that would result in greater and more 
timely information being provided to investors in municipal 
    Mr. Chairman, I want to thank you and the committee for 
your support of the SEC, and I look forward to discussing with 
you our other activities, our thoughts for additional 
legislation, and the state of our resources, and reform of the 
regulatory landscape.
    Thank you.
    [The prepared statement of Chairman Schapiro can be found 
on page 50 of the appendix.]
    Chairman Kanjorski. Thank you very much, Madam Chairman. It 
sounds like you are off to a great start.
    Part of the question I have is something I hear from many 
of my constituents, particularly after the most recent 
financial crisis in the country; they ask the question why, 
after mistakes are made by people in various positions of 
government, particularly in the regulatory area of government, 
you never seem to hear of anyone being fired?
    I do not want to suggest you have wholesale firings, but 
what is your philosophy in terms of, if they are a failure at 
the agency, not only from the past but on into the future, 
implementing some sort of more stringent accountability to 
employees so that they are not necessarily lax in how they 
pursue enforcement or investigations. I will be honest with 
you, in the Madoff situation, I sympathize with the 
constituents of my friend from New York, Mr. Ackerman. When you 
hear some of the stories from the testimony of the Inspector 
General, that if only somebody turned around when they were 
examining the Madoff operation and just asked Mr. Madoff, where 
are the securities, that would have resolved the problem that 
there weren't any and therefore that there was something 
fraudulent going on. And yet nobody asked that question.
    And now I think it is important enough to highlight so 
other people do not miss those questions in the future. So 
maybe if you could lay out your philosophy in how you intend to 
get a higher response to regulatory activities within the 
agency during your tenure.
    Ms. Schapiro. I would be happy to talk about that. I am a 
very big believer that we have to hold people accountable at 
all levels of the agency for performing the responsibilities 
that have been entrusted to us by the American people. We also 
have to be honest to undertake what I think we are doing right 
now, a very honest assessment of what were our failings and 
what were our shortcomings with respect to Madoff and, frankly, 
any other issues where we were not perhaps as quick to the draw 
as we should have been or could have been.
    One of the things that we are engaged in right now, as you 
know, is the review by our Inspector General; that, I expect, 
will reveal much more the fundamental causes of our failure to 
detect early on and prevent or stop early on the Madoff fraud. 
In the meantime, we have tried to pull all the lessons we can, 
whether it is from the stovepipe structure of the organization 
creating issues, whether it is from a lack of skill sets so 
that the people who received the information from Mr. 
Markopoulos didn't understand what they were looking at, 
whether it was a resource issue, whether it was an inability to 
track and follow up on the material received; we tried to pull 
all the lessons we can from those failings and move very 
quickly to put in place as many different changes in how we 
operate as possible.
    So, for example, the goal of creating specialized units 
within our Enforcement Division is really a response to the 
Madoff failure; the new custody rules to fill a gap in 
regulation that would have made it, if not impossible, very 
difficult for Madoff to do what he did. Those new rules that we 
have proposed are a response to that failure.
    Bringing in new skill sets across the agency through our 
risk assessment program as well as directly into the 
examination program again are a response very much to the 
Madoff failure. The fact that we have asked this committee to 
create whistleblower legislation to allow us to work more 
closely with whistleblowers and leverage those third-party 
resources and expertise, again, is a very direct response.
    So my view is, we have to be absolutely open to learning 
all the lessons that this tragedy can teach us and moving ahead 
to put those kinds of changes in place in a very aggressive 
    Chairman Kanjorski. Thank you very much. I am sure that you 
are going to do your best.
    We are going to be watching, though, I assure you of that, 
    I am going to pose my second question quickly if I can 
because my time is running out, but it is not done with the 
intention of embarrassing you or the Administration. But I am 
curious, should we not now take the opportunity to reform some 
of the structure of government, particularly by merging the 
CFTC and the SEC? I understand all the political ramifications, 
we have had meetings on end over the last several weeks on 
those discussions, but I asked the question the other day to 
the Secretary of the Treasury as to why in their White Paper 
they didn't discuss that seemingly natural possibility. And if 
we don't do it now after this disaster, what is the future plan 
of this Administration or Government as to what to do about 
what appears to be conflicting agencies that could logically be 
merged and accomplish better ends? I am going to end it there 
and not put you any further on the spot than that.
    Ms. Schapiro. Well, I think that the Administration having 
made the decision not to seek full merger of the two agencies 
really puts the burden on the SEC and the CFTC to work together 
more effectively than they have over the course of the last 35 
or so years that the CFTC has been in existence. And we are 
both quite committed to doing that. We have been charged with 
an effort to harmonize our rules to the greatest extent 
possible, and we are fully engaged in that process right now.
    But there will still be areas of uncertainty. There will 
still be the potential for products to be created that fall 
between the lines of the two agencies, and we will have to be 
extremely cognizant of that possibility so that we don't allow 
new unregulated markets to flourish between our two areas of 
    Chairman Kanjorski. Thank you. Again, we are going to be 
watching that, too.
    Ms. Schapiro. I appreciate that.
    Chairman Kanjorski. And that concludes my time.
    And now we will hear from Mr. Garrett of New Jersey for 5 
    Mr. Garrett. I thank you.
    Again, I thank the chairwoman. As the American public 
watches this hearing today, they probably think, in some 
respects, that we have been here before.
    I appreciate Mr. Capuano's comment, he is gone now, where 
he said, in light of everything that has happened in the past, 
he appreciates the fact that everything is going in the right 
direction now, which is good.
    But the public might say, well, we have been here before, 
because you know, if you think over history, and some of these 
things happened before I was in Congress, you had the mutual 
fund market timing issue in the past. You had the missed 
accounting scandals in the past. You had the analyst-conflict 
issues during the dot-com issues in the past. All these errors, 
if you will, by the SEC in the past, and I assume that there 
were probably other hearings like this after each one where the 
SEC, someone else other than you, would come back and say, we 
realized we have made some mistakes, and now we are going to 
fix them with X, Y, and Z. And probably somebody on this panel 
sat here and said, well, we are glad that they are now going in 
the right direction.
    I mean, we have already talked about the Madoff situation. 
What somebody hasn't mentioned so far of course is the SEC is 
also responsible for investment bank oversight in the Bear/
Lehman situations as well. So the list just continues. In one 
respect, it seems like the SEC is always coming in after the 
fact to the table, always a different chairman, saying, we 
realized our errors, and now we are going to try to correct 
    And that of course probably leaves the American public 
questioning the veracity of the SEC and also the Congress as 
well in order to do its job. And that probably leads to the 
tremendous frustration that the public has for all of this.
    One of the issues that has been addressed so far is the 
Administration's proposal in a number of different areas. One 
of them is the President wants to give the SEC the power to 
ensure in the area of compensation. And he wants to make sure 
that it does not skew investment advice. So just three quick 
questions. Is that something that the SEC specifically asked 
for from the Administration for that power? If so, did you work 
closely to try to come up with it? And how would you try to 
address that issue?
    Ms. Schapiro. Thank you.
    Let me just say that I think, to some extent, all 
regulators, not just the SEC, play catch-up with the 
fraudsters. And perhaps that will always be the unfortunate way 
for us to operate, although we are not going on that 
assumption, we are really working very hard to build a risk-
assessment capability to try to get ahead of the curve of the 
problematic practices. And we could I guess end all problematic 
practices, but it would be a pretty heavy-handed regulation in 
order to ensure that none of them were ever perpetrated against 
the public.
    Mr. Garrett. Well, that is a good point. Because it can 
either go in the over heavy-handed approach which is suggesting 
what some of us suggest may be coming out of the Administration 
right now, or you can go in completely the other direction. 
Maybe we have to find in the middle where you still ask for 
personal responsibility from the individual in these cases. But 
if you can get to the point.
    Ms. Schapiro. Yes. What the SEC has been interested in and 
what we worked with the Administration on was the ability--
first of all, we have done compensation disclosure rules at the 
SEC within the last couple of weeks to try to require forced 
disclosure, required disclosure, of how compensation plans 
incentivize long-term and short-term risk-taking within the 
corporation. And we have always approached compensation from a 
disclosure basis at the SEC.
    We have sought the ability to regulate investment advisors 
and broker/dealers as to the standard of care that they need to 
provide to customers. Right now, they are actually regulated 
under different regimes because of their different compensation 
models. Investment advisors seek compensation for a fee; 
broker/dealers seek transactional compensation. As a result, 
even though they may both be providing advice to retail 
    Mr. Garrett. I don't have much time. Is that a fiduciary 
    Ms. Schapiro. We are looking for a fiduciary standard from 
the perspective of investors on getting advice from a financial 
services professional.
    Mr. Garrett. Again, I apologize. I don't have much time. 
Can an advisor receive a commission and still come under a 
fiduciary standard in your understanding?
    Ms. Schapiro. Well, advisors generally don't get 
compensation related--a transaction-related compensation; 
broker/dealers do. And what we are saying is that it should not 
be how they are compensated but what they are doing that gives 
rise to a fiduciary standard. So if you are giving advice, 
whether you are a broker or an investment advisor, the act of 
giving advice should require that you adhere to a fiduciary 
    Mr. Garrett. But then the aspect of the first part of the 
question, as far as giving you the power to set compensation 
schemes, would then commission-type compensation schemes go in 
an opposite direction from where you want to go with meeting 
that fiduciary standard or meeting those--making sure that it 
is in line with what the Administration wants to come out of 
    Ms. Schapiro. I guess I am not exactly sure how directly we 
would set compensation schemes. We would like to see, for 
example, the end of retail price maintenance that would allow 
brokers or advisors to offer mutual funds without having to 
adhere to the sales prices that are quoted in the prospectus. 
We would like to be able to see much better disclosure with 
respect to compensation schemes so that investors understand 
exactly what it is they are paying for.
    Mr. Garrett. Thanks a lot.
    Chairman Kanjorski. Thank you, Mr. Garrett.
    The gentleman from New York for 5 minutes, Mr. Ackerman.
