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




 
                      INDUSTRY PERSPECTIVES ON THE
                    OBAMA ADMINISTRATION'S FINANCIAL
                      REGULATORY REFORM PROPOSALS

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 17, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-62

                 HOUSE COMMITTEE ON FINANCIAL SERVICES


                  U.S. GOVERNMENT PRINTING OFFICE
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                 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
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
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
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 17, 2009................................................     1
Appendix:
    July 17, 2009................................................    29

                               WITNESSES
                         Friday, July 17, 2009

Baker, Hon. Richard, President, Managed Funds Association........     7
Brodsky, William J., Chairman and Chief Executive Officer, 
  Chicago Board Options Exchange.................................     8
Lassus, Diahann W., President, Lassus Wherley & Associates, on 
  behalf of The Financial Planning Coalition.....................    16
Lowenstein, Douglas, President/CEO, Private Equity Council.......    14
Nichols, Robert S., President and Chief Operating Officer, The 
  Financial Services Forum.......................................    17
Snook, Randolph C., Executive Vice President, Securities Industry 
  Financial Markets Association (SIFMA)..........................    11
Stevens, Paul Schott, President and CEO, Investment Company 
  Institute......................................................    13

                                APPENDIX

Prepared statements:
    Baker, Hon. Richard..........................................    30
    Brodsky, William J...........................................    54
    Lassus, Diahann W............................................    72
    Lowenstein, Douglas..........................................    76
    Nichols, Robert S............................................    84
    Snook, Randolph C............................................    90
    Stevens, Paul Schott.........................................   121

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Written responses to questions submitted to Hon. Richard 
      Baker......................................................   158
    Written responses to questions submitted to William J. 
      Brodsky....................................................   163
    Written responses to questions submitted to Diahann W. Lassus   165
    Written responses to questions submitted to Douglas 
      Lowenstein.................................................   166
    Written responses to questions submitted to Paul Schott 
      Stevens....................................................   170
Green, Hon. Al:
    Written responses to questions submitted to Hon. Richard 
      Baker......................................................   175
Royce, Hon. Ed:
    Written statement of Hon. Sheila C. Bair, Chairman, FDIC, 
      from a March 19, 2009, hearing before the Committee on 
      Banking, Housing, and Urban Affairs of the U.S. Senate.....   177


                      INDUSTRY PERSPECTIVES ON THE
                    OBAMA ADMINISTRATION'S FINANCIAL
                      REGULATORY REFORM PROPOSALS

