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




 
                   CAPITAL MARKETS REGULATORY REFORM:
                   STRENGTHENING INVESTOR PROTECTION,
                  ENHANCING OVERSIGHT OF PRIVATE POOLS
                  OF CAPITAL, AND CREATING A NATIONAL
                            INSURANCE OFFICE

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                            OCTOBER 6, 2009

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-84

       CAPITAL MARKETS REGULATORY REFORM: STRENGTHENING INVESTOR

    PROTECTION, ENHANCING OVERSIGHT OF PRIVATE POOLS OF CAPITAL, AND

                  CREATING A NATIONAL INSURANCE OFFICE



                   CAPITAL MARKETS REGULATORY REFORM:
                   STRENGTHENING INVESTOR PROTECTION,
                  ENHANCING OVERSIGHT OF PRIVATE POOLS
                  OF CAPITAL, AND CREATING A NATIONAL
                            INSURANCE OFFICE

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 6, 2009

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-84




                  U.S. GOVERNMENT PRINTING OFFICE
55-810                    WASHINGTON : 2010
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092104 Mail: Stop IDCC, Washington, DC 20402ï¿½090001

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 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:
    October 6, 2009..............................................     1
Appendix:
    October 6, 2009..............................................    85

                               WITNESSES
                        Tuesday, October 6, 2009

Abraham, Janice M., President and Chief Executive Officer, United 
  Educators Insurance, on behalf of the Property Casualty 
  Insurers Association of America (PCI)..........................    56
Atkinson, David B., Executive Vice President, Reinsurance Group 
  of America (RGA), on behalf of the Reinsurance Association of 
  America (RAA)..................................................    58
Bullard, Mercer E., President and Founder, Fund Democracy, Inc...    11
Chanos, James S., Chairman, the Coalition of Private Investment 
  Companies (CPIC)...............................................    45
Crawford, Denise Voigt, Texas Securities Commissioner; and 
  President, North American Securities Administrators 
  Association, Inc. (NASAA)......................................     8
Herchel, Dennis S., Assistant Vice President & Counsel, 
  Massachusetts Mutual Life Insurance Company, on behalf of the 
  American Council of Life Insurers (ACLI).......................    60
Houldin, Spencer M., President, Ericson Insurance Advisors, on 
  behalf of the Independent Insurance Agents & Brokers of America 
  (IIABA)........................................................    62
Kaswell, Stuart, Executive Vice President and General Counsel, 
  Managed Funds Association (MFA)................................    41
Ketchum, Richard G., Chairman and CEO, the Financial Industry 
  Regulatory Authority (FINRA)...................................    10
Lowenstein, Douglas, President/CEO, the Private Equity Council...    43
Maisel, Bruce W., Vice President & Managing Counsel, Thrivent 
  Financial for Lutherans, on behalf of the American Council of 
  Life Insurers (ACLI)...........................................    17
McGuire, Terry, Co-Founder and General Partner, Polaris Venture 
  Partners; and Chairman, National Venture Capital Association...    46
Taft, John, Head of U.S. Wealth Management, RBC Wealth 
  Management, on behalf of the Securities Industry and Financial 
  Markets Association (SIFMA)....................................    13
Tittsworth, David G., Executive Director and Executive Vice 
  President, Investment Adviser Association (IAA)................    15
Vaughan, Therese M., Chief Executive Officer, National 
  Association of Insurance Commissioners (NAIC)..................    64
Zielezienski, J. Stephen, Senior Vice President & General 
  Counsel, American Insurance Association (AIA)..................    66

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    86
    Garrett, Hon. Scott..........................................    88
    Abraham, Janice M............................................    89
    Atkinson, David B............................................    97
    Baker, Hon. Richard H........................................   104
    Bullard, Mercer E............................................   120
    Chanos, James S..............................................   126
    Crawford, Denise Voigt.......................................   147
    Herchel, Dennis S............................................   161
    Houldin, Spencer M...........................................   168
    Ketchum, Richard G...........................................   175
    Lowenstein, Douglas..........................................   188
    Maisel, Bruce W..............................................   194
    McGuire, Terry...............................................   211
    Taft, John...................................................   227
    Tittsworth, David G..........................................   241
    Vaughan, Therese M...........................................   273
    Zielezienski, J. Stephen.....................................   280

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Written statement of the Financial Services Institute........   294
    Written statement of the National Association of Insurance 
      and Financial Advisors (NAIFA).............................   300
    Written statement of the National Association of Mutual 
      Insurance Companies (NAMIC)................................   306
    Written statement of the National Association of Small 
      Business Investment Companies (NASBIC).....................   314
Chanos, James S.:
    Written responses to questions submitted by Representative 
      McHenry....................................................   317
Tittsworth, David G.:
    Written responses to questions submitted by Representative 
      Cleaver....................................................   318


                   CAPITAL MARKETS REGULATORY REFORM:
                   STRENGTHENING INVESTOR PROTECTION,
                  ENHANCING OVERSIGHT OF PRIVATE POOLS
                  OF CAPITAL, AND CREATING A NATIONAL
                            INSURANCE OFFICE