    Mr. Ackerman. Thank you, Mr. Chairman.
    Madam Chairman, the issue that I addressed in my opening 
statement, to refresh your memory, is the Madoff victims and 
the terrible situation that we are looking at where we actually 
have classes of victims pitted against each other in addition 
to all the other confusion. Which Madoff investors are eligible 
for SIPC insurance?
    Ms. Schapiro. Congressman, let me just say that this 
shouldn't be such a difficult issue, but it is, and of course, 
it is a very heartbreaking issue, because the tragic truth is 
there is not enough money available to pay off all the customer 
claims. And as you point out--
    Mr. Ackerman. That leaves, if I could just interject there, 
a larger problem because that means that our citizens are not 
entitled to have confidence in the system.
    Ms. Schapiro. Well, there is no doubt that what has 
happened with Madoff has shaken everybody's confidence in the 
integrity of the financial services industry and in the 
regulatory system to protect investors.
    With respect specifically to the specific question, as you 
know, the trustee has chosen a cash in/cash out view when 
determining net equity on which claims and at what amount to 
pay out. There are a group of investors who believe that net--
so that if you paid in $2 million, over time you took out $1 
million, your net equity would be $1 million. There is a group 
of investors--
    Mr. Ackerman. But these, unfortunately, are people that we 
have encouraged and assured by virtue of the fact that we 
provide the supervision. Now, these people knew that there were 
questions raised about Madoff, and the government basically 
gave him a clean bill of health year after year. People knew 
about Mr. Markopoulos. People knew about other people as well 
who had raised questions that were dismissed and then felt the 
government is saying that this guy is okay, and the million 
dollars I put in has grown over the years, and I have this much 
money to live on now.
    Ms. Schapiro. I understand that. And there is a group of 
investors who feel very deeply that their net equity on which 
they would be paid should be determined by looking, as you 
point out, at their last account statement. So they may have 
paid in $2 million, but that amount of money has grown to $10 
million, and they were relying on that $10 million to be there 
for them.
    Mr. Ackerman. Well, they weren't relying on the $2 million, 
which they were of course, they were relying on the 
government's assurance that they had the $2 million, and they 
made life decisions based on that.
    So where do you come down, Madam Chair?
    Ms. Schapiro. Well, we have been meeting with SIPC and with 
the lawyers for the investors who would like to calculate the 
net equity based on the last account statement in hopes of 
trying to find a way to settle this matter between the two 
groups to expedite getting these payments out to people who are 
very dependent upon them. These investors have challenged the 
trustees' cash in/cash out methodology in court, and that is 
before the bankruptcy court--
    Mr. Ackerman. We are going to have to make a decision. 
Someone has to make a choice here.
    Ms. Schapiro. I understand.
    Mr. Ackerman. Here is a case. A woman who has a small 
business, a publishing business, she sells it for $3 million--
she is taking out of, and that is everything she owns in the 
world, $3 million. It is in Madoff. She gets a check for 
$30,000 a month that she is taking out, which is the money she 
is making on it and still has the equity in there. She buys a 
huge apartment in Manhattan. That is the only asset that she 
has. The asset is now underwater. She spends the $30,000 a 
month paying her taxes, paying her mortgage and her maintenance 
and her living expenses. She has done this for a couple of 
    Suddenly one month, when Madoff turns himself in, she has 
no income. The unit she lives in is upside down, as they say. 
She can't sell it for what it is worth, she owes $15,000 to 
$20,000 in carrying charges and can get nothing from it if she 
sells it and has $1,500 in her bank and is waiting for her 
$30,000 return from Madoff. She is homeless. She has no assets. 
Her $3 million has been stolen. And then, on top of that, she 
is being told that the $30,000 a month that she has gotten that 
she has paid taxes on with half and half to her mortgage, she 
suddenly owes back because of a clawback thing that they are 
    Where is she going to get the $30,000 a month that she has 
collected to give back? I mean, these people are absolutely 
destitute. And they were reliant on the government's seal of 
approval that this guy is legit, that he is on the up and up. 
How can we turn our back on these people?
    Ms. Schapiro. We cannot turn our back on them, and we 
should not turn our back on them. And I am committed to working 
as aggressively as we possibly can with SIPC to take the most 
expansive possible view of how to repay these claims and to do 
it in as quick a fashion as they possibly can.
    That specific issue is before the bankruptcy judge right 
now. I don't have, although I would be happy to get for you, 
some indication of timing when it might be resolved. But I 
agree that we need to push very hard to make people whole to 
the greatest extent possible.
    Mr. Ackerman. I thank you for your concern and your 
    Mr. Chairman, if I can just have another couple of seconds 
to add. Some of our colleagues have raised an accountability 
question. And I just want to compliment the chairman. That 
rather bombastic initial hearing that we had with people from 
the agency before us that got an awful lot of attention because 
it was the first one, the chairman called me immediately after 
the hearing and said she was aghast at some of the things that 
she had heard during the testimony.
    Chairman Kanjorski. You mean she called you, too?
    Mr. Ackerman. Yes, she did, even me.
    And by the end of that week, two of those people were gone 
from the agency. And I just want to say that is accountability 
that I have never seen in my 14 terms here. And I want to thank 
the chairman for her swift action and dedication to her 
    Ms. Schapiro. Thank you.
    Mr. Ackerman. I yield back the balance of my time.
    Chairman Kanjorski. Thank you, Mr. Ackerman.
    And now we will hear from the gentleman from Alabama, Mr. 
    Mr. Bachus. Thank you, Mr. Chairman.
    Chairman Schapiro, I mentioned last Friday that Secretary 
Geithner made this statement that they would require regulators 
to carefully police any attempts by market participants to use 
spurious customization to avoid central clearing and exchanges.
    Now, my concern is that, every day, American companies 
enter into hundreds if not thousands of these derivative 
agreements and customized derivative agreements, today, and yet 
there is no requirement that they clear them today. So they are 
not fashioning them today. They are not customizing them today 
to avoid this rule that the Administration says they are going 
to put in place.
    So, number one, I mean, do you agree that this is going to 
be pretty complex and difficult to police these derivative 
    Ms. Schapiro. I think that is a great question.
    I do believe in the approach that should encourage the 
maximum standardization as possible to get as many of these 
instruments cleared through central clearinghouses which will 
reduce systemic risk pretty dramatically, even to get some of 
them on exchanges so we can actually have real pre- and post-
trade transparency.
    But I also agree that there is a need and will continue to 
be a need for businesses to be able to hedge their particular 
needs for commodities or financial protection in a customized 
    And I think we--I honestly can't tell you that I know how 
we would police specifically at this point, whether or not 
products that could have been standardized are for some other 
reason being customized and what we would do about that.
    I do think the incentives will be there to move things into 
the more standardized format even without the regulators 
necessarily policing them, because it is envisioned that for 
the standardized product, the capital requirements, the margin 
requirements are likely to be lower, the costs of transacting 
are likely to be far lower than they are for the customized 
    So I believe the incentive will be for any industrial 
business that wants to hedge its exposure to a commodity or to 
a currency, for example, will be inclined to go the 
standardized route because it will be the most efficient thing 
to do.
    But where it is not going to work for them, they will have 
to bear the additional costs, likely, of taking the customized 
approach. And we, as regulators, will have to figure out 
exactly how we are going to police them.
    Mr. Bachus. Yes. You know, he didn't say whether it was a 
preapproval process, which I don't think would be workable at 
all. I guess you would have to decide ex post facto. And, you 
know, to me, you would have get inside the minds of these 
corporations, and I am not sure that you have the expertise or 
could hire that expertise.
    Ms. Schapiro. Well, I think that the industry would have a 
right to expect from the regulators some significant guidance 
on exactly what constitutes standardized and what constitutes 
customized. And it would almost surely have to be a look-back 
and not a preapproval process.
    Mr. Bachus. But even reviewing all these customized 
derivatives would be an incredibly complex job.
    Ms. Schapiro. I don't disagree. And I can't tell you that 
we have thought through exactly how that would happen at this 
    Mr. Bachus. All right. And you would have to make the 
business decisions that really--you know, as to what the 
corporations did and why they did it. And, as I said, they are 
doing that today, so it is not, obviously, to avoid a rule.
    You are going to increase supervision of credit rating 
agencies. One of the things that has been talked about, 
preventing companies from shopping around for favorable credit 
ratings, how do you envision doing that?
    Ms. Schapiro. Well, that is an issue I am particularly 
interested in. As you know, the SEC has engaged in multiple 
rulemaking since it got authority under the Credit Rating 
Reform Act in 2006 to provide disclosure for the prevention and 
the disclosure of conflicts of interests and so forth.
    But I have been particularly interested in the idea that I, 
as an issuer of a structured product, would like to get a good 
high rating for that product to be able to sell it. And so I 
will shop around and get preliminary ratings from multiple 
rating agencies and then be in a position to pick the highest 
    One of the areas we are looking at--there are two things we 
are looking at specifically to respond to that. One is that we 
could require issuers to disclose all of those preliminary 
ratings so that if some of them weren't AAA, investors would at 
least know that.
    The second would be to require on a confidential basis 
disclosure of the underlying loan data for a structured 
product, for example, to all the other rating agencies, who 
could then perform an unsolicited rating and make that rating 
available to the marketplace. So, again, you would have some 
competition and you would have some diversity of perspective 
about the quality of a particular security being brought into 
the marketplace.
    Mr. Bachus. All right. I think every member of this 
committee applauds you on your focus on credit rating agencies. 
I think if they had done their job properly, we could have 
avoided the majority of the problems we find ourselves with 
today. And I suppose your special examination on their role in 
the financial crisis will shed more light on that.
    Ms. Schapiro. That is right. And we are also looking at 
whether--because ratings are enshrined in many SEC regulations, 
we are looking at creating a roadmap to lessening SEC reliance 
on ratings in our regulatory--
    Mr. Bachus. And just the three of them, the oligarchy that 
I think has been set up.