                              ----------                              


                         Friday, July 17, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 11:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [member of the committee] presiding.
    Members present: Representatives Kanjorski, Waters, Watt, 
Sherman, Meeks, Clay, Miller, Green, Cleaver, Perlmutter, 
Foster, Carson, Minnick; Royce, Biggert, Hensarling, Garrett, 
Neugebauer, McHenry, Posey, Jenkins, Lee, Paulsen, and Lance.
    Mr. Kanjorski. [presiding] This hearing of the Committee on 
Financial Services will come to order. Without objection, all 
members' opening statements will be made a part of the record.
    Today we will hear from several industries that will soon 
feel the effects of the regulatory reform this committee will 
adopt. All affected parties deserve to have a voice in our 
ongoing deliberations about reform. I hope, however, our 
witnesses understand that because public faith in our financial 
system has significantly ebbed, we must enact strong new laws.
    Among many of the casualties of the ongoing financial 
crisis, investors' confidence ranks high. According to a survey 
by shareowners.org, 58 percent of investors are now ``less 
confident in the fairness of the financial markets than they 
were 1 year ago.'' One of the biggest reasons investors cite 
for their lack of confidence is the failure of regulators.
    Earlier this week, I advised Chairman Schapiro of the 
Securities and Exchange Commission that the Commission must 
take bold and assertive action as it moves forward to 
strengthen enforcement. The Commission must also rewrite the 
rules governing the industry to better protect investors who 
sorely lack adequate safeguards.
    Additionally, Congress must update our securities laws to 
advance action on regulatory reform for the securities 
industry. I have already solicited input from the experts at 
the Commission, and Chairman Schapiro recently transmitted 42 
legislative proposals to me. The Commission's Inspector General 
has also provided input on these matters. Moreover, the Obama 
Administration's White Paper and accompanying pieces of 
legislative language complement these suggestions, especially 
in areas like hedge fund regulation and establishing a 
fiduciary duty for broker dealers providing investor advice.
    Based upon these many ideas, I am now developing 
legislation. Ultimately, we need to close loopholes and stop 
unscrupulous practices. Among other things, we ought to put 
more cops on the beat by allowing the Commission to pay 
bounties to whistleblowers whose tips result in catching 
fraudsters.
    Reform of credit rating agencies also has a top spot on our 
agenda. Overly optimistic ratings, to put it kindly, played a 
significant role in the global crash. I am therefore working to 
craft a bill that will bring sanity back to the credit rating 
process.
    As the various ideas for overhauling financial service 
regulation undergo debate, the industry representatives present 
today should rest assured that we will dutifully consider your 
ideas and critiques. However, we can no longer allow the 
investing public to suffer at the hands of narrow interests. 
Profit is fine. It is capitalism. But profit seeking alone, 
without regard to long-term viability of the system, and abated 
by weak regulatory oversight, has proven disastrous. We must 
therefore put in place a thoughtful, smart, and efficient 
regulatory system for the future.
    In closing, I welcome the witnesses and look forward to 
their testimony. The Chair now recognizes Mr. Hensarling for 2 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. For many of us 
here, we continue to feel like we are in an ``Alice in 
Wonderland'' moment, as we look at a piece of legislation that 
seems to want to give five unelected government bureaucrats the 
power to essentially ban consumer financial products, decide 
which mortgages Americans can have, and whether or not they 
qualify for a credit card.
    I had the opportunity yesterday in the House to introduce 
the guest clergy to offer the prayer. I saw once again over the 
Speaker's chair were the words, ``In God we trust.'' I fear for 
many on this committee, they now may want to change the words 
to, ``In government we trust.'' They have a lot more faith in 
government than I do.
    As I look again at the financial turmoil that we have in 
our economy, I think about Fannie Mae and Freddie Mac. 
Government really wasn't to be trusted there with that 
particular policy.
    I think about oligopolies that were in the credit rating 
agency. Government was not to be trusted there.
    I think about AIG and the head of OTS telling us that he 
had the supervisory capacity, he had the regulatory authority, 
but he just missed it when it came to AIG's credit default swap 
exposure.
    I am particularly concerned, as I look at this Draconian 
piece of legislation, how it will impact jobs in an economy 
that is seeing the highest unemployment rate in a quarter of a 
century--2.6 million people have lost their jobs since 
President Obama was sworn in.
    I am concerned about a credit contraction that can be 
caused by this regulator of consumer products. I am concerned 
about what may happen to derivatives that are used by those who 
want to finance our small businesses and our jobs to lower 
their risk. I am wondering what is going to happen to the cost, 
the greater cost of clearing these. The lack of the ability to 
customize them is going to cause many financial firms to no 
longer have the ability to lessen their risk, leading to less 
credit and fewer jobs in an economy that is drowning in 
unemployment.
    So Mr. Chairman, we have to take a very, very careful look 
at this rather radical Draconian piece of legislation before it 
is passed through this committee. I look forward to hearing 
from our witnesses, and I yield back the balance of my time.
    Mr. Kanjorski. Thank you, Mr. Hensarling. Now, we will hear 
from Mr. Sherman for 3 minutes.
    Mr. Sherman. Thank you. I shared the gentleman from Texas's 
concern that the Consumer Financial Protection Agency would be 
a lawmaking body until I received assurances from the chairman, 
I believe the author, that we were creating a law enforcement 
body that would issue interpretive and implementing 
regulations, and would not be a lawmaking body. The chairman 
has invited me, and I assume all members of this committee, to 
suggest legislative language that would nail that down, and I 
don't think it is the purpose of this bill to transfer to an 
unelected body the decisions, and very tough decisions. I would 
prefer to punt them, actually. But as long as I am paid to be a 
Member of Congress, we should be debating them here.
    There are three other issues. First, we have to look at how 
the banks dominate the selection of the members of the regional 
Boards of Governors of the Federal Reserve, especially as the 
Fed acquires more power, and particularly because those 
regional boards then elect members to the Open Markets 
Committee.
    Second, we need to look at a system where the issuer of a 
debt instrument picks the rating agency. That is like the home 
team picking the umpire. They gave triple A to Alt-A. They 
won't do that again soon with dodgy mortgage-backed securities, 
but we will see other types of dodgy securities out there 
instead. I will propose legislation, or hopefully an amendment 
that will allow the SEC to select the credit rating agencies, 
just as the league selects the umpire, not the home team.
    Finally, as to custom over-the-counter derivatives, these 
have been justified as a way to hedge legitimate risks. But I 
see perhaps the majority of the transactions are actually just 
casino bets where someone does not have a risk to hedge. This 
is of particular concern since Secretary Geithner told this 
committee and the Agriculture Committee that he reserves the 
right to perhaps bail out derivatives, their issuers, and their 
counterparties, even derivatives that are being issued now. So 
the Federal Government has a real interest in restricting these 
instruments as long as we have a Secretary of the Treasury who 
may want to bail them out.
    We at least need to see much higher capital requirements 
for over-the-counter derivatives. We might look toward 
restricting those derivatives, to only use them where you 
cannot hedge a legitimate risk in a market-traded derivative. 
In any case, we should by legislation make it clear that none 
of these derivatives, over-the-counter or exchange, are going 
to be subject to any bailouts in the future, and that if you 
buy an AIG derivative, you have to look only to the balance 
sheet of AIG.
    I yield back.
    Mr. Kanjorski. The gentleman from Texas, Mr. Neugebauer, 
for 2 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I appreciate the 
witnesses providing us today with their views on the 
Administration's financial regulatory restructuring proposal. 
While we have draft legislation covering a few of these areas 
now, I hope that we will have an opportunity to get further 
feedback when we actually have additional legislative language, 
particularly with regard to over-the-counter derivative 
proposals. There seems to be an agreement with broad principles 
of the Administration's proposal on improving transparency and 
information about the activities in this market. But with 
complex products in a complex marketplace, the devil will 
certainly most be in the details.
    At the end of the day, we must ensure businesses large and 
small, hedge risks, particularly risks that are customized to 
their particular business, and having the ability to do so. We 
shouldn't take actions that make users of derivatives less 
competitive, and we shouldn't take actions that put U.S. 
markets at a disadvantage with our competitors.
    As we consider options to correct regulatory failures, we 
have to acknowledge that the government cannot micromanage our 
capital markets to prevent future failures or losses. 
Government regulation can't substitute for due diligence for 
investors and other market participants. They need to know, in 
no uncertain terms, the responsibility rests on them and that 
future government bailouts for poor behavior are not an option.
    Basically, what we have seen so far is product regulation, 
not a new way of doing business in the regulatory structure. 
And one of the concerns I have is that in product regulation, 
we are trying to protect investors from themselves. What we do 
need, though, is a robust look at the way we have been doing 
business, looking at where the failures were in the system and 
making sure that we address those, but not radically changing 
the way that businesses have been able to take precautions to 
hedge their risks, which in fact protect investors, and also 
make sure that the marketplace is a more streamlined place to 
do business in a way that we can make sure that American 
markets continue to be very competitive.
    With that I yield back.
    Mr. Kanjorski. Thank you very much, Mr. Neugebauer. Now we 
will hear from Ms. Waters for 3 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. As some of 
our witnesses may already know, I am very concerned with 
protecting our financial system from similar crises in the 
future. To accomplish this, we will need stronger and more 
innovative investor protections. We must also make sure that 
institutional financial instruments, such as over-the-counter 
derivatives, never have the chance to halt consumer or small 
business lending again.
    While products such as credit default swaps may have been 
sold to institutions, many of them were used to insure consumer 
debt in the form of CDOs. As these CDO structures failed and 
credit events occurred, these credit default swap contracts 
came due. A lack of transparency, combined with an overwhelming 
number of improperly collateralized swap contracts, served to 
freeze our lending markets and transfer billions of dollars 
from taxpayers to all kind of Wall Street firms such as Goldman 
Sachs and banks such as Bank of America.
    Some say we should only be concerned about naked credit 
default swaps, which is swaps where people have no interests 
insuring anything they actually own. Those who enter into naked 
CDS contracts are simply trying to profit from some company's 
bankruptcy, yet as Gillian Tett pointed out in a recent 
Financial Times column, even nonnaked CDSs have motivated 
investors to send a company into bankruptcy.
    No matter what shape our financial reforms take, rooting 
for companies, especially American companies, to fail should no 
longer be allowed. That is why I introduced H.R. 3145, the 
Credit Default Swap Prohibition Act of 2009. Banning credit 
default swaps is vital to preserving companies, jobs, and 
taxpayer funds. Our constituents and their 401(k)s will not be 
safe until we eliminate this product.
    I know that is highly controversial, and I am sure we will 
hear a lot of disagreement. But I thank you for arranging this 
hearing, Mr. Chairman, and I yield back the balance of my time.
    Mr. Kanjorski. Thank you very much, Ms. Waters. Now we will 
hear from Mr. Royce of California for 2 minutes.
    Mr. Royce. Thank you, Chairman Kanjorski. Much of the blame 
for the recent economic turmoil has centered on the belief that 
a lack of regulation was the root cause of the excessive risks 
and residual effects that followed, whereas there was a great 
deal of regulation in the banking sector. It was our most 
regulated sector.
    I think that Congressman Richard Baker was the first to 
really point out at great length the enormous overleveraging 
that was occurring in Fannie Mae and Freddie Mac, as did the 
Federal Reserve, and the systemic risk they posed to the 
system. But I think it is worth noting that while hedge funds 
and private pools of capital have experienced significant 
losses, they have not asked for or received any direct 
government bailouts in an era where the government has become 
savior of all things failed.
    The losses borne by hedge funds and their investors did not 
pose a threat to our capital markets or the financial system. A 
major reason why this was the case was because of the general 
lack of leverage within the hedge fund sector. Thus far it 
appears counterparty risk management, which places the 
responsibility for monitoring risk on the private market 
participants who have the incentives and capacity to monitor 
the risks taken by hedge funds, has held up well.
    Considering so many of our major heavily regulated 
financial institutions acted recklessly, drove up their 
leverage ratios to unstable levels, suffered significant losses 
on failed investments, and then came to the American taxpayers 
for assistance, the performance of these private pools of 
capital over that same period is reassuring.
    I must also note my concern with adding additional 
responsibilities to the SEC given their recent handling of the 
Bernie Madoff incident and what looks like a similar misstep in 
the handling of Allen Stanford's firm. The few hearings on the 
Madoff Ponzi scheme revealed an overlawyered, overly 
bureaucratic SEC.
    As former SEC Commissioner Paul Atkins recently noted, if 
hedge funds and private equity firms are forced to register 
with the SEC, the burden to the agency's examiners would be 
enormous. I think it would be wise to first address the 
problems within the SEC, and then discuss adding new 
responsibilities onto the agency.
    I would like to thank the panel of witnesses for coming 
here today, Mr. Chairman. Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Royce. Now we will 
hear from Mr. Green for 1 minute.
    Mr. Green. Thank you, Mr. Chairman. And I welcome our 
colleague Mr. Baker back to the committee. Mr. Chairman, it is 
very obvious, intuitively obvious to the most casual observer 
that our regulatory institutions failed. We allowed persons to 
be qualified for teaser rates, but we did not qualify them for 
the adjusted rate. We had undisclosed yield spread premiums 
that allowed persons to be pushed into the subprime market who 
actually qualified for prime rates. We had universal defaults 
that were taking place. We had persons who were having to make 
payments on interest rates such that they were allocated to 
lower rates when they could have been allocated to higher 
rates.
    Some changes have taken place. But these changes have been 
reactionary changes; they were not proactive changes. Reactive 
legislation is fine, but proactive legislation is better. I 
think we must take advantage of the opportunity to make some 
serious changes that will look out for the consumer in the 
future. The consumer must be protected. Safety and soundness 
must be protected. These things are not mutually exclusive.
    I yield back.
    Mr. Kanjorski. Thank you, Mr. Green. And we will now hear 
from the gentleman from North Carolina, Mr. McHenry, for 2 
minutes.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you all for 
being here today. This is by far one of the most wide-ranging 
panels that we have had representing the financial markets, and 
I am glad you are here.
    My concern is for my constituents and average Americans to 
have options for investments, have options for the type of 
savings accounts they have, the type of investment vehicles 
they have. And my additional concern is about the credit rating 
agencies.
    But beyond that, when you look at CFPA and the idea of 
creating another bureaucracy by which you have to jump through 
hoops, will that limit options for my constituents to have 
products that they can invest in? Will it basically make 
vanilla bean products, will it limit innovation in the 
marketplace? Will it hamstring our capacity and my 
constituents' capacity to get the lending that they need to 
grow this economy?
    The fact is that in this severe downturn, capital is hard 
to come by for average Americans. Will this proposal further 
restrict capital? And what are your firms and the people that 
you represent doing in anticipation of this massive regulatory 
reregulation, overregulation? So what are they doing right now? 
Are your firms holding more capital in anticipation of 
regulatory changes? Are we further limiting options because 
Congress is talking about completely changing financial 
regulations?
    That is a concern that I have, and I would hope that the 
panel would touch on that today as well. Thank you, Mr. 
Chairman.
    Mr. Kanjorski. Thank you very much, Mr. McHenry. We will 
now have our panel, the only panel for today. And each witness 
will be recognized for 5 minutes to present their testimony. 
Their written testimony will be made a part of the record.
    First, we have our friend and former colleague, the 
gentleman from Louisiana, the Honorable Richard Baker, 
President of the Managed Funds Association. Mr. Baker?