                              ----------                              


                        Tuesday, October 6, 2009

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Waters, 
Moore of Kansas, Miller of North Carolina, Scott, Green, 
Cleaver, Bean, Klein, Perlmutter, Foster, Carson, Speier, 
Minnick, Adler, Himes, Maffei; Bachus, Royce, Manzullo, 
Biggert, Capito, Garrett, McCarthy of California, and Posey.
    The Chairman. This hearing will come to order.
    It is the next in a series in which I have lost count of 
specific legislative hearings on pending legislation. It is a 
long day. The gentleman from Pennsylvania, the chairman of the 
Subcommittee on Capital Markets, and his staff, along with the 
staff of the full committee, have done a great deal of work; 
and there will be a great deal presented today.
    I am now going to recognize the chairman of the 
Subcommittee on Capital Markets for 5 minutes.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Today, the Financial Services Committee will examine the 
three legislative discussion graphs on investor protection, 
private fund adviser registration, and insurance information 
that I released last week.
    If we have learned anything from the financial crisis, it 
is that excessive deregulation is dangerous. My three bills 
work to reverse this trend by closing loopholes and fixing 
problems in the broken regulatory structure, especially in our 
securities and insurance markets.
    As we work through these drafts and the many other pieces 
encompassing financial services regulatory reform, we should 
listen to commonsense ideas and seek out consensus where it 
exists. I am, therefore, open to making changes in these draft 
bills.
    In working to enact meaningful regulatory reform, however, 
we must ensure that special interests do not weaken particular 
solutions to the point of becoming toothless. Looking ahead to 
next year and beyond, after this round of reform is done, we 
must remain diligent guardians of the public interest and of 
the financial system's health as a whole. Financial innovation 
and capitalism always seek to outpace the development of laws 
and regulations. This is the nature of our system. To correct 
this bias, vigilance is our only hope.
    That said, the three draft bills before us today will no 
doubt enhance regulatory authority and improve access to 
information. For example, the Investor Protection Act provides 
the U.S. Securities and Exchange Commission with more firepower 
to perform its mandated duties. Like the Administration's 
reform plan, this bill includes the requirement that all 
securities professionals providing advice have a fiduciary duty 
toward their customers. Through a harmonized standard, brokers, 
dealers, and investment advisers will have to put investors' 
interests first.
    The draft Investor Protection Act also significantly 
expands the ability of the Commission to reward those 
whistleblowers whose tips lead to successful enforcement 
actions. This legislation will further permit the Commission to 
adopt rules to bar the inclusion of mandatory arbitration 
clauses in securities contracts.
    Additionally, this legislation significantly expands upon 
the proposal put forward by the Administration by closing 
loopholes identified by the Madoff and Stanford financial 
frauds, updating the Securities Investor Protection Act, and 
modifying the authorities of the Public Company Accounting 
Oversight Board. Moreover, the bill doubles the Commission's 
available funding over the next 5 years.
    But enhancing the Commission's firepower and providing more 
money are simply not enough. As a result, the draft bill calls 
for an independent, comprehensive study of the entire 
regulatory structure that oversees the securities industry by a 
high-caliber body with expertise in organizational change that 
will identify further improvements to the implementation of our 
securities laws.
    The second draft bill, the Private Fund Investment Advisers 
Registration Act, requires advisers of hedge funds, private 
equity firms, and others who have previously escaped direct 
regulatory oversight to register with the Commission and 
disclose certain vital information. Transparency has been 
nonexistent in this area for far too long, and the financial 
crisis revealed that our system cannot tolerate such omissions 
going forward.
    The third bill would create a Federal Insurance Office to 
provide national policymakers with access to the information 
and resources needed to respond to crises, mitigate systemic 
risks, and help ensure a well-functioning financial system. The 
credit meltdown highlighted the lack of expertise within the 
Federal Government regarding the insurance industry, especially 
during the collapse of the American International Group and 
last year's turmoil in the bond insurance markets. My bill 
would rectify these shortcomings and promote stability in our 
insurance markets.
    In closing, Mr. Chairman, our job today is to swing the 
regulatory pendulum back toward the interests of hardworking 
Americans. The three draft bills before us will accomplish that 
objective. Billionaires on Wall Street have had their day, 
egged on by a culture of greed, deregulation, and a survival-
of-the-fittest attitude that ignored the harsh effects those 
things inflict upon larger society. Today's hearing advances 
the effort to correct these excesses.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman from Alabama is recognized for 
3\1/2\ minutes.
    Mr. Bachus. Thank you.
    The catastrophic failure of AIG and the Madoff and Stanford 
Ponzi schemes provide clear evidence that our current 
regulatory structure is in need of reform. Republicans and 
Democrats have both offered legislation to address these 
concerns.
    Chairman Kanjorski's draft bill, which is the subject of 
today's hearing, incorporates key portions of the Republican 
financial regulatory reform plan, including providing the SEC 
with enhanced enforcement powers and giving victims of 
financial fraud additional relief. The legislation represents a 
solid foundation on which to build a bipartisan consensus on 
investor protection issues.
    The draft bill also contains provisions sponsored by 
Representatives McCarthy, Lee, and Jenkins that have already 
passed the House this year on suspension and clarify and 
provide corrections to securities laws in addition to promoting 
transparency and financial reporting. It includes provisions of 
H.R. 2873, introduced by Representative John Campbell, to 
provide the SEC with increased enforcement powers.
    All these provisions enhance investor protection, modernize 
our capital markets, and begin to restore investor confidence 
in our markets and in the SEC; and I commend Chairman Kanjorski 
for incorporating them.
    Other elements of the draft bill require further study, in 
my view. For example, the bill could substantially increase 
dispute resolution costs for investors and compliance costs for 
firms by providing the SEC with the authority to restrict and 
eliminate arbitration agreements.
    In addition, the discussion draft does not go far enough in 
restructuring the SEC. The Inspector General's report detailed 
a massive failure of the SEC and their staff to detect the 
Madoff Ponzi scheme and is the best evidence for the need of 
SEC reform. The Office of Compliance, Inspections, and 
Examinations needs to be eliminated, in my view, and its 
functions returned to the divisions from which it was created.
    Chairman Kanjorski has released draft legislation to 
address private pools of capital and insurance. The Private 
Fund Investment Advisers Registration Act mandates SEC 
registration for previously unregistered advisers of hedge 
funds, private equity, and other private pools of capital.
    While no private pool of capital was the source of systemic 
risk or contributed to the current financial crisis, greater 
transparency in this part of our capital markets could serve as 
an important safeguard in the future if done right. However, we 
must ensure that any new regulatory powers granted the SEC are 
appropriate and do not interfere with the comprehensive due 
diligence that investors already perform or discourage 
innovation and capital formation.
    Finally, today's hearings will examine the Federal 
Insurance Office Act of 2009, which would create a new Federal 
Insurance Office housed within the Treasury Department to deal 
with insurance issues. This draft builds on the bipartisan 
insurance legislation reported by this committee in the 110th 
Congress. Judy Biggert and Chairman Kanjorski introduced that.
    Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman.
    Now the gentleman from California, Mr. Royce, for 2 
minutes.
    Mr. Royce. Thank you, Mr. Chairman.
    Earlier this year, in an op-ed in the Washington Post, 
Secretary Geithner and Larry Summers noted the importance of 
international coordination among regulators; and they wrote 
this in the Post. They said, ``We live in a globalized world, 
and the actions we take here at home, no matter how smart and 
sound, will have little effect if we fail to raise 
international standards along with our own standards. We will 
lead the effort to improve regulation and supervision around 
the world.''
    Well, with our fragmented regulatory regime over insurance, 
I think it is very clear that we are lagging behind the rest of 
the world. Solvency II will be implemented by the EU in the 
coming months, and that will bring all of Europe under one 
market for insurance. Yet the United States continues to 
struggle with 50 individual markets.
    Certainly, creating a Federal Insurance Office would be a 
beneficial first step, but I am afraid that it will not go far 
enough. The current State-based regulatory system is, as the 
Treasury Department said in its White Paper when it did its 
analysis, they said: ``It is highly fragmented, it is 
inconsistent, it is inefficient. In short, it costs consumers, 
and it makes our regulatory model weaker.''
    So, as Chairman Bernanke and Secretary Geithner have stated 
in previous hearings, we should consider establishing a world-
class regulatory alternative to what is currently a fragmented 
State-based system.
    I believe any regulatory reform effort will be incomplete 
without the inclusion of a world-class Federal insurance 
regulator, and I look forward to hearing from our panel of 
witnesses today. I hope some of them will comment on that.
    I yield back, Mr. Chairman.
    The Chairman. So as not to change the subject, the 
gentlewoman from Illinois is now recognized for 2 minutes.
    Ms. Bean. Thank you, Mr. Chairman, for yielding and for the 
time and for holding today's hearing.
    I want to recognize the leadership of Subcommittee Chair 
Kanjorski and the three bills before us today as part of the 
broader financial regulatory reform designed to restore 
investor confidence, all of which are critical to making sure 
that what happened last year doesn't happen again.
    I am proud to again be an original cosponsor of the 
National Insurance Office Act. I believe this bill is an 
important step towards addressing the lack of insurance 