    Ms. Schapiro. Yes, it is a highly concentrated business. I 
think over 95 percent of ratings are done by the top three 
    Mr. Bachus. Which our Republican plan also addresses.
    Thank you.
    Chairman Kanjorski. Thank you, Mr. Bachus.
    Now we will hear from the gentlewoman from New York, Mrs. 
    Mrs. McCarthy of New York. Thank you, Mr. Chairman.
    And thank you, Chairwoman Schapiro.
    We have talked before, have met and asked questions back 
and forth, and especially on the confidence, what the SEC has 
to do to bring to the consumer and the investor. And I know 
that, you know, everybody looks at the Madoff case and how many 
millions and billions of dollars were lost there. What I think 
everybody is forgetting--and anybody who looks at their 401(k), 
they are not forgetting--people who were thinking of retiring 
can't retire; those that are retired are in dire straits.
    And so your job, to build up confidence with the American 
people again, is going to be a difficult one. And even when we 
see the reaction of the financial institutions and the banks, 
that they don't want any of these regulations--and they are 
fighting us. The lobbying that is going on here is 
unbelievable. And yet we are supposed to be taking care of our 
    So one of the things that I was thinking when you were 
giving your testimony with regard to the many open 
investigations and cases the Enforcement Division is now 
working on, how is that being relayed to the public and the 
consumers. And, in your opinion, should enforcement updates 
fall within the CFPA, or is that something you would like to 
maintain within the SEC?
    Ms. Schapiro. Thank you.
    Well, I think everything we are doing at the SEC now is 
geared towards trying to reorient the agency towards investor 
protection. We have spent a lot of time, I think historically, 
worrying about capital formation and the ability of U.S. 
businesses to compete internationally, and those are all 
important. But right now our focus is very much on restoring 
and rebuilding investor confidence which, frankly, is critical, 
I think, to the success of our economy over the long run.
    And the important part of that, as you point out, is 
enforcement cases, because that shows the public we are there, 
on the job, trying to protect them. And we have stepped up our 
enforcement efforts very significantly.
    We relay them to the public really through the media, and 
we count on the press to write about the cases that we bring, 
the dozens of temporary restraining order cases that we have 
done. Over 40 in the last several months have gotten very good 
publicity, particularly in local markets. And those help to 
both educate people going forward about the problems, but it 
also helps them to think of the SEC as a place where they can 
bring information so that we can pursue it.
    I feel very strongly that the SEC's enforcement program is 
under terrific new leadership, a new director, a new deputy 
director, a new head of the New York office, a new 
organizational structure being rolled out over the next several 
weeks, new skill sets, and new resources that we hope to bring 
in over time will make this once again the premier civil law 
enforcement agency in the Federal Government.
    I think the enforcement of the securities laws very much 
needs to stay with the Securities and Exchange Commission. And 
the dislocation and disruption that would be created by trying 
to move it into the CFPA or to take investor protection out of 
the SEC, in all of its different permutations because it is 
about so much more than just enforcement, would really leave us 
with a very fragmented regulatory regime.
    So I would expect that if a CFPA is created, we will work 
very closely with that agency. There will be areas of overlap 
and adjacencies that we will want to coordinate on. But I feel 
very strongly that SEC enforcement needs to stay integrated 
with the rulemaking and the policy functions that we engage in.
    Mrs. McCarthy of New York. The final thing that I will 
say--and I am speaking for my constituents. They didn't lose 
the millions and millions of dollars that might have been 
invested in the Madoff scheme, but, you know, their $200,000 
that they might have had in their retirement--and they are not 
going to get that back. You know, when reports come out that 
someone in their 60s, middle 60s, even higher, it will take 12 
to 15 years for them to get that money back. They feel kind of 
burnt that they are not getting any help and they won't be 
getting any help. And I think that is a shame, because you are 
turning off an awful lot of people. There is probably more 
money under somebody's mattresses these days than even going 
into the banks, which haven't been of any help.
    I hope that you are going to be able to stand up to the 
financial institutions. I hope that you can restore the credit 
to all the financial institutions, because there are a lot of 
good people who work in those jobs. But I have to say, the pain 
that the majority of my constituents and probably so many 
constituents around the country--they are not going to trust 
any of us. And, to be very honest with you, I can't blame them.
    But thank you for your job, and I wish you luck in it.
    Ms. Schapiro. Thank you.
    Chairman Kanjorski. Thank you very much, Mrs. McCarthy.
    And now the gentleman from California, Mr. Royce, for 5 
    Mr. Royce. Thank you, Mr. Chairman.
    Again, Madam Chairwoman, let me ask you a couple of 
questions here. And this goes to a couple of the observations 
that Mr. Markopolos made.
    And one was the vast differences in fraud cases that he was 
focused on that had come from industry tips as compared to 
those that had come from an audit. And, clearly, his desire was 
to try to get resources into running down these tips that are 
turned in. But let me just read you what he said in his 
testimony here before the House and then get your comment on 
    He said, ``First, I would replace the senior staff at the 
SEC, because they have the wrong senior staff right now. And 
then I would go to the bottom of the organization. You need to 
change who the people on these teams are down at the bottom. 
They can't be young 20-somethings without industry experience. 
You need to get higher, senior, seasoned professionals. And the 
third thing you need to do, you need an Office of the 
Whistleblower to centralize these thousands of complaints that 
they get so that they are handled ad hoc by 11 regional 
offices. You need one centralized location, the Office of the 
Whistleblower, instead.''
    That is his view on that. Now, I know some of the senior 
staff have stepped down since that hearing. What do you make of 
the other suggestions?
    Ms. Schapiro. I would be happy to address those. Let me 
start with the Office of the Whistleblower to handle 
    First of all, we have asked Congress to enact a 
whistleblower statute to give us the authority to compensate 
whistleblowers, in the hopes that they will bring us well-
formed and well-developed evidence of fraud that the SEC can 
then prosecute much more quickly. And we are very hopeful that 
will pass, and it was also included in the Administration's 
legislative package.
    Mr. Royce. And the concept of the Office of the 
Whistleblower instead of doing it through 11 regional--
    Ms. Schapiro. In fact, very shortly after I arrived, I 
learned that we receive between 700,000 and 1.5 million tips 
every year at the SEC. We are a tiny agency to handle that kind 
of volume. And they come in, as Mr. Markopolos points out, to 
every district office around the country and multiple offices 
in Washington. There is no central computer system. There is no 
tracking. There is no ability to look for a trend or a pattern 
of conduct across complaints coming from different areas. And 
there is no capability to combine that information with 
external sources of information.
    I brought in the MITRE Corporation's Center for Enterprise 
Modernization almost within a month after I arrived, I believe, 
to do a top-to-bottom review of exactly how we are handling all 
of these tips and how we might get to a system that could 
centralize them for triage, tracking, and resolution purposes.
    They have completed phase one of the work, which was a 
complete review of all existing processes. We are in phase two 
now, which will create new procedures for the entire 
organization. And then phase three is procurement of a 
technology that will provide a centralized IT solution for 
handling these tips agency-wide.
    So we are moving very aggressively on that count.
    Mr. Royce. Let me ask you, then, one other question he 
brought up, while I have time. He said he thought the SEC was 
``over-lawyered,'' to use his words. And he believed, and the 
SEC officials later affirmed, that there was a fundamental lack 
of understanding of some of the more intricate aspects of the 
financial markets within the SEC.
    The exception to that that he cited was Ed Manion in the 
Boston office who had actually been a trader and been a 
portfolio manager but, therefore, was frozen out by the 
Washington and New York offices, which he viewed also as being 
    Can you comment on this idea of the SEC being over-lawyered 
and whether that kept them or maybe prevented them from 
uncovering the Madoff incident over the years?
    And I know you have taken some reform measures already, but 
what specifically is the SEC doing to address this problem?
    Ms. Schapiro. I would be happy--
    Mr. Royce. Maybe along the lines that we had talked about 
with him, bringing in retired people who really had the kind of 
experience in the market that they could identify scams like 
this. Well, just like Ed Manion, you know, people like that.
    Ms. Schapiro. Let me start by saying that we have really an 
amazing staff at the SEC. We have people who are committed to 
their core to serving the public interest, to enforcing the 
law, to getting to the right answer that will serve investors. 
And it is important to be said because it is, in fact, true, 
and that is the backdrop against which all the changes are 
being made, that we have something very important there that we 
need to grow and provide the resources and the training to make 
    That said, we are recruiting actively for people with 
trading experience, risk management experience, portfolio 
valuation experience, forensic accounting, financial analysis. 
I mean, Wall Street's bad news, in terms of having to lay off 
many people, has been very much good news for the SEC. And we 
are able to recruit people with tremendous industry experience 
and expertise and bring them into the SEC. And we are taking 
full advantage of that opportunity right now.
    Mr. Royce. Thank you, Chairwoman Schapiro.
    Chairman Kanjorski. And now we will hear from Mr. Lynch of 
Massachusetts for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Madam Chair, I thank you for your attendance at this 
hearing today, and I appreciate the work that you have done. I 
think the SEC is in good hands, and I think you have made a lot 
of changes in an institution that isn't necessarily inclined to 
    To follow up on Mr. Royce's questions, he talked about Mr. 
Markopolos's valid complaint that the SEC was over-lawyered. As 
well, Harvey Pitt, former chairman, as well, of the SEC, wrote 
a great piece called, ``Over-Lawyered at the SEC'' that raised 
a lot of the same points.
    What are you doing specifically to get folks in who could 
help make these more, I think, financial-based analyses rather 
than simply a legal analysis?
    Ms. Schapiro. In two ways, we are actually specifically 
recruiting for those new skill sets to come into the agency. 
The first is within our examination program. As we post 
positions, as we have available a head count, we are actually 
seeking people with very particular skill sets like valuation, 
risk management, trading, sophisticated structured products, 
over-the-counter derivatives, and so forth.
    Mr. Lynch. Great, great.
    Ms. Schapiro. The second is that we have an Office of Risk 
Assessment that is quite small. We are building it rather 
significantly. And this year we created a risk fellows program. 