 STATEMENT OF THE HONORABLE RICHARD BAKER, PRESIDENT, MANAGED 
                       FUNDS ASSOCIATION

    Mr. Baker. Thank you, Mr. Chairman, Mr. Hensarling, and 
members of the committee. I am pleased to be back in this very 
familiar room and enjoy the opportunity and appreciate your 
courtesy in asking me to participate.
    I am Richard Baker, President and CEO of the Managed Funds 
Association (MFA), which represents the majority of the world's 
largest hedge funds and are the primary advocate for sound 
business practices for professionals in hedge funds, funds of 
funds, and managed futures. Our funds provide liquidity and 
price discovery to markets, capital for companies to grow, and 
risk management services to investors such as our Nation's 
pension funds. Our work enables them to meet their commitments 
to their retirees.
    With an estimated $1.5 trillion under management, the 
industry is significantly smaller than the $9.4 trillion mutual 
fund industry or the $13.8 trillion banking industry. I make 
note of this fact for the reason to assess the appropriate 
level of risk that our sector could present to broader market 
function.
    Further, many hedge funds use little or no leverage, as has 
been stated earlier this morning, which additionally limits 
their contribution to market risk. In a recent study, 26.9 
percent do not deploy leverage at all. And a recent analysis by 
the Financial Services Authority found that industry-wide, over 
a 5-year period, fund leverage averaged between two and three 
to one. This is certainly not the generally accepted view of 
leverage in our industry.
    The industry's modest size, coupled with the relatively low 
leverage, give reasons for those to view that we are not and 
have not been contributors to the current dislocation in the 
market and, unfortunately, that has led to the broad deployment 
of taxpayer dollars.
    Notwithstanding these facts, our funds have a shared 
interest with other market participants in restoration of 
investor confidence and in establishing a more stable and 
transparent marketplace. These important objectives we believe 
can be attained with careful analysis and construction of a 
smart regulatory structure. This will require appropriate and 
sensible regulation. It is aided by the adoption of industry-
sound practices, which we have promoted at the MFA, and it will 
require investors to engage in their own due diligence. There 
is no substitute for asking the right questions before you 
write the check.
    Our members recognize that mandatory SEC registration for 
those advisers who are not currently registered for all private 
pools of capital is a key regulatory reform. Registration under 
the Investment Advisers Act, we believe, is the smartest 
approach. Currently, over half of our members are registered in 
this manner with the SEC. The Advisers Act is a comprehensive 
framework, and among many other elements, requires disclosure 
to the SEC regarding the advisers' business, detailed 
disclosure to clients, policies and procedures to prevent 
insider training, maintenance of books and records, periodic 
inspection, and examination by the SEC.
    We do believe it is important to establish an exemption 
from registration, however, for the smallest investment 
advisers that have de minimis amount of assets under 
management. This exemption should be narrowly drawn to ensure 
that an inappropriate loophole from registration is not 
created.
    Also the provision should coordinate, not duplicate, we 
hope, regulation at the State level. Good regulation is also 
efficient regulation. In that regard, we do have some concerns 
with the Administration's proposed legislation that would 
impose duplicative registration requirements on a number of our 
commodity trading advisers, most of whom who are already 
regulated by the CFTC. We hope, Mr. Chairman, that we would be 
able to work with the committee to remedy this particular 
concern.
    With regard to a subject of some recent interest, credit 
default swaps, we have worked with regulators to reduce risk 
and improve market efficiency. We support efforts to increase 
standardization and central clearing or exchange trading of OTC 
derivatives. However, it is essential to maintain the ability 
of market participants to enter into customized OTC contracts. 
All market participants should post appropriate collateral for 
OTC transactions. And that collateral should importantly be 
segregated, meaning that it is protected. And there should be 
reporting to the regulator as deemed appropriate.
    The subject of systemic risk is also of current concern as 
well. There should be a systemic risk regulator with oversight 
of the key elements of the entire financial system, but it 
should only be enabled with confidential reporting by our firms 
to that regulator. A clear mandate for the regulator should be 
established to protect the integrity of the financial system, 
not individual market participants. The regulator should have 
clear authority to act as required by his evaluation of the 
circumstance and in a decisive manner.
    We believe these views are consistent with the 
Administration's stated goals. I appreciate this courtesy to 
present these views, and look forward to working with the 
committee toward effective resolution.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Baker can be found on page 
30 of the appendix.]
    Mr. Kanjorski. Thank you very much. And now, we will have 
our next witness. We have Mr. William J. Brodsky, chairman and 
chief executive officer of the Chicago Board Options Exchange. 
Mr. Brodsky.

 STATEMENT OF WILLIAM J. BRODSKY, CHAIRMAN AND CHIEF EXECUTIVE 
            OFFICER, CHICAGO BOARD OPTIONS EXCHANGE

    Mr. Brodsky. Thank you, Chairman Kanjorski, and Mr. 
Hensarling. I am honored to be here on behalf of the Chicago 
Board Options Exchange. I also want to just mention that I have 
had the distinct honor in my career to have served as a senior 
executive of the American Stock Exchange. I was for 11 years 
the CEO of the Chicago Mercantile Exchange, a futures exchange, 
and now for 12 years as chairman of the Chicago Board Options 
Exchange.
    The CBOE actually operates several exchanges. We have a 
stock exchange, we have a futures exchange, and our main 
business, of course, is a securities options exchange. And we 
also own an interest in One Chicago, which is a single stock 
futures exchange.
    Just a minute on the growth of the options business. The 
options industry in 2008 traded 3.5 billion contracts, which 
was a 25 percent increase from the prior year. And our 5-year 
compound growth has been 25 percent. That is spread among seven 
vibrant and highly competitive exchanges. A lot of that growth 
is due to the risk management tools that we provide for all 
investors who can hedge their individual stocks, their ETFs, 
and their mutual funds.
    I applaud the Administration's proposal on financial 
regulatory reform, but I don't think that the Congress should 
squander the opportunity offered by this period we have just 
experienced to design and mandate regulatory reforms that are 
long overdue. The status quo should not be an option. At the 
outset, I would like to commend the Administration for drafting 
a proposal that seeks that reform, and I will comment on 
certain aspects of it.
    We are also gratified that the proposal addresses not only 
the underregulation of OTC derivatives, but also the existing 
regulations, including the CFTC-SEC jurisdictional divide, 
which we believe is dramatically antiquated. While this 
jurisdictional matter may be a mere technical issue to some, 
given the many serious issues that face this committee, this 
bifurcated system has had persistent negative consequences that 
we ignore at our peril.
    The proposal clearly describes that the regulation of 
securities and futures under different structures, with 
separate agencies and separate congressional committees, causes 
legal uncertainty, delay, and impedes innovation and 
competition, and imposes unnecessary costs on our regulated 
financial markets. But it is important to note that in the 
midst of the financial tsunami that we have endured, when 
precious little worked, regulated exchanges delivered as 
promised. There were no failures. There were no closures. And 
there were no taxpayer rescues. Despite the most extreme market 
conditions, exchanges continued to provide transparent, liquid, 
and orderly markets, and protections against counterparty risk 
through centralized clearing without interruption, and 
continued to fulfill those essential functions of capital 
formation and risk management.
    Yet the effectiveness of many exchanges is severely 
compromised by the yoke of the regulatory structure that is 
outdated. The nature of our legacy system of regulation has had 
the perverse effect of facilitating regulatory arbitrage and 
the problems it fosters by inhibiting the inherent strengths of 
regulated exchanges. I would like to give you two examples.
    One, in the area of new products, there have been 
persistent problems and conflicts between the SEC and the CFTC 
in determining whether a product is a future or whether it is a 
security. It has caused interminable delays. The most vivid 
example is the CBOE proposal to trade options on gold ETFs. 
ETFs, as you know, are a very valuable investor tool. We 
proposed to trade this, and it took the SEC and CFTC 3\1/2\ 
years to come to a resolution on that issue. In another case 
Eurex, which is Europe's largest derivative exchange, proposed 
to trade a credit default instrument on an exchange with 
counterparty clearing, and they proposed to do that in a matter 
of weeks, and it took our agencies 7 months to agree on how to 
approve that product.
    I note that these product delays are not just an exchange 
issue, but also represent loss of revenue to the Federal 
Government. Dual jurisdiction means that futures and comparable 
securities are not regulated consistently. This leads to 
disputes between the agencies in areas involving default of 
market participants.
    And the fact that the CFTC doesn't have an insider trading 
provision potentially enables a wrongdoer to use inside 
information when others are prohibited from doing so under the 
SEC. This disparity will take on increased importance as this 
committee grapples with the jurisdiction of credit-related 
products.
    We heartily endorse the Administration's recommendation as 
necessary first steps toward a comprehensive regulatory reform. 
Specifically, we support the reform proposal's recommendation 
that there be created a Federal Regulatory Oversight Council, 
chaired by the Treasury, to resolve disputes between the two 
agencies. Currently, there is no dispute mechanism, and we 
believe that Treasury is well suited to chair that group.
    In addition, we strongly recommend that exchanges, as self-
regulatory organizations, have the ability to bring issues 
directly before the new Council. We support the 
Administration's recommendation for harmonization of the 
statutes that exist between the two agencies, and we urge 
Congress to adopt that proposal.
    However, while harmonization may represent an improvement, 
we believe it is only a step toward ending the ultimate issue 
of bifurcated jurisdiction. Even with optimal harmonization, 
the existence of two separate agencies with different 
philosophies will continue to foster conflicting 
interpretations and enforcement of similar laws and perpetuate 
regulatory uncertainty and delay. While the reform proposal 
outlines interim steps that can dampen some of the ill effects 
of divided jurisdiction, consolidation of the SEC and the CFTC 
is the only truly comprehensive solution. Any rational, 
unbiased assessment of the bifurcated regulatory system would 
lead to this conclusion.
    On other issues, I would just summarize by saying that we 
agree with the reform proposal's recommendation that there 
should be a single authority, the Federal Reserve Board, to 
supervise all firms that pose a systemic risk.
    Second, we agree with the proposal that greater regulatory 
oversight is needed of OTC derivatives. At a minimum, we 
believe that jurisdiction over all OTC derivatives involving 
securities, including corporate events, should be with the SEC. 
I might point out that I gave testimony in 1997 saying that the 
absence of regulation on OTC derivatives would be a very 
dangerous thing. And I said that it had seeds of great danger. 
Unfortunately, that was 1997, and there was an exemption 
granted which we opposed. That was part of my testimony.
    We recognize that there are competitive disadvantages 
inherent in the way the SEC approves rule filings, and we 
support the report's recommendation that the SEC should 
overhaul its process of reviewing proposed rule changes by 
allowing more SRO rule filings to become effective upon filing.
    Finally, in conclusion, the CBOE believes that Congress 
should promptly adopt the harmonization of SEC and CFTC rules 
and regulations and the establishment of the Federal Regulatory 
Oversight Council as well as the proposal's call for the 
streamlining of SRO rule processes at the SEC.
    Taking these steps will at least help our markets remain 
competitive in the global marketplace until we are able to 
complete a more comprehensive reform. No other major country 
with well-developed derivative markets uses a system of having 
two different government agencies regulating equivalent 
financial products. The U.S. markets require a 21st Century 
system of market regulation to operate in today's global 
marketplace.
    On behalf of CBOE, I personally thank you for the 
opportunity to appear before the committee, and we would 
certainly welcome an opportunity to work with you in the coming 
months.
    [The prepared statement of Mr. Brodsky can be found on page 
54 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Brodsky. Next, we 
will hear from Mr. Randy Snook, executive vice president, 
Securities Industry Financial Markets Association.