expertise and oversight at the Federal level. It will establish 
for the first time a Federal voice for insurance matters and a 
Federal official who can negotiate international agreements 
that are important to the competitiveness of the U.S. insurance 
industry.
    However, since last Congress, much has changed in our 
financial system. The collapse of AIG, the world's largest 
insurer, has proven to be one of the most costly and dangerous 
corporate disasters in our Nation's financial history. With 
nearly $180 billion of Federal tax dollars committed to AIG, 
plus billions more offered to other insurers, the Federal 
Government has made an unprecedented investment in an industry 
over which it has no regulatory authority.
    There has never been a greater need for national insurance 
regulatory oversight. Not just an office to collect 
information, however. Through two Capital Markets Subcommittee 
hearings this year, we have heard general agreement that there 
should be a Federal role in the regulation of the insurance 
industry.
    The call for reform was most recently echoed 2 weeks ago 
before this committee during a hearing on systemic risk. In his 
written testimony and during the question-and-answer period, 
former Chairman Paul Volcker advocated that establishing a 
national insurance regulator was a critical component to 
broader regulatory reform in order to ensure oversight of an 
important pillar of the U.S. financial system.
    Mr. Volker's statement follows the call for insurance 
reform by the Obama Administration. The Treasury proposal 
specifically cited six principles for reform, including, 
``increased national uniformity,'' and recognized again our 
current--
    The Chairman. The gentlewoman will get 30 additional 
seconds. It will come from my time.
    Ms. Bean. Thank you, Mr. Chairman.
    --and recognized that our current insurance regulatory 
system is highly fragmented, inconsistent, and inefficient.
    It supported consideration of a Federal charter. The 
creation of a National Insurance Office is helpful, but without 
the authority to require consistent regulatory rules 
enforcement and accountability, it falls short. As we work to 
modernize our financial regulatory structure, we should address 
the failure of the current insurance regulatory system that 
increases risks and costs to customers. Today, we have that 
opportunity. I look forward to working with my colleagues on 
the committee to do just that.
    Thank you. I yield back.
    The Chairman. The gentlewoman from Illinois for 1\1/2\ 
minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. I would like to 
thank you for holding today's hearing.
    First, I would like to thank a few organizations 
represented on panel one--FINRA, Thrivent Financial for 
Lutherans, and ACLI--for their work to promote financial 
education.
    As we all know, empowering consumers with financial 
education and the tools they need to thrive in today's 
complicated marketplace is the best kind of consumer 
protection. It is also important that we crack down on fraud.
    Second, I would like to thank the witnesses on the second 
panel for their work to invest in America and America's 
entrepreneurs who create jobs.
    Lastly, I want to say a few things about proposals to 
create a national insurance office, which will be the subject 
of panel three and something that Congressman Kanjorski and I 
are working on.
    Through the last decade, it has become increasingly 
apparent that our Federal Government has little or no knowledge 
or understanding of the insurance industry. After 9/11, the 
Federal Government had to step in and provide terrorism risk 
insurance. Federal regulation lacked expertise and failed to 
completely understand a multifaceted business like AIG, a 
global company with savings and loan and insurance and 
derivatives business.
    Almost a year ago, we worked to stabilize the financial 
market's treasury. Due to a lack of understanding, dismissed 
proposals modeled after insurance and State guarantee funds. 
And, finally, there is no in-house expertise in the Federal 
Government to represent the U.S. positions on insurance during 
international negotiations.
    I look forward to today's discussion.
    The Chairman. By the way, we have very outdated equipment. 
Let me explain to people. It does not do 30 seconds. It only 
does minutes. I am going to see if we can get the Legislative 
Branch to spring for a more modern one. So that is why, before 
the red light goes on, it may happen sometimes. But we are 
working on that.
    The gentleman from New Jersey is now recognized for 1\1/2\ 
minutes.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you to this 
panel and all the panelists who are coming here.
    The first item on the agenda, the investor protection 
piece, I think really offers us an opportunity for 
bipartisanship as we work forward; and I look forward to doing 
so.
    But I think we need to be clear about what we are doing 
here today and what this panel and panels are all about and the 
hearing. It is really just checking the boxes. In order to stay 
in line with some artificially imposed deadline, really, the 
Majority has scheduled today's hearing on a Members' travel 
day. That is why we have so few people here. Today's hearing is 
not one, not two, but three completely separate issues over the 
course of three panels. Also, the Majority can say we have had 
a legislative hearing on each one of these items and they are 
fully examining these important issues.
    Unfortunately, what we have here before us today is, rather 
than fulfilling a good-faith commitment to a deliberative 
process, some people are saying it makes a mockery of it; and 
there is a risk in making a mockery of the entire hearing 
process.
    These witnesses, for instance, only had one business day to 
review a 114-page draft before having to submit their testimony 
yesterday; and witnesses won't give their due consideration 
like they otherwise should to their testimony if they don't 
think the committee will take it seriously.
    Secretary Geithner already said that he doesn't take 
seriously the testimony of independent regulators. But that is 
another issue.
    The issues before us today really are all very important. 
In another Congress, they would each receive careful 
deliberation. But not in this one. Here, we set unrealistic 
politically imposed deadlines which rush the legislative 
process and threaten really unintended consequences throughout 
large swaths of our market and our broader economy as well.
    I thank you.
    The Chairman. I now recognize myself for 2\1/2\ minutes.
    I apologize to the gentleman from New Jersey. We gave him 
no substance to complain about, so he had to manufacture some 
artificial complaints about process.
    First he said, wholly inaccurately, that this was scheduled 
for a travel date. When this hearing was scheduled, we did not 
know that there would be no votes last night. So, no, it was 
not scheduled that way.
    Second, I do not apologize for telling members that we have 
to have more than 2 days a week in which we can work. This 
defense of a work ethic that says, oh, we can't be expected to 
sit at a sensible important hearing because there aren't votes 
until 6:30 leaves me wholly unimpressed. If members choose not 
to--there was only recently an announcement that today would be 
a no voting day.
    So, secondly, as to arbitrary deadlines, in April of 2008, 
George Bush's Secretary of the Treasury urged us to start 
acting. Many people think we have delayed longer than we 
should. We have a lot of hearings, and I guess for some members 
it is a problem. They were elected to Congress. We have 
legislative responsibilities. But leaving their home districts 
or whatever political activity they are engaged in or specific 
activity to come to a hearing to the gentleman of New Jersey is 
an imposition on them. No, I think it is part of our 
responsibility. Yes, it will be a day of hearings. In fact, it 
will work out well, because we will not be interrupted by 
votes. We will have a full day to have these hearings. These 
are not new subjects.
    And, again, I stress that the gentleman from New Jersey 
appeared to me to be a little frustrated because he could not 
find anything to disagree with. He began by saying that this 
could be bipartisan. But that moment of bipartisanship 
apparently unsettled him to the point where he had to then 
launch into a wholly inaccurate and unjustified partisan 
attack: We are having too many hearings. We are trying in a 
financial crisis to adopt legislation too quickly. We have, as 
he said, got a bipartisan agreement here. The gentleman from 
Alabama noted that there is a great deal of bipartisan 
agreement, that this bill incorporates a number of things that 
had been presented by members on both sides. There is a 
difference over arbitration. I think we have a very good debate 
about that. We have talked about that, and we have had hearings 
about it before.
    So I want to say that the gentleman from Pennsylvania in 
particular I think does not deserve that kind of partisan 
attack. He has, as the gentleman from New Jersey knows, reached 
out to try to be cooperative. The result is a product that 
people say is bipartisan but I must say a very unfair attack on 
the procedure by which we will move it into law.
    The gentleman from California is now recognized for 1\1/2\ 
minutes.
    Mr. McCarthy of California. Thank you, Mr. Chairman.
    I look forward to the testimony of all the witnesses and 
hearing their thoughts on the issues before the committee. 
Specifically, I am interested in their views on harmonizing the 
duty of care for all financial investors and how that would 
affect the entire investment advising community and their 
customers, from individuals to sophisticated institutional 
investors.
    Additionally, I am concerned about the draft's movement to 
restrict arbitration. I look to our panelists to provide 
additional comments about how this significant change will 
affect the marketplace.
    I also have a particular interest in the SEC's structural 
issues. I see that section 304 of the Investor Protection Act 
requires the SEC to hire an outside consultant to inform the 
SEC on how to better organize itself. While this may be 
helpful, I would like to point out that I have introduced 
legislation that would solve some of the structural problems 
within the SEC without additional studies.
    The SEC Inspector General's Report regarding the Madoff 
Ponzi scheme was a colossal regulatory failure. It is perfectly 
clear to me that reform is needed now, not more studies. H.R. 
2622 would move the Office of Inspection and Examinations back 
to the original functional location within the Division of 
Investment Management and Trading and Markets. This 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 policy.
    Thank you, Mr. Chairman, and I yield back.
    The Chairman. We will begin with the testimony.
    Our first witness is Denise Voigt Crawford, who is the 
Texas Securities Commissioner; and she is here on behalf of the 
North American Securities Administrators Association.