We have a very successful accounting fellows program. We bring 
in very senior people for a period perhaps only of 2 years, but 
to come to the agency and both train our people in very current 
ways of Wall Street but also to help us build risk assessment 
capabilities so that we can take the resources we have and 
focus them where they are most likely to do the maximum amount 
of good for the integrity of the markets and the protection of 
the investors.
    So through the risk fellows program and through our general 
recruiting, we are really looking to broaden our skill sets in 
examination and in enforcement.
    Mr. Lynch. All right. Let me ask you then, following up on 
that--and that is all good news--the President's regulatory 
reform framework envisions an exchange for derivatives, let's 
call them standard linear derivatives, over an exchange, but 
then also custom derivatives, trading privately and in a more 
opaque system. These are custom derivatives; they are the more 
complex ones. These are the ones that generate a big payday for 
these banks and are custom derivatives for the individual 
client, and yet those are often exchanged.
    So I am just wondering, from your standpoint, not from the 
systemic risk perspective that the Fed has to worry about, but 
from your standpoint, how do you think you are equipped to deal 
with that type of bifurcation? Are you going to be able to 
handle both of those situations as at least the President now 
envisions them?
    Ms. Schapiro. The SEC has a long history of dealing with 
both exchange-traded and centrally cleared products, as well as 
over-the-counter products. So I think we have the institutional 
expertise to do it.
    I do think for the custom derivatives that are not 
centrally cleared, the key to success will be both transparency 
and the regulation of the dealers who are engaged in those 
transactions. So, examination of those dealers, review of their 
risk management processes to make sure that they are stress-
testing, that they know their counterparties, that they are 
collecting margin, that they have credit limitations on 
traders, they have adequate documentation, and that they have 
appropriate sales practices and business conduct rules in 
    I think it is going to be really critical for the 
regulators, the bank regulators for many of the dealers, the 
SEC, for others, to have very hands-on oversight of the dealers 
in the customized products.
    Mr. Lynch. Okay.
    Mr. Chairman, my time has expired. I yield back.
    Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Lynch.
    Now we will hear from the gentlelady from Illinois, Mrs. 
    Mrs. Biggert. Thank you, Mr. Chairman.
    And thank you, Chairman Schapiro, for being here. I have 
just a couple of questions.
    First of all, what is your opinion of the new derivative 
tax that has been proposed in the recently passed cap-and-trade 
bill? Do you support it, or do you have fears that such a tax 
and additional restrictions will send U.S. businesses and jobs 
    Ms. Schapiro. I am afraid I am not that familiar with the 
cap-and-trade bill. I would love to be able to come back to you 
with a more thoughtful response.
    Mrs. Biggert. Could you do that in writing?
    Ms. Schapiro. Absolutely. Thank you.
    Mrs. Biggert. I would appreciate that.
    Then, in response to Mr. Royce's question, you mentioned 
forensic accounting and risk management and that you are 
recruiting individuals with expertise in this area. Are you 
also looking into new technologies and outside firms with that 
kind of expertise? You know, I am thinking of whether it is 
modeling or a central database.
    Ms. Schapiro. Absolutely. We have a program going on right 
now where our risk assessment office is reviewing multiple 
different technologies and services that do valuation, that can 
run tests of performance numbers, for example, for hedge funds 
and others to help us understand whether we have a pattern of 
improbably consistent and good results coming out of a 
particular investment vehicle. And it will be very important 
for us to enhance our technological capabilities.
    I will tell you the agency's technology--well, I was a 
Commissioner 20 years ago at the SEC and left about 15 years 
ago. I haven't seen a dramatic improvement in those 15 years 
from when I arrived to this year. And I think, given sufficient 
budget resources, we really need to devote some time and 
attention to building the technology that will allow us to keep 
up with the most technologically enabled financial institutions 
in the world.
    Mrs. Biggert. Thank you.
    Then, last year, former SEC Chairman Chris Cox banned 
short-selling of stocks in nearly a thousand financial firms, 
and later I believe he stated that he regretted imposing the 
ban and that its cost appeared to exceed its benefits.
    Given that these rules and comments were made at the 
beginning of our current financial crisis, why does the SEC now 
seem to think it is a good idea to heavily restrict the short-
    Ms. Schapiro. Well, I think what Chairman Cox was referring 
to were outright bans on short-selling, as well as some other 
requirements the SEC put in place. And the analysis that was 
done after that period does show that, while it resulted in 
lower short-selling, as you would imagine, it also resulted in 
lower liquidity and much higher volatility.
    What we are doing is quite a different thing. We are 
looking in a very deliberate and thoughtful way at whether 
reinstatement of the uptick rule that had been in place for 
many, many years up until 2007 ought to be reconsidered in our 
marketplace, which does not stop short-selling but only permits 
short-selling when the last prior transaction was done at a 
higher price.
    So we are looking at reinstatement of that rule or, as an 
alternative, a circuit breaker, so that if a particular stock 
declined by, say, 10 percent, short-selling might be prohibited 
for a period of time thereafter in that stock.
    We put all of our proposals out for comment. We had a 60-
day comment period. We have gotten 4,000 comment letters that 
we are now working our way through to determine what our next 
steps might be.
    Mrs. Biggert. So the comment period is over, and now you 
    Ms. Schapiro. The comment period ended June 19th. But it is 
not an emergency action; it is not being done in haste. It is 
being done in what we believe is a very thoughtful and 
deliberative way. We had a roundtable publicly held and brought 
in all different perspectives to talk about this issue. And we 
are trying to take it in a very thoughtful, deliberate way.
    Mrs. Biggert. Do you have any date for when you expect that 
this will be--
    Ms. Schapiro. I am hoping that by the end of the summer, we 
may be able to come back to the Commission with a proposal. I 
honestly don't know where the full Commission stands on the 
multiple proposals that we published for comment.
    Mrs. Biggert. Okay. Thank you very much for being here.
    Chairman Kanjorski. Thank you, Mrs. Biggert.
    And we will now hear from the gentlelady from California, 
Ms. Speier.
    Ms. Speier. Thank you, Mr. Chairman.
    And thank you, Chairman Schapiro. I have to just add my 
praise to all that has been showered upon you today. It is 
remarkable what you have done in a very short period of time.
    I was astonished to read the new GAO report, though, that 
suggests that, in the last 3 years, the SEC has reduced the 
number of disgorgements by something like 80 percent and the 
number of enforcement actions by 60 percent.
    We can't have that happen again. And I want your advice on 
what we should do to make sure that your agency becomes the 
toughest, most scrupulous cop in the Nation. And if it takes 
more staff, I want to give you more staff.
    I am concerned by this chart here, which I presume has been 
given to us by you, that shows that the growth in the 
enforcement staff is something like 23 percent, but the growth 
in tips and complaints has gone up 146 percent. The growth in 
SEC staff is up 15 percent but the growth in trading volume is 
up 264 percent.
    If we have learned nothing else in the last few months, it 
is that there wasn't the vigilance at the SEC. And so many 
people on Main Street are hurting today because the SEC wasn't 
doing its job.
    Ms. Schapiro. I will say on the budget that the SEC had a 
long period, from 2005 to 2007, of flat or declining budgets. 
And, in fact, even with the President's request for 2010, we 
will still have 4 percent fewer staff than we did in 2005.
    So, in the last 2 years, Congress has been very good and 
very supportive of a growing SEC budget, but the fact is we 
are, as I said before, a pretty small agency. We have over 
35,000 regulated entities; we have 3,600 employees. And that is 
not a great ratio by any standard. If you think about the 
11,000 investment advisors and 8,000 mutual funds where so many 
Americans entrust their money, we have 400 examiners.
    Ms. Speier. We need to give you more staff, and that is my 
    Next question: I am concerned about what I perceive to be a 
potential revolving-door problem at the SEC. Whether he was 
involved or not in decision-making, the attorney who was 
overseeing the Madoff case ends up marrying the niece of Mr. 
Madoff, who was also employed at the business. Another firm was 
being scrutinized. The particular lawyer, I believe, at the SEC 
then leaves the SEC and goes to work for that particular 
    I do not believe that any SEC employee who has had a 
responsibility over an enforcement action should be allowed to 
go and work for that company in the next 2 years. What is your 
opinion of that?
    Ms. Schapiro. It is a very fair question. And the revolving 
door is a problem for many agencies. It is a problem for the 
SEC, certainly.
    We are looking at a couple of different models. The bank 
agencies have some limitations on your ability to leave the 
banking agencies and go into a regulated institution for some 
period of time. And so we are looking at those.
    Here is my dilemma: I need to get the best and the 
brightest to come to the SEC and do what we do. And I fear that 
if I put too many limitations on their exits down the road, 
they might not be willing to come in the first instance.
    So I am acutely aware of the revolving-door problem, and I 
would like to find a solution to it, and I haven't figured out 
the correct balance yet. But I am committed to working on that.
    Ms. Speier. Rating agencies: I was astonished to find out 
that when they testified before our committee, they take the 
information that the issuer provides them and do not do any due 
diligence to determine whether that information is accurate or 
not. So, question number one, should there be a higher 
responsibility there?
    Secondly, should there be some kind of liability that the 
rating agencies incur when they rate an AIG as a AAA or a 
Lehman at an A- and then 2 days later both of those 
institutions are defunct.
    Ms. Schapiro. Well, I will say that the SEC has very 
recently done rules that require disclosure about the level of 
due diligence that they engage in when they are rating 
structured products, and the extent to which they go beyond 
information they have been handed directly by the issuer. So 
hopefully that disclosure will be helpful.
    I think with respect to liability, I would speak for myself 
and not for the SEC because I don't know the views of my 
colleagues on this, that I think private liability could have a 
very important effect on the quality of the efforts that rating 
agencies are making.
    Ms. Speier. My time has expired. Thank you, Mr. Chairman.
    Chairman Kanjorski. The gentleman from Delaware, Mr. 
Castle, for 5 minutes.
    Mr. Castle. Thank you, Mr. Chairman.