   STATEMENT OF RANDOLPH C. SNOOK, EXECUTIVE VICE PRESIDENT, 
   SECURITIES INDUSTRY FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Snook. Thank you, Mr. Chairman, and members of the 
committee. We appreciate the opportunity to testify at this 
important hearing. We appreciate your continued leadership on 
regulatory reform. SIFMA supports efforts to make the 
regulatory reform changes necessary to restore confidence in 
the financial markets and meet the challenges of the 21st 
Century marketplace and to protect consumers and investors. The 
financial system is critical to the Nation's competitiveness, 
and reform must provide a durable platform for steady economic 
growth, employment, and investment.
    I would like to now highlight elements from our written 
testimony. Systemic risk has been at the heart of the financial 
crisis. We have testified before as to the need for a financial 
markets stability regulator as a first step in addressing the 
challenges facing financial regulatory reform. Generally, we 
support Treasury's recommendations for a single accountable 
systemic risk regulator, balanced with the newly created 
Financial Services Oversight Council, as it would improve upon 
the current system. We think this construct should effectively 
assess threats to financial stability and ensure appropriate 
action is taken promptly. A Federal resolution authority for 
certain systemically important financial institutions should be 
established.
    Being systemically important in our judgment does not mean 
too-big-to-fail, but does require an orderly resolution plan 
should it be needed. The FDIC has broad powers to act as 
conservator or receiver of a failed or severely troubled bank, 
but does not have the experience with the operations of other 
types of systemically important financial institutions. We 
welcome Treasury's proposal to establish this authority for 
other institutions, and urge that it draw upon the experience 
of regulators familiar with the entity being resolved.
    We support proposals for increased regulation, reporting, 
and transparency in the derivatives markets. Clearing is a 
useful tool in the comprehensive risk management framework, and 
we support clearing of standardized OTC derivative transactions 
by financial firms whenever possible, but strongly believe 
there is a role for the continued use of customized contracts, 
which are employed by thousands of manufacturing and other 
companies across America every day to manage various kinds of 
risks. We believe that the transparency needed can readily be 
achieved without mandating exchange trading of OTC derivative 
products.
    SIFMA supports Treasury's proposal to harmonize the 
regulation of securities and futures. The key concern in this 
area is that the law should expressly delegate the regulation 
of financial products such as broad market indices, currencies, 
and interest rate swaps to the SEC, and nonfinancial products 
such as commodities to the CFTC.
    We agree that targeted reforms are needed in order to 
restore confidence and functionality to the securitization 
market, one of the keys to a better functioning market broadly, 
and the industry is working aggressively to make improvements 
in this area.
    We support efforts to find appropriate ways to have skin in 
the game, for securitization market participants to have skin 
in the game. One mechanism that can promote this goal is the 
required retention of a meaningful economic interest in 
securitized exposures, helping to align the incentives of 
originators and transaction sponsors with those of investors.
    SIFMA supports strengthening consumer protection 
regulation, including the creation of national standards 
governing consumer credit products and lending practices. There 
are concerns that creating a new agency for these purposes 
might result in mixed messages and conflicting directives, and 
therefore may fail to deliver the hoped-for benefits that 
underlie the suggestion of a new agency. More critical is the 
balancing of functions of any new consumer protection entity 
with other regulators. The CFPA as proposed could inadvertently 
encroach on the jurisdiction of the SEC and the CFTC. And we 
understand it was not intended to supersede the broad investor 
protection mandate of these two agencies, but suggest the 
clarity of a full exclusion for investment products and 
services regulated by the SEC and CFTC.
    SIFMA has long advocated the modernization and 
harmonization of disparate regulatory regimes for brokers, 
dealers, investment advisers, and other financial 
intermediaries. Individual investors deserve, and SIFMA 
supports, the Administration's recent proposal to create a new 
Federal fiduciary standard of care that supersedes and improves 
upon existing fiduciary standards, which have been unevenly 
developed and applied over the years, and which are susceptible 
to multiple and differing definitions and interpretations under 
existing Federal and State law. The new Federal standards 
should function as a standard that is uniformly applied to both 
advisers and broker-dealers when they provide personalized 
investment advice to individual investors. When broker-dealers 
and advisers engage in identical service, they should be held 
to the same standard of care.
    Finally, the global nature of financial markets calls for a 
global approach to regulatory reform. Unless common regulatory 
standards are applied and enforced across global markets, 
opportunities for regulatory arbitrage will arise. And so 
importantly, close cooperation among policymakers on an 
international basis is essential if we are to effectively 
address the challenges facing the financial system.
    We thank you for your time and look forward to your 
questions.
    [The prepared statement of Mr. Snook can be found on page 
90 of the appendix.]
    Mr. Kanjorski. Thank you very much. Now, we will hear from 
Mr. Paul Schott Stevens, president of the Investment Company 
Institute. Mr. Stevens.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CEO, INVESTMENT 
                       COMPANY INSTITUTE