     STATEMENT OF DENISE VOIGT CRAWFORD, TEXAS SECURITIES 
    COMMISSIONER; AND PRESIDENT, NORTH AMERICAN SECURITIES 
               ADMINISTRATORS ASSOCIATION (NASAA)

    Ms. Crawford. Good morning, Chairman Frank, Ranking Member 
Bachus, and members of the committee. I am so honored to be 
here today to discuss legislative changes that are most 
relevant to Americans who are looking to rebuild and safeguard 
their financial security.
    While the recent financial crisis was the result of many 
failures, I am very proud to say that a failure of State 
securities regulation was not one of them. Today, I will focus 
on several proposals.
    First, fiduciary duty. Financial service providers, 
generally stockbrokers and investment advisers, are regulated 
under two different statutes. The migration of stockbrokers to 
the advisory business has fueled confusion among investors. 
This is such an important issue for investors that Congress 
should explicitly direct the SEC to adopt rules no later than 1 
year from passage of the Act mandating compliance by broker-
dealers with the fiduciary duty standard established by the 
1940 Investment Advisers Act. There should be no equivocation 
in the language, And any rulemaking should be limited to simply 
effectuating this requirement.
    As you note, some industry groups have also called for the 
imposition of a fiduciary duty. However, their ``new Federal 
fiduciary standard,'' a harmonized standard, is not the 1940 
Act standard.
    Second, increased States' regulation of investment 
advisers. As evidenced by the Inspector General's report of the 
Madoff affair, the bulk of federally covered investment 
advisers are examined infrequently. When examinations are 
conducted, the SEC has demonstrated a lack of understanding as 
to the business of these registrants. An oversight gap exists.
    NASAA members, State securities regulators are fully 
prepared and equipped right now to fill this gap by accepting 
responsibility for the oversight of investment advisers up to 
$100 million in assets under management. Investors can walk 
into our offices so that proximity ensures accessibility. Plus, 
NASAA members are the only regulators that actually license the 
investment adviser representatives, the individuals who 
actually provide the investment advice.
    I would add that the lengthy experience of NASAA members in 
the application of fiduciary duty sets us apart from SROs.
    Third, securities arbitration. Today, virtually every 
broker-dealer's customer account contains a pre-dispute 
mandatory arbitration provision that forces investors to submit 
all disputes to mandatory arbitration run by FINRA. The only 
chance of recovery for most investors who fall victim to 
wrongdoing on Wall Street is through a single securities 
arbitration forum controlled by the securities industry. This 
clause in brokerage accounts is inherently unfair to investors. 
It is time to end mandatory industry-run arbitration.
    Short of an outright congressional prohibition, section 201 
of the discussion draft is a positive step. NASAA believes it 
should be amended, however, to require that the SEC prohibit 
this mandatory predispute arbitration and offer a meaningful 
choice to investors, including civil litigation. If arbitration 
really is as fair, inexpensive, and quick as its proponents 
claim, then these benefits will prompt investors to choose 
arbitration. If, on the other hand, arbitration does not offer 
these advantages, then this mode of dispute resolution should 
not be forced upon the investing public.
    Fourth, establishment of a systemic risk council. Any 
solution must provide enhanced communication among State and 
Federal regulators. A systemic risk council would establish a 
crisis management protocol with clear and regular lines of 
communication among all regulators. Generally, since State 
regulators are the first to identify risks and trends that 
contribute to systemic risk, we really do need some State 
banking insurance and securities regulators to serve on the 
systemic risk council.
    Fifth and last, aiding and abetting. One of the purposes of 
the original securities laws was to establish higher standards 
of conduct. Sections 206 and 207 of the draft further this 
purpose by explicitly providing the SEC the authority to 
prosecute secondary actors who aid and abet violations of these 
acts. However, the interests of investors would be best served 
by amending these sections to remove the language ``brought by 
the Commission.'' The current language may be misinterpreted as 
an explicit or implicit exclusion of private rights of action. 
Certainly, this is what the defendants will argue.
    Deceptive and manipulative transactions that are intended 
to defraud investors really should not be classified as 
ordinary business decisions, and secondary actors such as 
accountants and lawyers should not be allowed to skirt 
responsibility for their wrongdoing.
    In conclusion, NASAA greatly appreciates the opportunity to 
present our views today. Going forward, we are absolutely 
committed to working with you as you go forward to enhance and 
improve our regulatory framework. Thank you.
    [The prepared statement of Ms. Crawford can be found on 
page 147 of the appendix.]
    The Chairman. Thank you, Commissioner.
    Next, Mr. Richard Ketchum, who is the chairman and CEO of 
the Financial Industry Regulatory Authority.