    Chairman Kanjorski, I have an op-ed that appeared in the 
Financial Times, authored by Lawrence Mitchell, who is a law 
professor at George Washington University. I ask that it be 
entered into the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Castle. Thank you, sir.
    It is entitled, by the way, ``Protecting Industry from 
Predatory Speculators.'' And that, Chairman Schapiro, is what I 
want to ask you about. And I want to cite from that article. I 
won't read the whole thing; it is pretty long.
    But in the article, he stated, ``In the first place, 
shareholders are hardly an oppressed class. The beneficiaries 
of shareholder access rules will be the pension funds and 
mutual funds who hold billions of dollars of corporate stock. 
True, they hold it on behalf of ordinary Americans, but the 
managers of these funds have their own interests that often 
conflict with those of their beneficiaries. Managers thrive by 
increasing their portfolios value. That is a hard thing to do, 
and it takes time. So, for years, fund managers have increased 
their pay by putting pressure on corporate managers to increase 
short-term stock prices at the expense of long-term business 
health. Doing business that way puts jobs and sustainable 
industry at risk, now and in the future.''
    He goes on and says, ``For example, managers responded to 
the pressure by using their retained earnings to engage in 
large stock buy-backs. In the 3 years to September 2007, 
companies in the S&P 500 used more money to buy back stock than 
to invest in production. With retained earnings gone, all that 
was left to finance production was debt. When the credit 
markets collapsed, these corporations could not borrow and, 
thus, could not produce. Are boards and managers to blame? 
Sure. But so are the big shareholders who have been pushing 
management for this kind of behavior for years. They are more 
the problem than the solution. Enhancing their voting rights 
will only make things worse.''
    I would be interested in your comments concerning that 
portion of his statement.
    Ms. Schapiro. Okay. It is a great question.
    My view on this is that, at the end of the day, the 
shareholders are the owners of the corporations and ought to 
have the ability to influence the election of directors in a 
meaningful way. And you and I have had some limited discussion 
about the Commission's new proposals on access to the proxy. 
But that is what our goal has been, as we have proposed ideas 
about which I expect we will get thousands and thousands of 
comment letters. But it is a view that the shareholders of the 
corporation are entitled to vote for directors who are 
overseeing management and that we need to make that as 
meaningful an opportunity as possible.
    That said, there is clearly a lot of short-termism in the 
perspectives of managers and boards and shareholders, which has 
not necessarily been completely healthy for the U.S. economy. 
One of the areas we see this particularly has been with 
compensation plans that reward short-term risk-taking or reward 
short-term results to the detriment of longer-term planning and 
investment and R&D.
    And through our new compensation disclosures proposals, we 
are hoping to get at some of those issues in a very direct way 
that will allow shareholders to see the benefits of 
compensation plans that promote a longer-term perspective on 
the affairs of the corporation and less short-term focus.
    Mr. Castle. I, first of all, agree with your answer. I am 
very concerned that, in the name of small shareholders, that we 
are encouraging a lot of shareholder and proxy involvement when 
it may not be beneficial, even to the small shareholders. 
Obviously, a lot of the bigger shareholders are trying to drive 
this, and I would hope that we keep that balance in mind. I am 
aware that, you know, the stockholders are ultimately the 
owners and should have some proxy rights and control. But, on 
the other hand, we certainly don't want decisions being made by 
corporations which could end up being counterproductive.
    So I appreciate your answer. I hope we will keep an eye on 
this as time goes by.
    If I could just ask quickly, some would suggest that, if 
that the SEC repealed mark-to-market accounting and reinstated 
the uptick rule, that capital markets would return to normal. 
Is this an oversimplification of a rather complex issue? And 
your thoughts on those two subjects?
    Ms. Schapiro. Yes, I would say it is rather an 
    I think the uptick rule we are obviously exploring very 
carefully. You know, when the SEC took the uptick rule off 
several years ago, it was one of the most thoughtful, careful 
rule-makings that probably had almost ever been done. There was 
a pilot period, there were economic studies, there were 
multiple roundtables held, there were, you know, comment 
periods and so forth.
    Nonetheless, the markets have changed rather dramatically 
since that period of time, and investor confidence is something 
we have to be very concerned about. And so, that is why we are 
doing this very careful examination of the uptick rule. And I 
am not clear at all, as I said before, where we will land with 
    On the accounting issues, the SEC did a study at the end of 
last year, before my time, on fair value accounting. And one of 
the takeaways from it, while there were things to be tinkered 
with around the edges, was that investors, who we very much 
need in our marketplace and corporations need in order to raise 
money, value fair value accounting. It is important to them in 
making investment decisions. And the idea that we could 
eliminate fair value accounting and solve our problems--I think 
we would create many, many more problems down the road.
    So I think the approach that has been taken with respect to 
fair value, to provide interpretive guidance and other 
assistance from FASB, I think has helped alleviate some of the 
pressure on that issue.
    Mr. Castle. Thank you.
    And I yield back, Mr. Chairman.
    Chairman Kanjorski. The gentleman from New Jersey, Mr. 
    Mr. Adler. Thank you, Mr. Chairman.
    Madam Chairwoman, for a number of years, predating your 
time at the SEC, there has been some sense from the regulated 
community that the Commission was very good at nitpicking and 
not so good at catching some of the bigger things.
    I don't want to refer specifically to the Madoff situation 
because I think, for a number of years before that, there was 
just a sense that personnel at the Commission were very good at 
finding little detailed mistakes and doing enforcement with 
respect to those detailed mistakes but weren't so good at 
seeing the bigger problems that might be present there.
    Do you have a sense of whether that is a fair criticism of 
the Commission predating your time, whether you think it is an 
ongoing program, and, if you think it is a problem, how you 
think you can combat that?
    Ms. Schapiro. I don't think it is an entirely fair 
criticism. I think the agency, over the last several years, has 
brought some very important and some very major cases, with 
respect to the Foreign Corrupt Practices Act, with respect to 
auction rate securities, insider trading, and so forth. So I 
think they have done a great job in many areas.
    That said, we are making it very clear now that our goal is 
to refer to State regulators and to other self-regulatory 
organizations cases that are not going to have a major investor 
protection impact so that we can really focus our attention on 
very high-impact cases done in a much more timely way, because 
that is really how we protect investors. We shut down Ponzi 
schemes faster, we end accounting frauds faster, we stop 
insider-trading rings faster.
    So we are trying to shift the focus to larger cases brought 
more quickly, but I don't think it is entirely fair to suggest 
that only small matters were brought before.
    Mr. Adler. Thank you, Madam Chairwoman.
    I hear you say it is not entirely unfair either, I think, 
implicitly in your answer.
    You had a colloquy a moment ago with the gentlewoman from 
California regarding personnel and a revolving-door concern. I 
wonder if, given the fact that Wall Street has something of an 
unemployment problem right now, you are seeing an upturn in the 
quality of resumes to look at some of those bigger issues that 
you are describing the Commission doing such a good job 
    Ms. Schapiro. We absolutely have. And just to give you one 
small anecdote, we posted several positions, I think four, for 
risk assessment experts to come and join us, and we got over 
500 resumes, some of which had just amazing experience on Wall 
Street. So we are fully taking advantage of Wall Street's pain.
    Mr. Adler. It is good, from a Commission point of view.
    I heard another discussion you had with the gentlewoman 
from California regarding rating agencies. And I want to make 
sure I heard what you said, because I think I agree with you, 
and I want to have you articulate it a second time.
    Would you believe, from a personal perspective, Mary 
Schapiro's perspective, that imposing liability upon rating 
agencies would be a helpful check in the process of their 
rating various equities?
    Ms. Schapiro. I think it could certainly make a very big 
difference. And we would obviously want to be careful in 
crafting it. We want rating agencies to work; we want them to 
work effectively. And we want them to align their interests 
with those of investors. They are paid by issuers, but their 
audience is the investing public. And that is what we need to 
work on, incentives that will encourage that alignment much 
more effectively.
    Mr. Adler. I think you would agree with me that the three 
rating agencies didn't work so effectively in the last year and 
a half on some of the big failures where the market didn't have 
the information that rating agencies perhaps could have shared 
more accurately.
    Ms. Schapiro. I would agree, they didn't work perfectly.
    Mr. Adler. Are there other measures, other than what the 
Commission has already undertaken, that you would recommend 
that Congress consider, separate from the liability discussion 
you had with the gentlewoman and with me, that might help 
perfect markets which, right now, in a rating agencies context, 
are clearly not perfect?
    Ms. Schapiro. I would be happy to provide some additional 
thoughts on that in writing or in a separate meeting.
    As I said, we are looking at the rating shopping issues 
from two different perspectives because we are very concerned 
about that. We would like, I think, to move forward with more 
complete disclosure of the track history of how ratings have 
performed over time so investors can see basically the quality 
of ratings and whether they measured up over time or they would 
upgrade and then downgrade and how those were achieved.
    So we are look at some additional disclosure, as well.
    Mr. Adler. I know I would welcome and I believe the 
subcommittee would very much welcome additional information, 
additional guidance on that.
    Ms. Schapiro. I would be happy to do that.
    Mr. Adler. Thank you. I yield--
    Ms. Schapiro. If I could just go back to your question on 
the enforcement, because I do think it is important for me to 
say: The Enforcement Division at the SEC is full of people with 
tremendous energy and desire to bring cases. That is what they 
are there to do, and they are committed to doing it.
    And to the extent the Commission made that difficult for 
them, they may have focused on some of the less significant 
cases. But what I have found in my 5 months with just taking a 
few of the handcuffs off, that they have really stepped up to 
plate and done a phenomenal job.
    And so I don't want anything I said to in any way suggest 
that these aren't public servants who have been really knocking 
themselves out over the last 10 years to try to do the best 
they can for American investors.
    Mr. Adler. I suspect your work just empowered them further. 
Thank you very much.
    Chairman Kanjorski. Thank you very much.
    And now we will hear from the gentleman from Texas, Mr. 
    Mr. Hensarling. Thank you, Mr. Chairman.
    Madam Chair, welcome.