    Mr. Stevens. Thank you, Chairman Kanjorski, Congressman 
Royce, and members of the committee. I am very pleased to 
appear today to discuss the Obama Administration's proposal for 
financial regulatory reform. And I must say we commend this 
committee for all the very hard work and attention it is 
devoting to these important and complex issues.
    As you know, mutual funds and other registered investment 
companies are a major factor in our financial markets. For 
example, our members hold roughly one-quarter of all the 
outstanding stock of U.S. public companies, and funds have not 
been immune from the effects of the financial crisis. But the 
regulatory structure that governs funds has proven to be 
remarkably resilient.
    As a result of New Deal reforms that grew out of the 
Nation's last major financial crisis, mutual fund investors 
enjoy significant protections under the Investment Company Act 
of 1940 and the other securities laws. These include daily 
pricing of fund shares with mark-to-market valuations, separate 
custody of fund assets, very tight restrictions on leverage, 
prohibitions on affiliated transactions and other forms of 
self-dealing, the most extensive disclosure requirements faced 
by any financial product, and strong independent governance. 
The SEC has administered this regulatory regime effectively, 
and funds have embraced it and have prospered under it.
    Indeed, recent experience suggests that policymakers should 
consider extending some of these same disciplines, which 
arrived in our industry in 1940, to other marketplace 
participants.
    We are pleased that the Administration's reform proposals 
reaffirm the SEC's comprehensive authority not just with 
respect to registered investment companies and their advisers, 
but also over capital markets, brokers, and other regulated 
entities. The SEC can and should do even more to protect 
investors and maintain the integrity of our capital markets. 
But for this it needs new powers and additional resources.
    We agree with the Administration that the SEC should have 
new regulatory authority over hedge fund advisers, along with 
expanded authority over credit rating agencies. And we welcome 
plans to give the SEC new powers to increase transparency and 
reduce counterparty risk in certain over-the-counter 
derivatives.
    We have long supported additional resources for the SEC. It 
is just as important, however, that the SEC bolster its 
internal management and deepen the abilities of its staff. We 
commend SEC Chairman Mary Schapiro for the steps she is taking 
in this regard.
    Lastly, I would like to address one of the central 
questions of reform, how to regulate systemic risk. ICI was an 
early proponent of the idea that a statutory council of senior 
Federal regulators would be best equipped to look across our 
financial system to anticipate and address emerging threats to 
its stability. Thus, we are pleased that the Administration 
recommends creation of a Financial Services Oversight Council.
    We are concerned, however, that the Administration proposes 
that this council would have only an advisory or consultative 
role. The lion's share of systemic risk authority would be 
invested in the Federal Reserve. In our view, that strikes the 
wrong balance. Addressing risks to the financial system at 
large requires diverse inputs and perspectives. We would urge 
Congress instead to create a strong systemic risk council, one 
with teeth. The council should coordinate the government's 
response to identified risks, and its power to direct the 
functional regulators to implement corrective measures should 
be clear. The council also should be supported by an 
independent, highly experienced staff.
    Now, some have said that convening a committee is not the 
best way to put out a roaring fire. But a broad-based council 
is the best body for designing a strong fire code. And isn't 
that the real goal here, to prevent the fire before it consumes 
our financial system?
    This council approach offers several advantages. As I 
mentioned, the model would enlist expertise across the spectrum 
of financial services. It would be well suited to balancing the 
competing interests that will often arise. It would also likely 
make the functional regulators more attentive to emerging risks 
or gaps because they would be engaged as full partners. And the 
council could be up and running quickly, while it might take 
years for any existing agency to assemble the requisite skills 
to oversee all areas of our financial system.
    Mr. Chairman, thank you again for the opportunity to 
testify. We look forward to continuing to work with the 
committee as it develops legislation on these and other issues.
    [The prepared statement of Mr. Stevens can be found on page 
121 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Stevens. Next, we 
will hear from Mr. Douglas Lowenstein, president, Private 
Equity Council. Mr. Lowenstein.

STATEMENT OF DOUGLAS LOWENSTEIN, PRESIDENT/CEO, PRIVATE EQUITY 
                            COUNCIL

    Mr. Lowenstein. Thank you, Mr. Chairman, and members of the 
committee. I appreciate the opportunity to be here this morning 
and to present our views on the financial regulatory reform 
issues.
    The Private Equity Council is a trade association 
representing 12 of the largest private equity firms in the 
world. I think members of this committee are well aware of the 
positive role private equity has played in helping hundreds of 
American companies grow, create jobs, innovate, and compete in 
global markets. In the process, over the last 20 years, private 
equity firms have been among the best, if not the best 
performing asset class for public and private pension funds, 
foundations, and university endowments, distributing $1.2 
trillion in profits to our investors.
    In these remarks, I want to make four general points. 
First, it is important for Congress to enact a new reform 
regime. Obviously, action which elevates speed over quality is 
undesirable. But the sooner businesses understand how they will 
be regulated, the quicker they will be able to organize 
themselves to carry out their roles in reviving strong capital 
markets. Private equity firms today have $470 billion in 
committed capital to invest, and we are looking forward to the 
opportunity to do that.
    Second, the Obama Administration articulated three 
fundamental factors that trigger systemic risk concerns: first, 
the impact a firm's failure would have on the financial system 
and the economy; second, the firm's combination of size, 
leverage, including off balance sheet exposures, and the degree 
of its reliance on short-term funding; and third, the firm's 
criticality as a source of credit for households, businesses, 
and State and local governments, and as a source of liquidity 
for the financial system. Private equity contains none of these 
systemic risk factors.
    Specifically, PE firms have limited or no leverage at the 
fund level, and thus are not subjected to unsustainable debt or 
credit or margin calls. PE firms don't rely on short-term 
funding. Rather, PE investors are patient, and commit their 
capital for 10 to 12 years or more, with no redemption rights. 
Private equity does not invest in short-term tradeable 
securities like derivatives and credit default swaps, and 
private equity firms are not deeply interconnected with other 
financial market participants through derivative positions, 
counterparty exposures, or prime brokerage relationships.
    And finally, private equity investments are not cross-
collateralized, which means that neither investors nor debt 
holders can force a fund to sell unrelated assets to repay a 
debt.
    Third, we support creation of an overall systemic risk 
regulator who has the ability to obtain information, is capable 
of acting decisively in a crisis, and possesses the appropriate 
powers needed to carry out its mission. As to exactly how you 
carry that out, we are frankly agnostic on that subject.
    And fourth, regarding private equity and regulation 
specifically, we generally support the Administration's 
proposal for private equity firms, venture capital firms, hedge 
funds, and other private pools of capital to register as 
investment advisers with the SEC. And we support similar 
legislation introduced by Representatives Capuano and Castle.
    To be clear, registration will result in new regulatory 
oversight for private equity firms. There are considerable 
administrative and financial burdens associated with being a 
registered investment adviser. And in fact, these could be 
especially problematic for smaller firms. So it is important to 
set the reporting threshold at a level which covers only those 
firms of sufficient scale to be of potential concern. But 
despite the potential burdens, we do support strong 
registration requirements for all private pools of capital 
because it is clear that such registration can help restore 
confidence in the financial markets. And in the long run, 
private equity will benefit when confidence in the system is 
high.
    While supporting registration, we believe Congress should 
direct regulators to be precise in how new regulatory 
requirements are calibrated so the burdens are tailored to the 
nature and size of the individual firm and the actual nature 
and degree of systemic risk it may pose. It is vital that any 
information provided to the SEC be subjected to strong 
confidentiality protections so as not to expose highly 
sensitive information beyond that required to carry out the 
systemic risk oversight function.
    We stand ready to work with you, Mr. Chairman, and members 
of the committee as these issues are resolved through the 
legislative process. Thanks again.
    [The prepared statement of Mr. Lowenstein can be found on 
page 76 of the appendix.]
    Mr. Kanjorski. Thank you again, Mr. Lowenstein. And our 
next witness will be Ms. Diahann Lassus, president of Lassus 
Wherley, on behalf of the Financial Planning Coalition.

  STATEMENT OF DIAHANN W. LASSUS, PRESIDENT, LASSUS WHERLEY & 
   ASSOCIATES, ON BEHALF OF THE FINANCIAL PLANNING COALITION

    Ms. Lassus. Thank you, Mr. Chairman, and members of the 
committee. Thank you for the opportunity to speak on this 
critically important topic.
    My name is Diahann Lassus, and I come before you today as a 
representative of the Financial Planning Coalition, a group of 
three leading financial planning organizations dedicated to 
improving consumer access to competent, ethical, and 
professional financial planning advice. I also serve as 
chairman of the board of the National Association of Personal 
Financial Advisers, the leading professional association 
dedicated to the advancement of fee-only financial planning. 
Most significantly, however, I am the co-founder and president 
of Lassus Wherley & Associates, a woman-owned wealth management 
firm focused on helping families secure their financial future 
every day.
    Consumer protection and the need for accountability and 
transparency are not abstract concepts or academic debates. 
They are the reality my clients and I face every day. Every 
time I meet with new clients, I hear stories about their 
experience with other financial planners. These clients often 
explain that they trusted and followed the planner's advice 
because the planner said he was putting the client's best 
interests first. Based on the recommended products, it is 
abundantly clear that the planner was looking to profit from 
commissions, and may not have even considered the client's best 
interests. Sadly, though, these stories are not unusual.
    Since the Great Depression, financial services regulation 
has developed essentially along dual tracks: laws governing the 
sale of financial products; and laws governing investment 
advice. When the delivery of financial services involves a 
combination of product sales and financial advice, the dual 
regulatory structure has led to consumer confusion, conflicts 
of interest, and gaps in oversight.
    No single law governs the delivery of financial planning 
advice to the public. There is a patchwork regulatory scheme 
where financial planners currently maintain as many as three 
different licenses--insurance, brokerage, and investment 
adviser--with different standards of care and accountability to 
consumers. This has led to consumer confusion, 
misrepresentation, and fraud, all things that the 
Administration seeks to correct in their reform package.
    We were very happy to see the President propose that 
broker-dealers who provide investment advice be held to the 
same fiduciary standard as investment advisers. We are pleased 
that this committee is considering that proposal, and hope it 
results in an unambiguous fiduciary duty for all financial 
professionals who provide investment advice, and does not 
undermine the fiduciary duty that already exists under the 
Investment Advisers Act of 1940.
    We are working with a group of organizations that represent 
diverse interests and constituencies to support this concept. 
We all share the view that the highest legal standard, the 
fiduciary duty, should apply to all who give financial advice 
to consumers.
    Taking a step beyond extending the fiduciary duty, and in 
an effort to close the regulatory gap I mentioned, the 
Financial Planning Coalition supports the creation of a 
professional oversight board for financial planners and 
advisers, much like professional or medical legal boards, that 
would establish baseline competency standards for financial 
planners and require adherence to a stringent fiduciary 
standard of care. We seek to apply a principles-based 
regulation to individuals providing comprehensive financial 
planning services or holding themselves out as financial 
planners, not to the firms that employ them. This leaves intact 
other regulatory coverage for institutions, and operates 
consistently with existing Federal regulation for broker-
dealers and investment advisers, as well as State regulation of 
insurance producers, accountants, and lawyers.
    As a small business owner, I am very sensitive to charges 
of increased administrative and cost burdens, especially in 
this economy. However, the ability of Americans to identify and 
place their trust in competent, ethical, and professional 
financial planners outweighs these burdens.
    We fully support the Administration's five key principles 
for strengthening consumer protection: transparency; 
simplicity; fairness; accountability; and access. And we are 
pleased to see the chairman carry these principles forward as 
he works to fill the regulatory gaps to protect consumers.
    Thank you.
    [The prepared statement of Ms. Lassus can be found on page 
72 of the appendix.]
    Mr. Kanjorski. Thank you very much. And now, finally, we 
will have Mr. Rob Nichols, president and chief operating 
officer of the Financial Services Forum.

 STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND CHIEF OPERATING 
             OFFICER, THE FINANCIAL SERVICES FORUM

    Mr. Nichols. Chairman Kanjorski, members of the committee, 
I would like to thank you as well as Chairman Frank and Ranking 
Member Bachus for the opportunity to participate in today's 
hearing and to share the Financial Services Forum's views on 
the Administration's proposal to reform and modernize our 
Nation's framework of financial supervision.
    The Forum, as many of you know, is a nonpartisan financial 
and economic policy organization comprised of the chief 
executives of 17 of the largest and most diversified financial 
institutions doing business in the United States. Our purpose 
is to promote policies that enhance savings and investment, and 
that ensure an open, competitive, and sound global financial 
services marketplace.
    Reform and modernization of our Nation's framework of 
financial supervision is overdue and needed. Our current 
framework is simply outdated. Our Nation needs a new 
supervisory framework that is effective, efficient, ensures 
institutional safety and soundness and systemic stability, 
promotes the competitive and innovative capacity of the U.S. 
capital markets and, quite importantly, protects the interests 
of depositors, investors, consumers, and policyholders.
    With this imperative in mind, we applaud the 
Administration's focus on reform and modernization and the 
ongoing hard work of this committee. We agree with much of the 
Administration's diagnosis of the deficiencies of our current 
framework, and we applaud the conceptual direction and many of 
the details of the Administration's reform proposal. I will 
briefly touch on a couple elements of that plan.
    Perhaps the most significant deficiency of our current 
supervisory framework is that it is highly balkanized, with 
agencies focused on specific industry sectors. This stovepipe 
structure has led to at least two major problems that created 
the opportunity for, and some would say exacerbated, the 
current financial crisis: one, gaps in oversight naturally 
developed between the silos of sector-specific regulation; and 
two, no agency is currently charged with assessing risks to the 
financial system as a whole. No one is looking at the big 
picture.
    A more seamless, consistent, and holistic approach to 
supervision is necessary to ensure systemic stability and the 
safety and soundness of all financial entities. We believe the 
cornerstone of such a modern framework is a systemic risk 
supervisor. Indeed, one of the reasons this crisis could take 
place is that while many agencies and regulators were 
responsible for overseeing individual financial firms and their 
subsidiaries, no one was responsible for protecting the whole 
system from the kinds of risks that tied these firms to one 
another.
    As President Obama rightly pointed out when he announced 
his plan just a few weeks ago, regulators were charged with 
seeing the trees, but not the forest. This proposal to have a 
regulator look not only at the safety and soundness of 
individual institutions, but also for the first time at the 
stability of the financial system as a whole, is essential. 
During Q&A, we could visit about who might be best suited to be 
a systemic risk supervisor and how you could make that entity 
accountable.
    Of the many unfortunate and objectionable aspects of the 
current financial crisis, and the subsequent policy response, 
perhaps none is more regrettable and evoking of a more 
passionate objection than too-big-to-fail. Failure is an all-
American concept because the discipline of potential failure is 
necessary to ensure truly fair and competitive markets. No 
institution should be considered too big to fail. A critical 
aspect of regulatory reform and modernization, therefore, must 
be to provide the statutory authority and procedural protocol 
for resolving, in a controlled way that preserves public 
confidence and systemic integrity, the failure of any financial 
entity, no matter how large or complex.
    So while no institution should be considered too big to 
fail, there are some that are too big to fail uncontrollably. 
We think that putting in place safeguards to prevent the 
failure of large and interconnected financial firms, as well as 
a set of orderly procedures that will allow us to protect the 
economy if such a firm in fact does go under water, should go 
hand in hand.
    The Forum's insurance industry members agree that it is 
essential that there be increased national uniformity in the 
regulation of insurance. Congressman Kanjorski, you and I have 
had this discussion. And we are supportive of the creation of 
an Office of National Insurance within the Treasury Department. 
ONI will ensure that knowledge and expertise is established at 
the Federal level, which is critical to ensuring that insurance 
industry interests are represented in the context of 
international negotiations and regulatory harmonization 
efforts.
    Again, thank you for the opportunity to appear before you 
today. I look forward to your questions.
    [The prepared statement of Mr. Nichols can be found on page 
84 of the appendix.]
    Mr. Kanjorski. Thank you very much.
    If I may just comment, I wish we had about 3 hours today 
just for my own questions. All your testimony has excited me, 
and I have tried to limit in my mind what we would ask.
    I think, Mr. Stevens, you talked about a systemic risk 
regulator and you raised the question of where that should 
exist, that it ought to be clear and separate. Have you had an 
occasion to examine Mr. Donaldson's suggestions in his most 
recent report?
    Mr. Stevens. I have read the news reports about them, Mr. 
Chairman.
    Mr. Kanjorski. Well, I do not have a full understanding, 
nor have I had the opportunity to read the report fully, but, 
from what I gather, it is the closest thing to setting up a 
philosopher king elevated expert panel, a supreme court of 
economics, if you will. And it is rather interesting from the 
standpoint that I myself have extreme doubts about imbuing the 
Federal Reserve with additional responsibilities and powers, 
particularly some of them which appear to be inherently in 
conflict if we make them the systemic risk regulator also. I do 
not know how they carry out all the monetary policy decisions 
that may be contrary to what may be good for the entire 
economy.
    On that regard, though, most recently--I do not even know 
if I should refer to this--but we have a troubling financial 
institution right now on the brink of either going into 
bankruptcy or being rescued, and I had a rather national 
retailer call me on the phone yesterday in regard to part of 
the operations of that organization. I think you understand the 
organization I am talking about. I prefer not to mention it, if 
we can, although most people are informed. Part of it is they 
are a factoring operation, which affects 3,000 suppliers and 
manufacturers.
    The question that disturbs me is that I do not know whether 
or not we are recognizing the systemic risk. We are tending to 
think systemic risk has to be the size of the individual 
institution within their industry or within their field, but it 
does not necessarily have to be that. It could be 
interconnection. It could be providing vital services.
    This retailer said, look, these are 3,000 suppliers, and 
they are all factored by this organization. If they cannot 
continue that, they close down; and I cannot get goods to sell 
in the store, so that when we get the consumers' demand 
increase, there is nothing for him to buy.
    And it seems to me a pretty logical argument that comes 
close to systemic risk. I guess that is what we are faced with. 
Do you have any thoughts on that?
    Mr. Stevens. Well, with respect to what I understood to be 
the proposal by former Chairman Donaldson and former Chairman 
Levitt, it is to create a whole new agency that would be the 
systemic risk regulator, to put it on top of the entire 
framework that we have currently. I think that harbors, 
frankly, Mr. Chairman, even more troublesome concerns than 
vesting that authority in some existing player.
    I think the point that you make in addition is one that 
certainly we have given a lot of attention to, what is a 
systemic risk and what is a firm that should in the 
Administration's proposal be a Tier 1 financial holding 
company?
    The criteria that have been proposed, I think, are very 
uncertain of application. That could range to a small group of 
firms or it could range to a very wide group of firms, and I 
suppose it is in the eye of the beholder. I think if there is 
authority of that kind created, it would be imperative on the 
Congress to make sure that the standards are written as clearly 
as possible.
    In extremis, virtually any firm's management will say, ``I 
am systemically significant. You have to bail me out.'' I think 
that is just the reality of it. We can't have a system that 
works that way. You have to maintain, like it or not, some 
Darwinian element so that strong firms will survive and weaker 
firms simply go the way of history.
    Mr. Kanjorski. Thank you.
    Mr. Brodsky, you have been involved in some discussions and 
proposals on short sales, and those proposals are outstanding. 
Could you give us the benefit of your thinking on these 
proposals?
    Mr. Brodsky. Thank you, Mr. Chairman.
    The SEC is in the throes of analyzing responses that are in 
the thousands of comments to a proposal they put out on whether 
the short sale rule should be brought back in terms of up-tick 
or circuit breakers or other things. I believe that this 
committee should be reviewing the actions of the SEC in that 
regard, recognizing that the markets of 2009 are very different 
than they were 5 years, 10 years, or 20 years ago, and that we 
want to make sure that we don't hurt the markets in trying to 
deal with something that maybe already has been dealt with.
    The SEC has done a very good job in the last 18 months or 
so in dealing with the issue of closing out short stock 