    STATEMENT OF RICHARD G. KETCHUM, CHAIRMAN AND CEO, THE 
        FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

    Mr. Ketchum. Chairman Frank, Ranking Member Bachus, 
Chairman Kanjorski, and members of the committee, on behalf of 
FINRA, I would like to thank you for the opportunity to 
testify. I commend you, Mr. Chairman, for having today's 
hearing on the critically important topic of improving investor 
protection in our regulatory structure for financial services.
    Let me begin by saying I am deeply troubled by our system's 
failures during the past 2 years and eager to see changes that 
could improve the level of investor protection. When so many 
investors have been harmed, it is vitally important that all 
regulators take a hard look at their programs, identify 
lessons, and make changes that can better prepare them for the 
future.
    At FINRA, that process is well under way. Already this 
year, we have enhanced our examination programs, procedures, 
and training in a variety of ways intended to help us better 
detect conduct that could be indicative of fraud. We 
established an Office of the Whistleblower to handle high-risk 
tips, and last week, we announced the creation of FINRA's 
Office of Fraud Detection and Market Intelligence. This new 
office provides a heightened review of incoming allegations of 
serious frauds, a centralized point of contact, internally and 
externally, on fraud issues, and consolidates recognized 
expertise in expedited fraud detection and investigation.
    We will continue to develop plans to further strengthen our 
programs; and we also continue to believe that the broader 
financial reform that this committee is undertaking is vitally 
important, especially in terms of closing regulatory gaps that 
create exposure for investors.
    One of the most glaring examples of this type of regulatory 
gap is the disparity in oversight between broker-dealers and 
investment advisers. FINRA supports the Administration's goal 
of harmonizing the regulation of broker-dealers and investment 
advisers. We believe that, in order to accomplish that goal, 
two steps are necessary.
    The first is establishing a consistent fiduciary standard 
for investment advisers and broker-dealers providing investment 
advice. The second is harmonizing the enforcement of that 
standard and the other rules relevant to each channel to better 
ensure that participants in that industry actually comply with 
those obligations.
    The Administration has proposed that the SEC write rules 
establishing consistent fiduciary standards of care for 
investment advisers and brokers providing investment advice. 
FINRA stands in agreement with numerous interested parties that 
the standard of care in both channels should be a fiduciary 
standard for the provision of advice.
    Harmonization of the standard of care is an important first 
step. However, given the number of recently revealed frauds 
perpetrated by investment advisers bound by the fiduciary 
standard, it is clear that the existence of the fiduciary 
standard of care alone is not a guarantee against misconduct. 
Compliance with that standard must be regularly and vigorously 
examined and enforced to ensure the protection of investors.
    FINRA believes that authorizing the SEC to designate an 
independent regulatory organization to augment the agency's 
efforts in examining investment advisers would create a 
structure that would better protect investors regardless of how 
their financial profession is registered.
    To put this in real terms, there are nearly 5,000 broker-
dealer firms registered with the SEC; and between the SEC and 
FINRA, approximately 55 percent of those firms are examined on 
an annual basis. By contrast, there are 11,000 investment 
adviser firms registered with the SEC, and the agency expects 
only 9 percent to be examined in Fiscal Years 2009 and 2010. No 
one involved in regulating securities and protecting investors 
can be satisfied with a system where only 9 percent of 
regulated firms are examined each year. It is a dramatic lack 
of coverage, and must be remedied.
    Now, let me briefly turn to arbitration. We believe our 
forum provides efficient resolution of disputes in an impartial 
forum that is less costly and faster than traditional 
litigation. We focus our efforts on running a fair and 
efficient program, and we continually work to update and 
improve it.
    On the question of mandatory arbitration, I would note that 
FINRA rules do not require investors to arbitrate disputes with 
their brokerage firms, though they do require brokers to submit 
to arbitration if their investors choose. This is a matter of 
contract between firms and their customers.
    FINRA has long maintained that its determination about 
whether mandatory arbitration agreements should be allowable is 
a decision best made by Congress and the SEC. As such, we do 
not object to the proposal to authorize the SEC to restrict or 
prohibit mandatory arbitration agreements.
    Before I conclude, let me briefly touch on the issue of 
self-funding for the SEC. I believe that any mechanism that 
could provide more resources and predictability to the SEC in 
support of its critical mission should be explored. Especially 
now, I don't think we are in an either/or environment for 
enhancing oversight of security markets. We stand ready to work 
with Congress and the SEC to find solutions and fill the gaps 
in our current regulatory system and create a regulatory 
environment that works properly for all investors.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Ketchum can be found on page 
175 of the appendix.]
    The Chairman. Next, Mr. Mercer Bullard, who is founder and 
president of Fund Democracy, Incorporated.

  STATEMENT OF MERCER E. BULLARD, PRESIDENT AND FOUNDER, FUND 
                        DEMOCRACY, INC.

    Mr. Bullard. Chairman Frank, Ranking Member Bachus, and 
Chairman Kanjorski, thank you for the opportunity to appear 
before the committee today to discuss the protection of 
investors. It is an honor and a privilege to appear to discuss 
these issues before the committee today.
    I would like to comment on certain provisions of the 
October 1st draft of the Investor Protection Act of 2009.
    I strongly support the Act's position that brokers should 
be subject to a fiduciary duty with respect to retail 
personalized investment advice. Section 103 accomplishes this 
goal by requiring the SEC to adopt rules making brokers subject 
to such a duty. Personalized investment advice creates a 
situation in which it is likely that a retail client will rely 
heavily on a broker's recommendation. The authority, therefore, 
is the proper standard in that context.
    Under current law, brokers are subject to a suitability 
standard. Section 103 raises this standard. The duty requires, 
for example, that brokers disclose conflicts of interest that 
are not required to be disclosed under the suitability standard 
or other FINRA rules.
    I am concerned, however, about the mechanism that Section 
103 uses to establish a fiduciary duty for brokers. It amends 
the Exchange Act to impose the same standard of conduct for 
brokers that applies under the Advisers Act and then amends the 
Advisers Act to provide that standard shall be a fiduciary duty 
to act in the best interest of the client.
    My concern is the interplay between the amendment to the 
Advisers Act and the fiduciary duty that currently applies to 
the advisers under the Act. The amendment could be read to 
create a new and, more importantly, different fiduciary duty 
from the current Advisers Act fiduciary duty. For example, the 
imposition of a statutory fiduciary duty as to retail 
personalized investment advice raises the question of whether 
and how the existing fiduciary duty owed to nonretail clients 
survives the amendment.
    If the amendment to the Exchange Act simply provided that, 
with respect to retail investment advice, brokers were subject 
to the same fiduciary duty that applies to investment advisers 
under the Advisers Act, then no amendment to the Advisers Act 
would be necessary. Brokers and investment advisers would be 
subject to the same fiduciary duty with respect to retail 
personalized investment advice. Advisers would still be subject 
to a fiduciary duty with respect to nonretail clients as well.
    Imposing a fiduciary duty on brokers and investment 
advisers will amount to very little, however, if regulators 
lack the capacity to enforce it. The SEC has long been 
substantially underfunded, and the declining frequency of 
investor adviser inspections has been one result.
    Section 302 of the Act takes an important step toward 
addressing the problem by creating an industry financed 
mechanism for the SEC's advisory inspection program. But this 
will not be enough. States also play a critical role in the 
enforcement of investment adviser regulation. The cutoff amount 
for State regulation of investment advisers should be increased 
to return the number of advisers subject to SEC inspection to 
pre-INISMIA levels.
    Furthermore, the gap in inspections of advisers who are 
exempt from the Act should be plugged. Bernie Madoff was such 
an exempt broker for almost his entire career. The simplest 
mechanism would be to repeal the solely incidental exclusion 
for brokers. The SEC's overbroad interpretation of that 
exclusion has left brokers who provide a significant amount of 
investment advice unregulated under the Advisers Act.
    Alternatively, brokers' unregulated investment advisory 
activities should be regulated by their regulator, FINRA. FINRA 
has argued it lacks the authority to regulate the advisory 
activities of its members who are not registered investment 
advisers. I believe that FINRA clearly has this authority. But 
whether FINRA will not or cannot assume responsibility for its 
own members' unregulated advisory activities, this situation 
needs to be remedied. Brokers' new fiduciary duty with respect 
to retail personalized investment advice will mean little if 
their primary regulator isn't capable of enforcing it.
    I recommend that the committee resolve this issue by asking 
the SEC whether and to what extent FINRA lacks the authority to 
inspect its members' unregulated advisory activities. If it 
lacks such authority, then Congress or the SEC should take 
whatever steps are necessary to fix this regulatory gap. Then, 
if FINRA shows that it is capable of regulating the activities 
of brokers who are not registered investment advisers, then we 
can have the SRO discussion about whether FINRA might be 
capable of regulating the advisory activities of brokers who 
are registered investment advisers. But as long as Bernie 
Madoff continues to represent the most telling example of 
FINRA's oversight of brokers who are exempt from the Advisers 
Act, any discussion of expanding FINRA's role would be 
premature.
    Thank you for your consideration of my views; and I would, 
of course, be happy to take questions.
    [The prepared statement of Mr. Bullard can be found on page 
120 of the appendix.]
    The Chairman. Thank you.
    Next, we have Mr. John Taft from RBC Wealth Management, who 
is testifying on behalf of the Securities Industry and 
Financial Markets Association.