    I believe that, in an earlier colloquy with one of my 
colleagues, you articulated a concern that the proposal to 
create a CFPA potentially could erode the investor protection 
mission of the SEC.
    I don't want to put words in your mouth. Did you say 
something along those lines?
    Ms. Schapiro. What I said was the transfer of SEC 
enforcement responsibility to the CFPA would erode the SEC's 
overall ability to protect investors and to keep our rule-
making and policymaking connected to the enforcement arm of the 
agency, a linkage I think is--
    Mr. Hensarling. And what would be the consequences of that, 
ultimately, for the investing public, if Congress were to enact 
legislation that ultimately had that result?
    Ms. Schapiro. That took the SEC's enforcement authority 
    Mr. Hensarling. Yes.
    Ms. Schapiro. Well, I think what you would find is that, 
over time, the rule-making function, which is often informed by 
enforcement cases, would be damaged.
    So, for example, when we bring enforcement cases because we 
have found problems within a brokerage firm or an investment 
adviser, the results of that enforcement directly inform the 
policymakers about whether a new rule is necessary in a 
particular area. And it works going back the other way.
    I think of investor protection as all of a piece. It is 
enforcement, it is examination, it is rule-making, it is the 
accounting standards and the disclosure requirements. Those are 
all part of the fabric of investor protection.
    Mr. Hensarling. I believe you also said, or acknowledged, 
that you believe there would be some areas of overlap with a 
potential CFPA. What do you believe those areas of overlap may 
prove to be, and what are your concerns in that regard?
    Ms. Schapiro. I think the possibility--first of all, I 
should say that, as the legislation is currently drafted, there 
are actually some definitional issues that I think create 
    Mr. Hensarling. Well, there are several different pieces of 
legislation floating out there.
    Ms. Schapiro. Well, the last one I saw talks about the CFPA 
will not regulate entities registered with the SEC but have 
virtually everything else. The concern of that is public 
companies issue stock. That is very much an SEC-centered 
function that we bring enforcement actions for. We would not 
want to see this legislation preclude that, and I don't believe 
that is what was intended.
    But the areas I see where we have a potential are hybrid 
products. Credit products are intended to be part of the CFPA. 
There is a possibility for hybrids, I think, to be created. 
Undoubtedly, as we sit here, a rocket scientist somewhere is 
devising a product that will fall in an unusual place within 
the regulatory regime. And so it will require a lot of 
coordination, I think, to make sure that doesn't happen.
    Mr. Hensarling. With respect to a hybrid product, some type 
of investment product, isn't it true that an investment product 
may actually lower risk for one investor, yet the same 
investment product could increase the risk, depending upon what 
investment portfolio the investor has, what his investing goals 
are? Is that not true?
    Ms. Schapiro. Sure. I mean, that is why the SEC's rules and 
customer protection rules are really built on a concept of 
suitability: that a broker recommending a product must make a 
determination that product is suitable for that investor.
    Mr. Hensarling. So, again, one product could be helpful to 
one investor and may prove to be harmful to another investor. 
That is why many of us have the concern that, under all of the 
pieces of legislation we have seen with respect to the CFPA, 
that we have a body that ultimately can proscribe and simply 
outlaw certain consumer credit products. And so, again, I just 
make the point that a consumer credit product may be right for 
one consumer and may be wrong for another consumer.
    Let's move on in the very brief time I have to executive 
compensation. I believe I heard you say in your testimony that 
it is an area, certainly, the SEC is moving. I know there are 
at least two broad proposals that are out there. I think we are 
in the comment period, I believe, on those.
    My question is this: Has the SEC undertaken a study to look 
at the compensation proposals of, say, JPMorgan, Bank of 
America, Citi? And is there any data that indicates that the 
compensation structures for those that were hardest hit by the 
credit crisis were somehow different than the compensation 
structures of those who navigated the crisis more successfully?
    And, with the limited time I have, also with respect to the 
firms that have returned their CPP money, were they judged to 
have superior compensation structures than those that didn't 
return their CPP money as of yet?
    Ms. Schapiro. I am not aware of a study undertaken by the 
    I do believe that compensation practices can contribute 
very significantly to risk-taking within a company. But our 
rules have been designed to get at the maximum clarity and 
disclosure about how that happened. So we have already, and 
have had for years under my predecessors, very complete 
disclosure of compensation and a discussion by the compensation 
committee about how they arrive at different kinds of 
compensation programs within the company.
    What we are proposing to do now is expand that disclosure, 
to ask for a discussion by the comp committee about the linkage 
between compensation programs and risk-taking and also to 
disclose conflicts of interests of compensation consultants to 
the board who may also be doing work for management.
    Mr. Hensarling. Thank you.
    I see I am out of time.
    Chairman Kanjorski. Thank you very much, Mr. Hensarling.
    And now we will hear from Mr. Himes of Connecticut.
    Mr. Himes. Thank you, Mr. Chairman.
    I have a couple of questions relating to a specific matter 
I would like to submit for the record, if that is okay.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Himes. Thank you.
    Madam Chairman, thank you for joining us. And I would like 
to add my voice in praise for the efforts you have taken to 
    I have two maybe paradoxical observations and questions. 
The first is with respect to investor responsibility. And you 
are going to hear me say momentarily how important I think it 
is that we get the regulatory apparatus correct.
    But I get concerned, frankly, as we talk about the 
regulatory apparatus, that we may lose the critical concept of 
the responsibility that investors have for understanding the 
risk of the instruments that they employ. As we talk about 
money market funds, which were never designed to be guaranteed 
against the breaking of a buck, or about alternative 
investments like the Bernie Madoff deal, I think it is critical 
and the system will not work unless people understand that 
unless their instrument says ``guaranteed by the Federal 
Government,'' it is not and they can lose it.
    And I guess I would just love to hear you say that this is 
a thought and a concern of the SEC, as well.
    Ms. Schapiro. It very much is.
    This is a personal view. As a Nation, we don't do a very 
good job educating, starting with our young people, about 
investment and why it is important, what the risks are, and 
what the individual's responsibility really is. And it is 
something I hope that perhaps this Congress or another Congress 
will take up in a serious way.
    Mr. Himes. Thank you. I am sorry, but I have very limited 
time, and I am actually more concerned about question number 
two, which is: It staggers me, frankly, that the conclusions 
drawn by this debacle often on the other side of the room are 
that, because the regulatory apparatus failed, we should just 
throw the enterprise over the edge.
    It is dangerous, and it is ahistorical. The history of the 
last 120 years in this country has been of a gradual 
development of a regulatory apparatus that has protected 
American families--120 years ago, Americans ate rotten fruit, 
they burned to death in shirt factories that were not 
regulated, they bought securities that would make Madoff look 
easy, they bought snake oil. For 120 years, we have evolved a 
regulatory apparatus that has dramatically increased the 
quality of life and the safety of the American citizenry.
    And the conclusion, therefore, that because we did it 
wrong--and, boy, did we do it wrong in the last 4 or 5 years--
that we should just throw the enterprise away and leave 
everything to individual responsibility is dangerous and 
    We have talked a lot today about the rules and the changes 
that have been proposed, but we haven't talked enough about the 
topic that I would love to devote the rest of my time to 
hearing you talk about, which is the culture of your agency.
    We can get the rules right and everything else absolutely 
right, but unless the SEC has an entrepreneurial culture, where 
people feel like they can take some risk, where they can raise 
their hand if they think that something is wrong, where they 
think that they are adequately compensated for doing their job 
well, we are going to fail.
    So I guess I would love to, just in whatever remaining time 
I have left, hear you talk about what your vision is for the 
culture, the compensation of the SEC and its people.
    Ms. Schapiro. It is a great question, and it is absolutely 
fundamental to our being able to do any of the things that we 
have laid out as being important.
    And I would agree with you that writing rules is great and 
bringing enforcement cases is great and necessary and getting 
the structure right is necessary, but we have to be able to tap 
into a deep well of energy and enthusiasm on the part of our 
people in order to make any of that happen.
    And I have to say, in my 5 months, I have been stunned by 
the willingness of people, after a pretty long period of not 
raising their hands and not taking risks, I have been stunned 
by their willingness to do just that now.
    And some of the cases I mentioned in my opening statement, 
those are cutting-edge cases for the SEC. The willingness of 
people to come up with new ways to approach problems like 
Madoff, it gives us a list of actions that we have been able to 
take very quickly to try to respond. It didn't prevent Madoff, 
but hopefully going forward it helps us to prevent the next 
    Those things are all important. And my experience, as 
having been in and out of government my entire career, is that 
if you entrust people with the ability to make those decisions 
and do what they came to government to do, the results will be 
pretty good. And I will tell you, in my 5 months, that is 
exactly what I have seen at the SEC.
    Mr. Garrett. I see the gentleman has time, but will the 
gentleman yield?
    Mr. Himes. I will yield.
    Mr. Garrett. If the gentleman would please supply the 
committee with which Members on either side of the aisle has 
called for the entire scrapping of the entire system, I would 
be curious. I think I have heard from both sides of the aisle. 
Over here, Mr. Ackerman saying that Members from his 
constituency having problems with the system. I have met people 
from our side of the aisle saying they have problems with the 
system and that we are trying to get the right regulation. But 
if he has heard anyone say that they want to scrap the entire 
system and go back to absolutely no regulation, I would 
appreciate hearing from you, because I have never heard that.
    And I yield back.
    Mr. Himes. Thank you.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much.
    And now we will hear from the gentleman from Florida, Mr. 
    Mr. Putnam. Thank you, Mr. Chairman. I don't think I was 
next in line.
    I think the gentleman from California beat me here.
    Chairman Kanjorski. Oh, he did? Well, we will withdraw your 
recognition, and we will hear from the gentleman from 
California for 5 minutes.
    Mr. Miller of California. Well, thank you very much.
    Welcome, Madam Chairman.