positions and making sure that all fails-to-deliver have been 
taken care of.
    But we are very concerned that there are people who would 
like to see a world that doesn't exist anymore because of the 
success of the national market system and the way stocks are 
currently traded; and our concern is that if the SEC were to 
take any action, that the agency should not do anything that 
hurts the liquidity of the markets. Our most specific concern 
is there should be a market maker exemption for option market 
makers who are under very strict SEC requirements.
    Having said that, I would refer the committee to the IOSCO 
principles, which are the international standard of all SECs of 
the world, and urge the committee to make sure that our SEC 
does not put this country into a less competitive situation 
from other countries as the SEC proceeds on their determination 
of whether they should make any changes in the short sale rule.
    I think this is something from an oversight point of view 
that is very critical. Because our markets, as I said earlier, 
have provided tremendous liquidity and transparency, I think it 
is very important that we don't throw out the baby with the 
bath water.
    So I appreciate your question. We are very concerned that 
we should not put ourselves in an international competitive 
disadvantageous situation, and the IOSCO principles which were 
adopted by all SECs of the world would hold us in very good 
stead if we complied with them.
    Mr. Kanjorski. Thank you very much, Mr. Brodsky.
    Now the gentleman from California, Mr. Royce.
    Mr. Royce. Yes, Mr. Chairman.
    I would like to briefly address an issue from yesterday's 
hearing regarding Sheila Bair's perspective on the Consumer 
Financial Products Agency. Sheila Bair has been very vocal, as 
have most of the other banking regulators, in expressing her 
concern over separating consumer protection from safety and 
soundness regulation. I am sure, under duress, all will tote 
the line and endorse. But let's hear her concerns. This is 
March 19th she raised this issue before the Senate Banking 
Committee.
    She said, the current bank regulation and supervision 
structure allows the banking agencies to take a comprehensive 
view of financial institutions from both a consumer protection 
and safety and soundness perspective. Banking agencies' 
assessments of risks to consumers are closely linked with and 
informed by a broader understanding of other risks in financial 
institutions.
    Conversely, assessments of other risks, including safety 
and soundness, benefit from knowledge of basic principles, 
trends, and emerging issues related to consumer protection. 
Separating consumer protection regulation and supervision into 
different organizations would reduce information that is 
necessary for both entities to effectively perform their 
functions. Separating consumer protection from safety and 
soundness would result in similar problems.
    Our experience suggests that the development of policy must 
be closely coordinated and reflect a broad understanding of 
institution's management, operations, policies and practices, 
and the bank supervisory process as a whole. Placing consumer 
protection policy setting activities in a separate organization 
apart from existing expertise and examination of infrastructure 
could ultimately result in less effective protection for 
consumers.
    I would ask the Chair that Ms. Bair's testimony before the 
Senate Banking Committee be included into the record.
    Mr. Kanjorski. Without objection, it is so ordered.
    Mr. Royce. Those concerns were the reason that I mentioned 
Ms. Bair, and I just wanted to correct the record to state her 
precise views.
    I will go now to Mr. Brodsky with a question.
    As Congress looks at overhauling the regulatory structure 
over private pools of capital and the broader financial system, 
I think it is important that we focus more on effective 
regulation, as opposed to simply additional regulation.
    We witnessed some gross negligence on behalf of the SEC 
during the Bernie Madoff instance and the hearing featuring 
Harry Markopoulos, whom we heard from here in this committee. 
Do you believe the SEC and other financial services regulators 
are currently equipped to conduct examinations and other 
necessary regulatory steps?
    Mr. Brodsky. I think this is a question of management at 
the SEC, and I think that the SEC under its current leadership 
has the proper focus to organize itself to do that. I mean, 
there is always going to be a situation where the cop on the 
beat misses something.
    I think the Madoff situation is particularly regrettable, 
and I think there were things that were missed. But I think the 
SEC has the proper legislative mandate to do it, and I think 
they just have to organize themselves in a better way, and I 
think the current chairman is the person to do that.
    Mr. Royce. Let me ask you a question here that is on my 
mind. Because, in the hearing, it became very clear that there 
was no one at the SEC who understood the Ponzi scheme strategy. 
There was no one who could undercover that. There was one in 
the Boston office, but in the over-lawyered SEC, he didn't have 
a seat at the table.
    Under that kind of culture, are you going to have anyone 
who can understand how an OTC derivatives contract is 
structured? Are you going to have anybody who understands how a 
hedge fund engages in quantitative analysis and complex trading 
strategies? I just wonder about what the SEC has already proven 
itself incapable of handling, and now we transfer this on top 
of the SEC.
    A story just broke, I think yesterday, about another 
example of another Bernie Madoff-type swindle that the SEC had 
missed, where, again, the information allegedly had been turned 
over to them. They had not even been able to decipher that with 
the information that was given them. Hence my thoughts on that.
    I would also ask if any of the other panelists, maybe Mr. 
Stevens or Mr. Baker or anybody, would have any thoughts on 
this front?
    Mr. Stevens?
    Mr. Stevens. We have over the recent years, Congressman, 
emphasized the need for the SEC to focus on internal management 
issues and the capabilities and organization of its staff. That 
is, unfortunately, a priority that has not always been 
something that chairmen have been able to attend to because 
their tenures are fairly short. The markets have changed over 
the years much more than the SEC has.
    I think Chairman Shapiro has made it clear that kind of 
reinvention of our agency is what she is about and that is what 
is required. I am a lawyer, and I would agree with you. 
Different skill sets and different mixes and different 
organizational structures at the SEC would be very desirable. 
And I look at that not only as an issue of examination and 
enforcement. I look at it as an issue with respect to the 
formulation of appropriate regulations as well, where 
understanding regulated entities and regulated markets more 
intimately, not as lawyers do but perhaps as economists do, 
would be very helpful in the mix. I think we are encouraged in 
that direction.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Kanjorski. Ms. Waters from California, for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to thank all of our presenters here today, but 
I especially would like to welcome Mr. Baker to his old 
committee.
    You have been talked about a lot since you have been gone, 
and I know you have just gloated because you feel we didn't 
take your advice and your direction of FM Watch, and because of 
what has happened. I am sure you are saying, ``I told them 
so.'' I would love to talk about that with you some sometime, 
but I can't do it with you today. But welcome back.
    I want to ask you about credit default swaps. I have always 
appreciated your extreme knowledge of the financial markets, 
and I think that you could share information that could be very 
helpful to all of us.
    Now, did your members enter into credit default swap 
contracts with banks and other hedge funds?
    Mr. Baker. There is broad utilization of credit default 
swaps in the investment world, and our members do engage in 
utilization of those products.
    Ms. Waters. Did any of these CDS contracts insure consumer 
debt packaged as collateralized debt obligations, CDOs?
    Mr. Baker. If I may separate the collateralized debt 
obligations from the credit default swap protection, they 
really run on two separate tracks. Not to avert your question, 
but I can answer it this way: Our members engage in broad 
investment strategies, and almost every financial product that 
you would have a concern about I am sure that some of our 
members somewhere are engaging in the deployment of those 
credit risk strategies.
    But I can give you more specific answers at another time. I 
don't want to take an inordinate amount of your time this 
morning.
    By the way, thank you for your kind words.
    Ms. Waters. You are welcome.
    In your absence, I have not always been this kind, but I 
want you to know that I really do want to meet with you and 
talk sometime about the GSEs still and the future of the GSEs.
    Mr. Baker. I would be delighted to do that.
    Ms. Waters. Well, let me just further question you a little 
bit more about these credit default swaps.
    You know, I dropped a bill to discontinue them altogether. 
Of course, I have gotten a lot of pushback and feedback on 
that. But we do know that credit default swaps brought down 
AIG. We know that other companies, such as those that Gillian 
Tett has written about, were forced into bankruptcy over CDS 
contracts. Is it accurate to say credit default swaps are being 
misused and that the American taxpayer is paying the price?
    Mr. Baker. I would not characterize it quite that way. I 
won't attempt to argue your perspective relative to AIG. I will 
say that there were other circumstances that contributed 
mightily to their demise.
    But if I may, by way of best response, give you an example 
of concern I would have with regard to the legislation, and 