  STATEMENT OF JOHN TAFT, HEAD OF U.S. WEALTH MANAGEMENT, RBC 
  WEALTH MANAGEMENT, ON BEHALF OF THE SECURITIES INDUSTRY AND 
             FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Taft. Thank you, Chairman Frank, Ranking Member Bachus, 
and members of the committee. I am pleased to testify this 
morning on behalf of the Securities Industry and Financial 
Markets Association on this important subject.
    SIFMA and its members support your efforts to reform our 
financial regulatory system to provide strong and consistent 
safeguards, to protect individual investors, while preserving 
their ability to choose the widest range of products, services, 
and advice to meet their individual investment needs.
    Building upon SIFMA's testimony before this committee in 
July, we support a harmonized, uniform Federal fiduciary 
standard for broker-dealers and investment advisers when they 
are providing personalized investment advice about securities 
to individual investors. The average consumer does not know the 
difference between the 1934 Act or the 1940 Act, and they 
should not have to worry about different levels of protection 
when they are getting the same service.
    We believe that now is the time for a strong Federal 
standard that should supersede the existing set of State 
common-law-based fiduciary standards which have developed 
inconsistently among the 50 States and which therefore are 
inadequate to serve as a harmonized standard for individual 
investors. At the same time, we support the important role that 
States play in protecting the individual investors, and we 
recommend that any new legislation clearly permit the States to 
investigate or bring enforcement actions consistent with the 
Federal fiduciary standard.
    Mr. Chairman, we appreciate that the investor protection 
discussion draft embraces the term ``personalized investment 
advice'' by incorporating it into the definition of retail 
customer. We believe the term ``personalized investment 
advice'' is perfectly suited for clarifying the 
responsibilities that are the focus of this legislation.
    The term was coined in a U.S. Supreme Court case nearly 25 
years ago, where the courts sought to define the business of 
investment advisers. Since then, the term has been further 
clarified under various Federal securities regulations. Most 
recently, SEC Chairman Mary Schapiro invoked the term to define 
when a fiduciary duty should apply to both brokers and 
investment advisers. The SEC is well-positioned to ensure that 
a Federal fiduciary standard is clear, well-defined, and 
equally applied so that individual investors receive the same 
protection.
    It is important that the legislation appropriately define 
the circumstances under which a Federal fiduciary duty would 
apply and harmonize the duties under the 1934 Act with those of 
the 1940 Act. The SEC should retain sufficient flexibility to 
craft broker-dealer regulations without being constrained by 
investment adviser rules. Such flexibility would protect 
investors by appropriately respecting and preserving investor 
choice, a necessary component of putting investors first. SIFMA 
would like to continue to work with the committee to ensure 
that the language provides the necessary flexibility from a 
technical perspective.
    With respect to the provisions related to predispute 
arbitration clauses and the securities arbitration forum, we 
would urge that the language of the Investor Protection Act: 
one, be strengthened to support the fairness and efficiency of 
the current securities arbitration system; and two, include 
provisions consistent with the suggestion in the 
Administration's regulatory reform White Paper released in June 
that the SEC should study predispute arbitration clauses to 
determine whether they are beneficial to investors prior to 
making any changes to the current system.
    For nearly 4 decades, the SEC has upheld securities rules 
that require securities firms to arbitrate at the election of 
the investor. Securities firms have gained the same right in 
return by entering into predispute arbitration agreements with 
their new customers. These agreements ensure that both sides 
are treated fairly and that disputes are handled in a timely 
and cost-effective manner. In addition, previous studies have 
demonstrated that securities arbitration is faster and less 
expensive than litigation, and it particularly benefits small 
investors.
    In closing, Mr. Chairman, I would like to make the 
following point: Some have suggested that SIFMA's proposed 
fiduciary standard is somehow inferior to what has been 
described as the ``authentic fiduciary standard.'' SIFMA's 
vision of a harmonized fiduciary standard is, however, stronger 
and more pro-investor than any other alternative we have heard 
advanced. A fiduciary puts investors' interests first, acts 
with good professional judgment, avoids conflicts, if possible, 
or otherwise effectively manages those conflicts through clear 
disclosure and investor consent. These principles lie at the 
heart of what it means to be a fiduciary. This is the standard 
SIFMA endorses and that individual investors deserve.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Taft can be found on page 
227 of the appendix.]
    The Chairman. Next, Mr. David Tittsworth, who is the 
executive director of the Investment Adviser Association.

   STATEMENT OF DAVID G. TITTSWORTH, EXECUTIVE DIRECTOR AND 
 EXECUTIVE VICE PRESIDENT, INVESTMENT ADVISER ASSOCIATION (IAA)

    Mr. Tittsworth. Thank you, Mr. Chairman, Ranking Member 
Bachus, and members of the committee. On behalf of the 
Investment Adviser Association, I really appreciate this 
opportunity to be here today.
    Our organization represents SEC-registered investment 
advisers. The advisory profession serves a wide range of 
clients, including individuals, trusts, and families, as well 
as institutions such as endowments, charities, foundations, 
State and local governments, pension funds, mutual funds, and 
hedge funds. There are about 11,000 SEC-registered advisers.
    Contrary to public perception, most investment advisers are 
small businesses. About 7,500 employ 10 or fewer employees, and 
90 percent employ fewer than 50 employees.
    Our written statement addresses the Treasury Department's 
proposed Investor Protection Act and related issues. Mr. 
Kanjorski circulated a discussion draft at the end of last 
week, and we greatly appreciate his efforts to address these 
important issues as well.
    In my brief time, I would like to focus on two topics that 
would directly affect all investment advisers: fiduciary duty; 
and SEC resources.
    First, I wish to reiterate our strong support for the 
Administration's recommendation to require broker-dealers who 
provide investment advice to be subject to the same fiduciary 
standard as investment advisers. As fiduciaries, advisers must 
act in the best interests of all their clients and place their 
clients' interests before their own. The Supreme Court has 
stated that the Advisers Act reflects congressional intent to 
eliminate or at least expose conflicts of interest related to 
investment advice.
    Our organization has worked closely with the State 
securities regulators, consumer groups, and financial planning 
organizations to ensure that the Advisers Act fiduciary duty 
remains a bedrock foundation of the advisory profession. 
Unfortunately, the Investor Protection Act, as drafted, would 
not achieve this laudable result. Instead, it would open the 
door to watering down or weakening the current fiduciary 
standard by redefining fiduciary duty under the Advisers Act.
    In addition, we are concerned that the proposal could 
impose a fiduciary duty only with respect to retail clients, 
rather than to all clients. Different standards for different 
types of clients, whether individual or institutional, would 
not be in the best interest of all investors. We strongly 
believe it would be a mistake to alter or narrow the existing 
fiduciary standard under the Advisers Act. One of the greatest 
strengths of a fiduciary standard is its breadth. The standard 
has allowed the regulation of advisers to remain dynamic and 
relevant in changing business and market conditions.
    Second, I want to underscore our strong support for the 
critical missions of the SEC to protect investors, to maintain 
fair and orderly markets, and to facilitate capital formation. 
The SEC has the expertise and experience to regulate the 
diverse advisory profession, but it clearly needs adequate and 
appropriate resources to do its job. Accordingly, we believe 
the SEC should be fully funded and that Congress should examine 
alternatives to allow it to achieve long-term and more stable 
funding, including self-funding mechanisms.
    I note that Mr. Kanjorski's discussion draft includes 
provisions that would authorize the SEC to collect user fees 
from investment advisers for inspection activities. Frankly, we 
would prefer a self-funding mechanism. But user fees may be an 
appropriate option in the absence of self-funding.
    In addition, we believe the SEC or Congress should increase 
the $25 million threshold that separates SEC and State-
registered advisers.
    Finally, we oppose a self-regulatory organization for 
investment advisers. Non-governmental regulators pose serious 
investor protection questions, including inherent conflicts of 
interest, questions about transparency, accountability, and 
oversight, and added costs. A single governmental regulator for 
advisers--the SEC, operating without the confusion of 
overlapping regulation and additional regulators--is directly 
accountable to Congress and to the public. We particularly 
oppose the idea of FINRA as the SRO for investment advisers, 
given its governance structure, cost, track record, and its 
stated preference for the broker-dealer regulatory model.
    We look forward to working with you to ensure appropriate 
and effective regulation and oversight of investment advisers, 
and I would be pleased to answer any questions.
    [The prepared statement of Mr. Tittsworth can be found on 
page 241 of the appendix.]
    The Chairman. Finally, Mr. Bruce Maisel, who is the vice 
president and managing counsel, General Counsel's Office, of 
the Thrivent Financial for Lutherans, on behalf of the American 
Council of Life Insurers. And that doesn't come out of your 
time, that title.