    It was probably February last year I introduced an 
amendment to one of the housing bills, and it required the SEC 
and the Feds basically to look at the mark-to-market issue and 
consider suspending mark-to-market or modifying it in some 
    And it was funny, back then, many people you talked to, 
when you mentioned mark-to-market, they kind of looked at you 
like a deer in the headlights, like, what are you talking 
about? I know Chairman Frank understood the issue, and the 
committee accepted it on a voice vote. And I think it took me 
three more times putting it in bills, and every time we would 
put it in the bills, the Senate would pull it out of a bill and 
not recognize the situations we are going through today.
    And, according to the Feds, they give investors up to 90 
percent of asset current market value today, and then the Feds 
hold that asset and collateral in a non-mark-to-market account. 
Is that correct?
    Ms. Schapiro. I am sorry; I don't know the answer to that.
    Mr. Miller of California. Okay. Have you been very involved 
in the mark-to-market issue?
    Ms. Schapiro. Well, I have been involved in the mark-to-
market issue from the perspective of FASB and the SEC's 
oversight of FASB. And the SEC produced a report last year on 
fair value of mark-to-market accounting, which led to FASB's 
April guidance that was issued, with respect to how companies 
should value assets for fair market purposes, meaning that it 
is the price that you would get for an asset sold in an orderly 
market as opposed to having to go with a fire sale price.
    Mr. Miller of California. Okay. Under the terms and 
conditions of the Taft program, it states, ``Taft loans will 
not to subject to mark-to-market or remargining requirements.'' 
Is that correct?
    Ms. Schapiro. I assume so. I am sorry, I just don't know. I 
would be happy to provide information--
    Mr. Miller of California. Having been involved in the real 
estate industry for well over 35 years, you could see the 
problems that lenders were facing with the mark-to-market 
concept, especially in a declining market when you could not go 
out and determine the value of an asset because there was no 
market for the asset. Lenders not only made the loan, they were 
setting up huge reserves for prospective losses or, in some 
cases, losses they were taking on current foreclosures. It 
created a situation where the market basically became illiquid.
    It is an interesting marketplace we are facing today with 
banks. It seems like the Feds have put a lot of money in the 
banking industry today, and the banks are sitting on money. But 
the anomaly of that is they are not making loans, and for the 
average citizen who has money they want to put in a savings 
account, banks don't want the money.
    And so we have created an unusual situation that I think is 
having a dramatic impact on the marketplace. And if you look at 
how the mark-to-market has really had a negative impact on the 
banks today as it applies to residential loans, I think you see 
the same problem coming in the near future in commercial/
industrial loans.
    Are you current on the situation that the market is facing 
with those two areas?
    Ms. Schapiro. Very generally.
    Mr. Miller of California. We have experienced a huge 
decline in the residential marketplace in the last 2 or 3 
years. Probably by the fourth quarter of this year--and I have 
been saying it for about 6 months now--you are going to see a 
huge foreclosure hit on the commercial/industrial sector. But 
the problem with that is the bottom to that trough is probably 
not going to hit for 3 years.
    So we have a situation now where banks are not lending, 
they are not wanting loans because they have so many funds from 
the Federal Government they are holding, and they are going to 
be taking huge hits again on the commercial/industrial sector.
    How are the revisions in the mark-to-market going to impact 
them or benefit them in the future?
    Ms. Schapiro. Well, I think the way that--they are really 
two areas. One is the fair value guidance that was issued by 
FASB that makes it clear they do not have to price assets at 
fire sale prices, that they can use prices that would be 
received in an orderly market. And the second is with respect 
to other than temporarily impair, which allows the banks to 
recognize fair value declines that result from volatility, 
interest rates, liquidity, to include those in other 
comprehensive income and not have to include them in any--
    Mr. Miller. But how do the regulators apply this to the 
holdings of the banks at that point in time?
    Ms. Schapiro. I don't know how the bank regulators would 
apply the accounting rules or use them with respect to their 
capital requirements.
    Mr. Miller of California. But don't you think that is 
germane to what we are trying to deal with there? Or it is 
going to be significant. If you have two agencies looking at it 
from a different perspective, you trying to resolve the mark-
to-market issue in some limited fashion and the regulators are 
looking at it from a different perspective, don't you think we 
need to do something to get those two together?
    Ms. Schapiro. Well, we do talk with the bank regulators on 
these issues, and FASB has a very open door and an open line of 
communication with the bank regulators on all these issues. So 
for example, when the banks were going through their stress 
tests they were utilizing information provided by FASB about 
what might be expected in the future, for example, with respect 
to off balance sheet accounting so that those tests could be 
more comprehensive. So there is quite close communication.
    Mr. Miller of California. I think Ranking Member Bachus and 
Chairman Frank have a bill that they are putting on suspension, 
it should be next week. And the banks are in a difficult 
situation. They are having to take homes back, and then the 
regulators are basically forcing them to put those homes in the 
marketplace because of mark-to-market and liquidity and they 
are sitting aside because they are nonperforming assets at that 
point in time. And basically what the bill does is it says that 
a lender can have up to 5 years that they can put the unit on 
the market as a rental, thereby getting it off the declining 
asset again, performing asset market, which would change the 
mark-to-market value of it. Because in California, like San 
Bernardino County--they are part of this--probably 78 percent 
of the homes in the marketplace are distressed sales from 
lenders. L.A. County is like 56 percent. Even Orange County, 
which is a very good market, is about 43 percent. And dealing 
with the same situation of trying to give them some relief 
because the regulators are forcing the banks to put these units 
out there instead of holding them because banks are really not 
in the real estate business by law, but this gives them a 5-
year window to try to deal with it.
    But I think the concern I have is that the regulators and 
you might not be on the same page on this.
    Ms. Schapiro. Well, I can tell you, as I said, we have 
regular communication with the bank regulators with respect to 
accounting issues. And I think they have obviously great 
flexibility in the application of their capital requirements 
for banks, greater flexibility than we have--
    Mr. Miller of California. I hope they demonstrate their 
flexibility in working through these difficult times.
    Ms. Schapiro. I am sorry?
    Mr. Miller of California. I hope they demonstrate their 
flexibility in working through these difficult times. And I 
thank you for your patience, Mr. Chairman. I yield back.
    Chairman Kanjorski. Thank you, Mr. Miller. And now we will 
hear from the gentleman from Michigan, Mr. Peters.
    Mr. Peters. Thank you, Mr. Chairman. Thank you, Chairman 
Schapiro, as well for your testimony here today. And I would 
like to join others in applauding your efforts and appreciate 
several of your comments.
    One of your comments that I found particularly welcome was 
that everything at the SEC now is related to investor 
protection, and I appreciate that statement. And I believe it 
has also been consistent with your record, particularly as head 
of FINRA. I had the opportunity to be an arbitrator for a 
number of years at FINRA and know that under your tenure that 
organization continued to strive for excellence in protecting 
investors. And in follow-up to my colleague here, Mr. Himes, 
about investor education, I also had an opportunity to be part 
of an investor seminar that FINRA hosted in my district not too 
long ago to really work to make sure that investors understood 
the risk related to investments and to make sound investment 
decisions. And I know that occurred under your tenure so I 
appreciate your efforts.
    I also appreciated your comments to a question that at the 
end of the day it is the shareholders who are the owners of 
these companies. And in a capitalistic system of course it is 
fundamental to capitalism that the owners have the ability to 
exercise the authority that they have because of their 
ownership interest of those organizations.
    So my question is related to a speech that was given before 
the Society of Corporate Secretaries and Governance 
Professionals last month by Commissioner Walter. She discussed 
the SEC's efforts to enact new rules to empower investors in 
that speech. She specifically discussed proposed rules to give 
shareholders access to management proxy materials for the 
purposes of board elections, an SEC-approved rule on 
unrestricted broker voting, and improved disclosure of 
executive compensation and corporate governance. And in that 
speech she stated that, ``legislation that reaffirms our 
authority would remove the distraction of challenges to 
authority that Congress had previously granted to the SEC.''
    Do you also believe that it would be helpful for Congress 
to provide specific statutory authority to the SEC as it 
undertakes what I believe are very important reforms?
    Ms. Schapiro. I do believe it would be helpful. The agency 
has gone down these paths before and frequently been challenged 
in court over these issues. And we may well be challenged this 
time around, particularly with respect to proxy access.
    So while we have gone ahead and done proposed rules that we 
believe make sense, it would certainly not be harmful in any 
way to have backstop statutory authority.
    Mr. Peters. And in follow-up, are there other reform 
measures with respect to corporate governance that you feel may 
be important but would also explicitly require some statutory 
authority on our part to assist you in these efforts? Maybe you 
can answer broadly as to where you think we should be going, 
but also where Congress can be helpful to you in those efforts.
    Ms. Schapiro. Well, I think we are very focused right now 
on the issues. We have outstanding access to the proxy, the 
additional proxy disclosure requirements that we have gone 
forward with. We will be looking later this year at disclosures 
related to environmental issues as those become very, very 
prominent topics of public policy and enormous costs for public 
companies as they seek to meet different standards under 
environmental legislation. We will be looking at those issues. 
Again, those are disclosure related, so I don't think they will 
require legislation. I know that Congress has talked from time 
to time about whether there ought to be say-on-pay legislation. 
The SEC has gone forward with rules that were required under 
the Economic Stabilization Act to require say-on-pay advisory 
votes for companies that are recipients of TARP funding, and it 
would be a question whether say-on-pay should be extended more 
broadly to other public companies although many of those 
advisory votes are being done now pursuant to shareholder 
    Mr. Peters. Thank you. Mr. Chairman, I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Peters. And 
now we will hear from the gentleman from Florida, Mr. Putnam. 
If you start talking very quickly, that is it.
    Mr. Putnam. Thank you, Mr. Chairman. And I want to thank 
the Chairlady. Let me begin with short sales. Your predecessor 
suspended them in the beginning of the economic crisis. He 
later stated that he regretted having done so and that the 
costs outweighed the benefits.
    What is your take on that?