then quickly add there are things we can do that would help 
with your concerns relative to transparency, relative to 
centralized clearing, exchanges, collateral segregation, 
enhanced regulatory authorities, I think we can get to the safe 
point you would wish to go.
    But let me give the quickest, shortest example of the 
concern I have that I think you will find as a legitimate 
validating reason.
    If there is a pension who has a variety of investments, and 
let's just call one portfolio a technology-heavy, long-only 
type of investment strategy. But the pension is worried about 
having to meet its monthly flat obligations to write those 
pension checks. We all know there has been extreme volatility 
in the markets. The pension then wants to protect against that 
volatility in that technology portfolio. They turn around to a 
bank and say, we would like to buy credit index protection from 
you. No need to get into the definition, but it is a way to 
hedge against the volatility in that broad price swing of those 
technology stocks, enabling them for a small cost to make those 
monthly payments to retirees. Not only is that a credit default 
swap product, it could be defined--and I worry about this--as a 
naked credit default swap, and here is why:
    The pension might have 20 technology stocks in that 
portfolio. When you buy the credit index protection, it might 
have 100 companies in it, and you would have no underlying 
relationship, no bond, no debt, nothing with those 80 firms. 
And technically, if Congress would move ahead in this regard, 
you might preclude the pension from getting access to the 
credit index protection.
    It even gets worse. Because the bank then, because of 
regulator pressure, wanting to lower its risk profile, will 
turn that credit index exposure over to a hedge fund. The hedge 
fund will buy it and then perhaps need to go long on technology 
stocks because it just shorted the credit index.
    Amazing as it may sound, people will go buy IBM stock and 
then turn around and at the same time go short Apple. Now, it 
is not because they believe Apple is going to go south tomorrow 
and they are actually doing predatory shorting. They are doing 
it because they might be wrong on the long side on IBM, but 
since they have strong belief in the technology sector, they 
cover both ways. Hence, the definition of hedge fund.
    We can provide a lot more technical analysis to your staff. 
The SEC's Office of Risk Analysis has some really good work on 
the contributing causes to AIG's demise, and I think it would 
be very helpful in the appropriate context to have that made 
available to you.
    Ms. Waters. You see what I meant about Mr. Baker? He just 
gave us a lesson in credit default swaps and indexes that we 
probably have not even discussed before. I thank you very much.
    Let me just complete my remarks by saying I am interested 
in trying to find out who benefits from bankruptcy with these 
credit default swaps.
    Mr. Baker. Let me echo, I think disclosure is at the heart 
of many of the problems you have concerns about, and very 
legitimate concerns, and I believe we can find ways to offer 
assistance on this matter that would be very constructive.
    Ms. Waters. Thank you very much. I yield back.
    Mr. Kanjorski. I just want to advise the committee that we 
have 15 votes--18 votes, I am sorry. We are trying to 
determine--think about it, if you will, while we have Mrs. 
Biggert take her 5 minutes--whether we should return at 2:00 or 
thereabouts, or else let this panel go. Those are famous words, 
``let our people go.''
    Mr. Watt. Mr. Chairman, my vote would be to allow us to 
propound our questions in writing. I may be a little biased, 
because you may even get to me.
    Mr. Sherman. Mr. Chairman, I hope we would reconvene the 
hearing after the votes.
    Mr. Kanjorski. Mrs. Biggert?
    Mrs. Biggert. If I might ask my questions. Thank you.
    Mr. Brodsky, what was the impact of the ban that Mr. Cox 
put on the short sales?
    Mr. Brodsky. That was a very regrettable situation. In 
fact, Chairman Cox, in his final farewell remarks, said it was 
his biggest single mistake.
    I think one of the things was that he caught the market by 
surprise, and it had broad ramifications. And in the studies I 
have seen, the liquidity in the stocks where he banned short 
selling actually got worse, not better. I think it is a good 
lesson for all of us. I think that whatever is done has to be 
done in a very thoughtful way and not done in an ad hoc, knee-
jerk way.
    So there are markets, including the convertible bond 
market, for example, that seized up, which hurt pension funds 
and other investors, because the people who were doing the 
hedging and other strategies in convertible bonds couldn't 
then, as Mr. Baker said, short the stock as a countervailing 
move.
    So I think when you are dealing with market mechanisms, you 
have to do these things in a very thoughtful way. And 
admittedly, we were in a very unique environment. But it is 
instructive that Mr. Cox, in retrospect, said it was his 
biggest single mistake.
    Mrs. Biggert. Mr. Baker?
    Mr. Baker. I will just give you one quick example that 
really impacted our industry.
    In the convertible securities world, if an institution 
wants to borrow money and doesn't want to do it through a 
conventional bank loan, they could come to a hedge fund, borrow 
the money and, at time of settlement, instead paying it back in 
cash, they would actually transfer ownership to stock. The 
stock would be held separately from the company and separate 
from the hedge fund, and we would be worried in the intervening 
period of exposure that the value of the stock would go down, 
meaning we wouldn't get repaid.
    It had nothing to do with our view that it was a bad deal 
or a bad company. But we would enter into a short position, 
hence insure against any downturn in value, so when we get 
settled we get as much as we could toward the full obligation.
    Of that practice, the 12 months preceding the issuance of 
the order, the convertible securities world was about a $70 
billion business. Of that amount, ironically, $42 billion of it 
was going to banks. So when the short order was issued to 
protect banks, it seized up the convertible securities world 
because we couldn't go short, and therefore we did not extend 
the credit.
    Mrs. Biggert. Thank you.
    I do have one more question for you. We have been talking a 
lot about what I am calling the Credit Rationing and Pricing 
Agency, which is the Consumer Protection Agency. Could you give 
me your opinion on this? Is this really a wise thing to do, to 
separate the consumer protection from the safety and soundness 
that the other regulator would be responsible for?
    Mr. Baker. My members have directed me on this particular 
issue that we had an understanding or maybe a misperception 
about the applicability of this agency to certain financial 
sectors, and it is not now clear to me exactly how an SEC-
regulated or a CFTC-regulated entity will relate to this new 
agency, if adopted. We would need to have a lot more clarity 
before I could fairly respond. But we have some big questions, 
I would say is a fair characterization.
    Mrs. Biggert. Thank you. I am going to yield back.
    Mr. Kanjorski. Thank you very much.
    Mr. Watt, for 30 seconds, if possible.
    Mr. Watt. That is fine.
    I just wanted to welcome Mr. Baker and ask Mr. Nichols to 
let me know what his position--his organization's position on 
the consumer thing was. You didn't mention that very much. And 
ask Mr. Brodsky to give me some more explanation about how he 
can be so out of step with everybody else in this industry 
about consolidating, unless he addressed it more directly in 
his written comments.
    I will pass to Mr. Sherman.
    Mr. Sherman. Do all of that in writing.
    Mr. Brodsky, I am impressed that you were warning the 
Agriculture Committee of these dangers clear back in 1997. That 
is the only time I wish I had been a member of the Ag 
Committee.
    Mr. Nichols, you say no one should be too big to fail, but 
it is not clear whether you are saying that, through effective 
regulation, no matter how big they are, they are not too big to 
fail, or whether you are saying that there should be a limit on 
the size, of the complexity of an institution and we might have 
to break somebody up. I need to be convinced that the 
regulatory system was really good before I was convinced that 
unlimited size was not a problem.
    And I believe my time has expired.
    Mr. Kanjorski. Mr. Green?
    Mr. Green. Yes, sir. Thank you, Mr. Chairman.
    Let me just say this: Too big to fail is really the right 
size to regulate.
    I want to make a comment about a number of things that I 
mentioned. I can't get to all of them, but I want to say this.
    I mentioned the notion that you had teaser rates and you 
didn't qualify for the adjusted rate. Many of you took 
mortgage-backed securities into your portfolios--and I wanted 
to connect all of this--but those mortgage-backed securities 
were a problem for you because they did not qualify people for 
those teaser rates, and I am sorry we didn't get to develop 
that.
    Thank you very much, Mr. Chairman.
    Mr. Kanjorski. Thank you very much.
    Mr. Foster?
    Mr. Foster. I think getting to the kind of detailed 
questions I was hoping to go to on OTC derivatives is not going 
to happen in 30 seconds, so I will just try to get back to you 
individually.
    Mr. Kanjorski. The Chair notes that some members may have 
additional questions for today's witnesses 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 any of today's witnesses and to place their 
responses in the record.
    Without objection, it is so ordered.
    The panel is dismissed. We thank you very much. We are 
going to have to run. You know what it is like, Richard.
    This hearing is adjourned.
    [Whereupon, at 12:32 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             July 17, 2009


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