    STATEMENT OF BRUCE W. MAISEL, VICE PRESIDENT & MANAGING 
  COUNSEL, THRIVENT FINANCIAL FOR LUTHERANS, ON BEHALF OF THE 
            AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Maisel. Thank you, Chairman Frank, Ranking Member 
Bachus, and members of the committee.
    Thrivent is a fraternal benefit society, a membership group 
for Lutherans with a mission of helping to provide financial 
security to our members and serving communities. I greatly 
appreciate the opportunity to appear here before you to discuss 
strengthening investor protections.
    Life insurance company product distribution involves 
determining customer needs and matching them with appropriate 
fixed insurance and annuity products. Similarly, many life 
insurance agents of affiliate broker-dealers provide essential 
retail investor needs analysis and the sale of variable life 
and variable annuity products.
    Consistent with this needs-based approach, many of these 
broker-dealers offer a variety of other types of securities to 
meet the retirement, college savings, and other investment 
needs of retail investors. Many of these broker-dealers are 
also registered as investment advisers and offer investment 
advisory services to those investors.
    In short, life insurers products, functions, and 
regulations fit within the scope of various initiatives that 
address broker-dealer and investment advisers standards of 
conduct.
    As I will discuss further, while we support the 
establishment of fiduciary duty for broker-dealers and 
investment advisers and harmonization of their regulation, we 
do have some strong concerns with the proposed Section 913 of 
the Investor Protection Act and the recently released 
discussion draft.
    ACLI is focused on seeking to ensure that the establishment 
of a harmonized standard of conduct will enhance retail 
investor protection while at the same time permit ACLI member 
companies to continue to meet investor needs across the broad 
economic spectrum. We are also focused upon preserving the 
variety of ways in which retail investors receive personalized 
investment advice about securities.
    Many retail investors work with broker-dealers and 
investment advisers who provide personal investment advice and 
offer only those proprietary and nonproprietary securities 
available for distribution by the particular broker-dealer or 
adviser. In other cases, broker-dealers and advisers provide 
advice about proprietary securities exclusively.
    ACLI does not seek to advance one distribution channel or 
method as opposed to another. Instead, we believe that the 
overriding goal of the establishment of a harmonized standard 
must be tailored to reflect and preserve the various 
relationships that exist between a broker-dealer or investment 
adviser and the retail investor. By doing so, investor choice 
will be preserved.
    Regulators have urged that, to be effective, the imposition 
of a fiduciary duty must recognize the particular role in which 
a financial professional is acting. We agree. For example, SEC 
Commissioner Elisse Walter has suggested that, in developing a 
uniform standard, regulators should not dwell on the label to 
be placed on the standard. She also noted that it is important 
that any standard be accompanied by business practice rules 
that provide practical guidelines regarding the standard's 
parameters and that what a particular fiduciary duty requires 
would depend on the functional role being performed by the 
financial professional. We agree with those points as well.
    As I noted, we believe certain provisions to the Investor 
Protection Act and the discussion drafts are necessary to 
achieve a clear, workable standard under which broker-dealers 
and advisers can continue to meet the ever-increasing retail 
investor needs.
    First, any harmonized standard should apply only to 
personalized investment advice, meaning advice that is based on 
the retail investor's personal financial information.
    Second, the standard should be imposed only with respect to 
dealing with retail investors.
    Third, the standard should require that broker-dealers and 
advisers that provide personalized investment advice about 
securities to retail investors act in the best interest of the 
retail investors.
    Finally, the hallmark of the standard should be defined 
that broker-dealers and advisers make full, balanced, fair, and 
timely disclosure, including of material conflicts of interest 
and related information so that retail investors can make 
informed investment decisions. Advisers have historically made 
and currently do make such disclosures. Many broker-dealers 
have voluntarily adopted similar disclosure practices.
    While we support the establishment of the best interest 
standard, we strongly oppose the tying of acting in the best 
interest with the notion of acting without regard to the 
financial or other interests of the broker or investment 
adviser providing the advice. As detailed in my written 
statement, that concept is at odds with the fiduciary duty to 
which advisers are currently subject and could have the 
unintended effect of chilling the provision of investment 
advice by brokers and investment advisers which would run 
counter to serving the investing public's needs.
    We are also concerned that the requirement, if broadly 
construed, could even require that no compensation be paid or 
steps having to be taken to ensure that absolutely no disparity 
in comparison exists between similar or even different 
financial products.
    We believe with the above-noted modifications a harmonized 
standard of conduct and related rulemaking can result in 
brokers and advisers enhancing their ability to meet the ever-
increasing retail needs across the broad spectrum of U.S. 
retail investors while providing those investors with enhanced 
protections.
    Once again, I appreciate being given the opportunity to 
appear before you today. The ACLI applauds the efforts of the 
committee, and we are committed to working toward strengthening 
investor protections.
    [The prepared statement of Mr. Maisel can be found on page 
194 of the appendix.]
    The Chairman. Thank you.
    I will begin.
    The gentleman from Pennsylvania will be presiding for most 
of the day, but he is meeting with some constituents now.
    I did want to refer again to the question of the scheduling 
of the hearing. We announced today's hearing on September 15th, 
at a time when we were expecting that there would have been 
votes last night. A week or 6 days later, on September 21st, 
the office of the leadership announced there would be no votes 
last night. So the question was, should we have cancelled the 
hearing that had previously been scheduled because there were 
no votes? Given the number of hearings that I think we are 
obligated to have and other business, we thought that would be 
a very bad idea. So, again, we scheduled this hearing at a time 
when we thought there would be votes last night, and then we 
accommodated. The fact is that they cancelled the votes.
    I would say, by the way, in terms of having hearings on 
days when there are no votes, the gentleman from Texas, Mr. 
Paul, had been trying for years to get a hearing on his bill to 
audit the Federal Reserve during the period when the 
Republicans controlled the Congress. Not only couldn't he get a 
hearing, he couldn't get the chairmanship of that subcommittee, 
despite his seniority entitling him to it.
    And so we did give a hearing for that. I thought it was 
worthwhile. And I worked with the gentleman from Texas, and by 
mutual agreement--and he thought it was a good time--we had it 
on a Friday when there were no votes. The gentleman from Texas 
thought the subject was important enough so that he and some 
other Members on both sides did show up on that date.
    Now, let me reassure Mr. Bullard and Mr. Tittsworth, I have 
a phrase that I want to put on the bill keyboard: This bill 
does not do what this bill does not do. Nothing in this bill 
revokes any existing standard. So the question of, does it 
apply to nonretail? Yes. And you reinforce the view that I 
have: redundancy is preferable to ambiguity. So while the bill 
doesn't do it, we will say that the bill doesn't do it.
    Now, there is a question that Mr. Maisel raised, and I 
talked to some people about it yesterday in my own district 
office. We want to make sure who is covered and who isn't 
covered. So I think it is not retail and nonretail but what 
kind of activities are covered, and we will make that 
distinction.
    Now, let me go to Ms. Crawford.
    Ms. Crawford, you are the Securities Commissioner for the 
State of Texas. You were appointed by the Governor?
    Ms. Crawford. No, sir, I am not.
    The Chairman. Who appoints you?
    Ms. Crawford. I am appointed by a board that is, in turn, 
appointed by the Governor. I served for over 15 years.
    The Chairman. The Governor appoints a board. How long have 
you been in that position?
    Ms. Crawford. Since 1993, under different Administrations, 
both Republican and Democrat.
    The Chairman. And the first Governor under whom you served 
was?
    Ms. Crawford. Ann Richards.
    The Chairman. And, since 1993, you were continued by every 
subsequent Governor, Governor George Bush and Governor Perry. 
So you have a kind of bipartisan representation I think that is 
very important to have, because I do think we do have some 
bipartisanship here.
    On the role of the States--not now, no one has raised it at 
this point. It did came up in some of the witness statements. 
But in previous Congresses, there were efforts to substantially 
diminish the role of State securities administrators. Mr. 
Spitzer got under some people's skin; and the securities 
administrator in the State of Massachusetts, Secretary of the 
Commonwealth, Bill Galvin, does a great job. What is your view 
on this? Do you think that the role of States as it now--as it 
exists, are you an obstacle to the harmonious enforcement of 
the national securities market?
    Ms. Crawford. With all due respect, Mr. Chairman and 
members, we are not an obstacle. In fact, we have been filling 
the gap for a number of years now. There has been less 
regulation on the Federal level for a variety of reasons. You 
may have read about the auction rate securities cases where we 
were able to free up $60 billion and other cases of national--
    The Chairman. Right. And I would say Secretary Galvin of 
Massachusetts has done that as well. I think that is very 
important.
    Now, look, we have the Federal supremacy clause. If anyone 
can show a conflict, then the Federal Government wins. But I 
agree with you that you have been collectively, as States, 
responsible for a significant improvement in the enforcement.
    But now as to arbitration, and one of the witnesses said, 
well, it is good for the small investor. Is it your experience 
that small investors are so dumb that they would refuse to deal 
voluntarily with something that would save them time and money?
    Ms. Crawford. Mr. Chairman, arbitration is a problem that 
is recognized even by the--
    The Chairman. I understand that. Our bill says it should be 
mutual. Nothing in this bill prevents the mutual agreement by 
the investor to arbitrate dispute by dispute. It does say that 
this supposed mutuality of an imposed clause in a contract, 
when you have no choice, is not really mutuality.
    But if in fact you were to have a situation where you could 
have that agreement, that you would have a choice, if in fact 
there was a form of arbitration that was better for the 
investor, do you think they would refuse voluntarily to accept 
it?
    Ms. Crawford. Of course not. I think that investors want 
choices. They don't want to be captive to an arbitration board.
    The Chairman. All right, let me take the last question. We 
are told while they have a choice, they can sign a contract 
that requires it in advance or not. If they decide they want to 
invest and they don't want arbitration, what options are open 
to them?
    Ms. Crawford. They have no options. They cannot go to 
court, even small claims court, nor can they go to an 
arbitration forum that is not industry-run. So they are 
essentially out of luck.
    The Chairman. Thank you, Commissioner.
    The gentleman from Alabama.
    Mr. Bachus. I thank the chairman.
    I want to acknowledge Joe Borg, who is the past president 
of the State Securities Commissioners. He also, like Texas, has 
done a tremendous job in Alabama on protecting consumers. I 
think there is bipartisan agreement, at least between the 
chairman and I, that State securities commissioners do a very 
good job of protecting consumers, and often when there has been 
a failure on the Federal level, there has not been at the State 
level.
    I also believe that a lot of the questions will probably be 
on what standard. Let me start with a very elementary question 
that I am struggling with, because when I read the testimony 
and people visit my office from various associations, I can't 
even get them to say which is a stronger standard, fiduciary or 
suitability.
    Just starting with you, Commissioner Crawford, tell me what 
you think the difference in the standards is?
    Ms. Crawford. Mr. Bachus, there is no question but that the 
fiduciary standard is the more stringent standard. It is simply 
a standard to put the clients' best interests first. Whereas 
suitability is a standard that focuses on whether or not the 
investment at issue is suitable for the investor.
    Mr. Bachus. All right.
    Mr. Ketchum. From our standpoint at FINRA with experience 
over the last 10 to 15 years, a standard that clearly provides 
a requirement to put the investors' best interest first is the 
right standard. There is great value for some specific 
rulemaking that provides guidance as to how you handle 
advertising, communication with customers and the rest, but 
there should be no question that the requirement should be to 
put the customer first, and we believe that a fiduciary 
standard is the right way to do that.
    Mr. Bachus. And you think the fiduciary is a higher 
standard?
    Mr. Ketchum. I believe the fiduciary is a clearer and 
higher standard. It is not enough in this environment to just 
determine a product is okay. The product needs to be in the 
best interest of the customer. That standard shouldn't make 
decisions from the standpoint of what type of business model 
should be okay. The standard should be business model neutral. 
It should encourage disclosure of conflicts. But the right 
question for anyone involved in providing advice to customers 
is, is this advice in the best interest of the customer.
    Mr. Bachus. All right.
    Mr. Bullard. I would essentially agree with Mr. Ketchum 
that the fiduciary duty for some purposes is clearly a higher 
example. An example is precisely the disclosure of conflicts of 
interest I think is of greatest interest to investor advocates. 
For example, when a broker is paid differential amounts of 