    Ms. Schapiro. Yes, Chairman Cox did make the statement that 
it was one of the worst mistakes that he felt that they had 
made. And I will say that what the agency did last fall was 
done in a series of very quickly implemented emergency measures 
of different sorts; banning short selling, along with a number 
of other things. As we have reexamined short selling, we have 
determined not to do it in any kind of an emergency context but 
rather to do it in a very thoughtful deliberative rulemaking 
process. So we published several months ago two different 
approaches to not banning short selling but restricting short 
    One would essentially bring back a marketwide uptick rule 
that would require that you could only short sell when the last 
prior transaction was implemented on an uptick or an up bid. 
The other is a very focused rule that would apply to individual 
stocks but not across the whole market where if a stock 
declined by say 10 percent in a day there might be a short 
selling restriction for some period of time thereafter.
    The comment period on those proposals closed on June 19th. 
We have close to 4,000 comment letters that we are working our 
way through. We also held a roundtable where we brought lots of 
experts, investors, financial services firms, exchanges and 
others in to talk about the impact on the markets of short 
selling rules and the impact on investor confidence. We are 
factoring all of that into our process and our thinking and we 
have come to no conclusions yet about whether or not to go 
    Mr. Putnam. Let me jump ahead to money markets. One of the 
most telling signs that we were in a noncyclical economic 
crisis last fall was when a money market broke the buck and 
another closed just before breaking the buck. Your new rules--
first of all, the additional government protection that has 
been placed in the money market funds world, will that in your 
view cause greater risk taking among the money market pool of 
    Ms. Schapiro. Well, that cover guarantee program, I 
believe, expires in a couple of months. So what we have 
actually seen, though, is given the events of the Reserve Fund 
breaking the buck, money market funds actually tightened up on 
their quality and liquidity and maturity standard. So they went 
to higher quality, not lower quality, despite the presence of 
the guarantee fund. And I don't know that the Fed and the 
Treasury have come to any conclusion yet on whether or not to 
extend that.
    Our proposed rules are geared towards really bolstering the 
resiliency of money market funds going forward, so they are 
higher quality standards. We also propose that money market 
fund boards of directors be able to suspend redemptions when a 
fund breaks the buck as the Reserve Fund did so that all 
shareholders will get equal treatment in the distribution of 
assets rather than those who are just quick to the draw getting 
in first when the fund has broken a buck and getting a higher 
payout. And we have also asked for comments on whether money 
market funds should move away from the $1 stable net asset 
value to a floating net asset value that might cut down on the 
chances for a run on money market funds.
    Mr. Putnam. And finally, the regulatory reform bill package 
that is being discussed, it is my understanding does not 
include GSE reform.
    Ms. Schapiro. No, that is right. I believe the decision of 
the Administration was to engage in further study with respect 
to the GSEs and come back to that issue later this year.
    Mr. Putnam. Is it your view that these entities which hold 
up to 50 percent of the mortgages in the country would need to 
be part of a regulatory overhaul?
    Ms. Schapiro. I think at some point we as a government are 
going to need to address the future of the GSEs, yes.
    Mr. Putnam. Thank you. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Putnam. Now we 
have a request for a second round. I have passed, and Mr. 
Garrett has passed, but we recognize the ranking member of the 
full committee, Mr. Bachus, for 5 minutes.
    Mr. Bachus. Thank you, Mr. Chairman. Recently FASB 
announced some changes in the securitization accounting rules. 
The Federal Reserve and other bank regulators have cautioned 
that the rule changes threaten the viability of the Federal 
Government's economic recovery plan because that plan is 
partially dependent on restarting the securitization markets. 
And there has been some comment and concern that the accounting 
changes would actually throw into question the securitization 
model that we have been using in the past.
    Are you concerned about the timing of the scope of their 
accounting rule changes, particularly given the emphasis that 
the government and I think private economists have in 
restarting the securitization market?
    Ms. Schapiro. I should say as a prelude to that, that the 
SEC is very interested in doing what we can to help assure a 
vibrant asset-backed securities market. And we have made a 
number of proposals that would require legislation that would 
allow for a more continuous disclosure, and so forth, for 
asset-backed securities. I think what FASB has done with 
respect to off balance sheet is really very important. There 
has been a conclusion or at least a view widely expressed, 
frankly, by governments around the world that off balance sheet 
accounting is a contributor to the financial crisis.
    And so FASB and other accounting standard setters have 
worked very hard to eliminate the exception that allowed a 
company to remove financial assets from their balance sheet 
when they transferred them to a special purpose entity even 
though they retained an interest in the loans--in the cash flow 
from the loans. And I think it was a very important gap for 
them to close.
    I recognize, and maybe there is never a good time for new 
accounting standards to be put in place from the perspective 
particularly of regulated entities, but I think it was a very 
important gap that needed to be closed. It goes into effect at 
the end of the year, and obviously we will watch it very 
    Mr. Bachus. Now, you are aware that the bank regulators and 
the Federal Reserve has expressed some real concerns about it.
    Ms. Schapiro. Well, I haven't heard that they had recently 
expressed real concerns about it, although it doesn't 
completely surprise me. We will certainly have conversations 
with them.
    Mr. Bachus. And when you do, when you talk to them could 
you maybe, if you maybe respond in writing as to whether you 
think that if they still have those concerns, if there is 
    Ms. Schapiro. I would be happy to.
    Mr. Bachus. Okay. Thank you. You know, for the first time 
in the SEC's history, your budget is likely to cross the $1 
billion mark. And with all the current responsibilities you 
have and the likelihood that you are going to have a greatly 
increased number of entities subject to your Commission 
oversight, you know, that is not surprising.
    Do you think that the Commission can leverage the expertise 
of the existing and potentially new self-regulatory 
organizations to supplement its work? How do you perceive it?
    Ms. Schapiro. Well, my bias is I come from a self-
regulatory organization where I spent 13 years. And so I think 
self-regulatory organizations with close oversight from the 
Federal Government, from the SEC in the case of FINRA or the 
New York Stock Exchange or the Nasdaq Stock Market, with close 
oversight can bring tremendous value to the protection of 
investors, and in the case of exchanges the assurance of market 
    So it is an area that we are willing to explore, because 
even though our budget is growing we are likely to never have 
all the resources we need to do everything we would like to do. 
And the extent to which we can leverage SROs, accounting firms, 
other whistleblowers, I am game to do that because I think it 
will allow us to do a better job.
    Mr. Bachus. And to focus on the Bernie Madoffs of the 
world. Any specific ideas on where you might go with that?
    Ms. Schapiro. Well, we have engaged in quite a lot of work 
to try to be very responsive to the Madoff tragedy.
    Mr. Bachus. No, I didn't mean the Madoff. I meant the 
private, the self-regulator.
    Ms. Schapiro. Again, I think the key to the success of 
self-regulation is really vigilant oversight by the SEC, and it 
is something that we don't have a self-regulatory organization, 
for example, with respect to investment advisers. We have not 
opined as an agency about whether that would be an appropriate 
thing for us to do. But I think given our resources, we need to 
consider every opportunity to leverage third parties.
    Mr. Bachus. Could I have one more question, Mr. Chairman?
    You know, for almost 30 years we have had a financial 
products regulatory structure which is divided into two 
categories, securities and futures, where you had two different 
regulators, and I know there has been a lot of discussion about 
where to go. I am not going to ask you whether you think we 
ought to merge the CFTC and the SEC. I don't think you probably 
want to volunteer your opinion on that, but if you do you are 
welcome to. I know we are the only nation that still has 
separate regulators. But given that there is a unique situation 
which does present some regulatory challenges, do you--and you 
are supposed to prepare, you and the CFTC are supposed to 
prepare a report to harmonize the offering rules, the 
regulations, and the regulatory approaches on securities and 
futures. What are some of the challenges facing you with this 
September 30th date coming up and do you think you are going to 
be able to do it by the 30th? And I will throw in, and do you 
think there ought to be one regulator? But you don't have to--
    Ms. Schapiro. I have said that I believe there is a logic 
and efficiency to merging the two agencies. I think we have 
overlapping authorities, we have some arbitrary lines that have 
been drawn between the agencies over many years, and I 
absolutely understand the origins of all that. There would be a 
logic and an efficiency. But if we are not going to do that 
then it really does behoove the two agencies to work together 
as effectively as we possibly can. And we are both, Chairman 
Gensler and I, very committed to doing that.
    As you point out, we have been charged with creating a 
report on harmonization initiatives by September. We are well 
into working through that and trying to identify those areas 
where the agencies have different rules and requirements. It is 
challenging in part because we also have very different 
approaches to regulations and we grew up under very different 
circumstances. CFTC largely regulates an institutional market 
with a vertically integrated exchange and clearing structure. 
We regulate largely retail markets with multiple exchanges and 
clearinghouses that are not vertically integrated. And just 
those two perspectives alone make this a challenge, but we are 
working in good faith to get as far as we can in this process 
of identifying the areas of difference.
    Mr. Bachus. And if you can't make that deadline of course 
you will ask for a--will you put--do you anticipate putting out 
some agreement and then working towards other areas of 
    Ms. Schapiro. We haven't really talked through what we 
would do if we don't make it on the theory that we have to put 
the pressure on our staffs to see if we can make it, but my 
guess is we would put out some kind of interim statement at 
least about our progress.
    Mr. Bachus. All right. Thank you very much. Thank you, Mr. 
    Chairman Kanjorski. Thank you very much, Mr. Bachus.
    The Chair notes that some members may have additional 
questions for this witness which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to this 
witness and to place her responses in the record.
    I will just take a moment. We normally dismiss the panel, 
but thank you very much, Chairman Schapiro, for I think really 
being forthcoming to the committee since your entry into this 
position and working with us over the last 5\1/2\ months in a 
very positive way. We look forward to a continuation of that 
progress and want to thank you for being here. We thought we 
would have you out before noon but it is pretty close, and for 
government time that is very good.
    Ms. Schapiro. Thank you very much.
    Chairman Kanjorski. Thank you. The panel is dismissed, and 
this hearing is adjourned.
    [Whereupon, at 12:25 p.m., the hearing was adjourned.]

                            A P P E N D I X

                             July 14, 2009