compensation for selling mutual funds, the fiduciary duty would 
require that be disclosed. The suitability standard, while it 
goes a long way towards protecting investors, would not protect 
the investor.
    Mr. Taft. No question, the fiduciary standard represents a 
raising of the bar in terms of the standard under which 
brokerage activities would be conducted, and we are proposing 
fiduciary standard with the intention of raising the bar. If I 
might elaborate on that for a minute.
    Firms like mine, most brokerage firms are duly registered 
under the 1940 Act and as broker-dealers. We operate every day 
as investment fiduciaries under the investment advisory 
fiduciary standard. But unlike the businesses of registered 
investment advisers, those activities regulated by the 1940 Act 
only constitute a small part of what we do for retail investors 
and only constitute a small part of what our clients ask us to 
do for them.
    We are not proposing to water down or narrow the fiduciary 
standard. Quite the opposite. What we are proposing to do is 
extend its reach from the small set of activities it applies 
to, investment advisory activities, to all the activities and 
services we provide to individual investors. And doing that 
will require work if we want to preserve the ability of 
customers to retain the breadth and range of services they 
receive today.
    Mr. Bachus. Thank you.
    Mr. Tittsworth. Fiduciary standard is well established 
under the Advisers Act and is a higher standard than 
suitability.
    Mr. Maisel. Fiduciary standard is a higher standard, but I 
think it brings up an issue of it becomes an argument of the 
labels. Investment advisers as fiduciaries have to make 
suitable recommendations just like registered reps, and there 
are obviously a slew of rules, including SRO rules for broker-
dealers on the suitability side. And behind the label of 
fiduciary and acting in good faith and several others, there is 
not a lot of ``there'' there. So I think starting from the best 
interest point on both sides and following would be the way to 
go.
    The Chairman. The gentleman from Kansas.
    Mr. Moore of Kansas. Thank you, Mr. Chairman.
    My first question is to my fellow Kansan, Mr. Tittsworth. I 
appreciate the point you made on page 2 of your written 
testimony that while the SEC's regulatory inspection and 
enforcement efforts should be fully funded, Congress should 
``examine alternatives to allow the agency to achieve longer 
term and more stable funding, including self-funding mechanisms 
and user fees.''
    Do you have specific suggestions on how Congress should 
guard against regulatory capture, sir?
    Mr. Tittsworth. Thank you, Congressman Moore. We do have 
several suggestions. The goal should be giving the SEC the 
resources it needs to do its job. Our first preference would be 
self-funding, which has received a fair amount of attention 
lately, tying the SEC in to a dedicated revenue stream.
    Secondly, as Commissioner Crawford and Mr. Bullard have 
indicated, we strongly believe that the $25 million line that 
was established by Congress in 1996 and that has never been 
increased should be increased. I believe Commissioner Crawford 
suggested a level of $100 million. That would shift 4,200 
advisers to State regulation from SEC regulation and basically 
put us back where we were when NSMIA was enacted in 1996.
    Finally, Congressman, Mr. Kanjorski has put a provision in 
his draft bill, section 302, on user fees for investment 
advisers. If those are properly structured and if it is clearly 
in lieu of a self-regulatory organization, we would be happy to 
work with you on that funding source as well.
    Mr. Moore of Kansas. Thank you very much.
    There seems to be a lot to learn from the Madoff scandal 
and other Ponzi schemes that have been exposed in the financial 
crisis. For example, the Inspector General for the SEC recently 
issued a sweeping report and the draft investor protection bill 
includes language authorizing an independent, comprehensive 
study of how to improve securities regulation.
    Mr. Taft, does the draft bill we are considering today 
answer all of the concerns raised by the Madoff and other 
investor fraud cases, in your opinion?
    Mr. Taft. Congressman, I would like to speak in support of 
the comments that Mr. Ketchum made earlier. The imposition of 
or creation of a fiduciary standard for brokers and investment 
advisers, a harmonized standard, is a first step towards 
preventing Madoff-like events from happening in the future. I 
think though you have to marry that first step with an 
acceptable and appropriate enforcement regime, and I think Mr. 
Ketchum spoke very articulately to that point, and that is a 
necessary second step if you want to prevent future Madoffs.
    Mr. Moore of Kansas. Mr. Tittsworth or other witnesses, do 
you have any comments in response to this question?
    Mr. Tittsworth. Well, I assume what Mr. Taft is referring 
to is the creation of an SRO or, as Mr. Ketchum, my good 
friend, has argued, extending FINRA's reach over investment 
advisers. We are strongly opposed to that suggestion, 
Congressman.
    I certainly agree that enforcement is absolutely key to any 
appropriate regulatory structure, but we believe that the SEC 
has the expertise, the experience to do the job. What it needs 
is to have appropriate resources, and in my previous response, 
I hope I gave you some of our ideas on that subject.
    Mr. Moore of Kansas. Do any other witnesses have comments?
    Mr. Ketchum. Congressman, if I could just briefly say, I do 
believe that there is a choice here between one way or another 
ensuring that there are enough boots on the ground and 
providing the SEC resources is absolutely critical if the 
determination is not to have an additional independent 
regulator with responsibility on the investment adviser side.
    I suggest moving back to the NSMIA standard that perhaps 
moves the SEC from 9 percent to 15 to 20 percent is not even 
close to enough. So there needs to either be a realistic 
expectation of a huge increase from the standpoint of SEC 
resources or considering other alternatives.
    Mr. Moore of Kansas. Ms. Crawford, do you have a comment? 
We are just about out of time.
    Ms. Crawford. With all due respect to my friend Mr. 
Ketchum, I would say that the dividing line, if you raise that 
dividing line from $25 million to $100 million, you immediately 
address the bulk of the problem, because the SEC is left with 
the giant money managers, those more complex firms that need to 
be looked at by the Federal Government with their expertise, 
while the States take on those smaller shops, and that way you 
have governmental accountability, you have local 
accountability, and it would not cost the Federal Government 
more money.
    Mr. Moore of Kansas. Thank you very much.
    The Chairman. The gentleman from California, Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    I remember talking to a British regulator and asking him, 
how do you think the SEC missed this? He said, how did you miss 
it? How did we miss some of the things we missed? He said, with 
the financial services authority, the first thing we need to do 
is fire half the lawyers and hire somebody who knows something 
rudimentary about the market in Britain.
    That brings me to the question, because as we look at the 
regulatory reform proposal issued by the Treasury Department, I 
think it is important that we fully understand the events of 
the past year, and I think one of the things that looking back 
is the most troubling is the SEC's handling of the Ponzi scheme 
of Bernie Madoff, the Ponzi scheme of all Ponzi schemes. And 
before we look at increasing the regulatory responsibilities of 
the SEC, we should make sure some of the systemic problems are 
addressed.
    That takes me to the theme of Harry Markopolos' testimony 
here that I think riveted everyone when he said that it was his 
belief that the SEC was over-lawyered. He noted, and then 
subsequently the SEC officials affirmed it, he noted there was 
a fundamental lack of understanding of the more intricate 
aspects of our financial markets within the SEC which prevented 
the SEC year after year from uncovering the Madoff incident.
    I would like each of you to comment on the idea of the SEC 
being over-lawyered and what else can the SEC do to address 
this problem, in your opinion. Maybe we can start with Mr. 
Taft.
    I do think Mr. Markopolos is on to something inasmuch as 
the British seem to feel that part of their problem was the 
same lack of understanding of how the market works by the 
people who are supposed to regulate it.
    Mr. Taft?
    Mr. Taft. Congressman, I have to say that I really have no 
informed opinion on that subject, and, more importantly, I am 
here speaking on behalf of the SIFMA, and it would be far 
beyond my ken if I spoke to that.
    Mr. Royce. Well, that is all right. We will go down the 
line and see if any of the other witnesses would like to 
comment on it.
    Ms. Crawford. Congressman, I have an opinion. I think that 
the point was very well taken. The SEC has, no question about 
it, brilliant lawyers. They are very good at writing rules, 
they are very good at interpreting statutes, they are good at 
bringing complex cases, appeals, that sort of thing.
    However, they are not what I would call nimble and scrappy. 
They don't have people on staff who really have the will to 
burrow into the facts and circumstances and analyze the 
numbers. They need more MBAs, they need more accountants.
    Mr. Royce. Well, I am told by someone who has expertise in 
this area, and Harry Markopolos would certainly be one, that it 
doesn't take that much burrowing in to find a classic Ponzi 
scheme, especially of this magnitude. The question is, did they 
have anybody?
    Well, as a matter of fact, we now know that the SEC did 
have someone who understood the market. He was in the Boston 
office. He had been a former portfolio manager and trader, and 
he was constantly trying to alert the New York office, he was 
trying to alert the home office, as to the nature of that 
particular scam, and he was constantly being ignored, because 
in that corporate culture, anybody with that background wasn't 
an attorney and wasn't to be listened to. At least that was Mr. 
Markopolos' summation of the problem.
    Ms. Crawford. There is a question of accountability. One of 
the differences between State and Federal regulation is when 
you have people literally walking in off the street, defrauded 
investors that you have to sit across the table from and talk 
with one-on-one and try to address their problem, it changes 
your sensibility, it changes your culture.
    I think oftentimes the SEC, based as it is in Washington, 
doesn't have those types of encounters on a day-to-day basis. 
If you actually looked at the lawyers there--
    Mr. Royce. Ms. Crawford, let me just stop you there. If we 
had somebody in the Boston office who understood it, why 
wouldn't you just change the equation so that you have people 
who understood the problem. Rather than arguing well, if down 
in Texas somebody walks into the office, it might be a lawyer, 
it might not, at least we would have more empathy, why not 
acknowledge, and maybe having somebody who understands the 
nature of the problem would be something of an assist here.
    I think that is the bottom line. And changing that 
corporate culture is going to be necessary, I think, in order 
to get the kind of expertise necessary the next time to spot a 
Ponzi scheme. I don't think it is empathy. I think it is a 
question of having somebody on board who understands the basic 
rudimentary nature of a Ponzi scheme.
    Ms. Crawford. Well, in addition to empathy, I absolutely 
agree with you. You need those MBAs, you need those 
accountants, you need people with solid business experience 
employed at the SEC.
    Mr. Bullard. I would say, having worked at the SEC, Ms. 
Crawford is correct. I wouldn't necessarily call it over-
lawyered, I would call it maybe under-quantified, and the staff 
needs to hire more experts in those quantitative areas, and it 
is my understanding that is Chairman Schapiro's intent.
    Mr. Ketchum. Congressman, if I could also say, having spent 
a large number of years at the SEC and then working closely 
with the SEC in time, I would just leaven that. I do believe 
that the SEC needs a broader diversity of capabilities. They do 
have a lot of MBAs, they do have a lot of accountants, they 
have a lot of people who know reverse conversions and 
conversions and understand the arbitrage. They failed in this 
particular case because of a stovepipe mentality and problem 
that needs to get fixed.
    I think that Chairman Schapiro, and I would also note 
somebody who hasn't been mentioned so far, Robert Khuzami, is 
exactly the junkyard dog with the right type of experience to 
be able to cut through that. So I think you can feel that the 
SEC has already taken significant steps to move in the right 
direction.
    Mr. Kanjorski. [presiding] The gentleman's time has 
expired.
    There is a choice now; the issue came up that I am 
particularly interested in. I was going to go to Mr. Green, but 
I am going to hold off for a second, Mr. Green, and take my 5 
minutes, if I may.
    In putting the Investors Protection Act together, we were 
particularly struck by some of the material that came out in 
the latter part of September in regard to the IG's report on 
the Madoff and Stanford frauds, and it seemed to me that any 
fair impartial reading of the IG report indicated that we were 
now dealing with a totally dysfunctional agency. We can all be 
sensitive as to whether when we use that word, folks will be 
embarrassed, but I do not use the word for the purpose of 
embarrassing either the agency or its leadership, present or 
past. The fact of the matter is it does not really matter what 
the Congress does in passing new laws and encouraging new 
regulations at the securities level if the cop is incapable or 
not inclined to carry out those new laws. And that is what we 
have, we have a blockage of implementation, and it is so very 
clear.
    So it became apparent to me that, unfortunately, we did not 
have all of the diagnosis in place to make recommendations or 
create authorities that are necessary to straighten that agency 
out, but it was with the understanding and the perception that 
we have a regulator now that is sensitive to what is necessary 
and desirous of removing a dysfunctional agency into a 
functional agency.
    That being the case, she will need assistance and help, and 
it is my intention that our subcommittee and committee give 
that assistance and help as necessary. But in order to 
adequately accomplish that, a very thorough study is necessary, 
unless we are going to go down this path of acting like blind 
men, not knowing quite what we are doing, because that is what 
we are. We are not experts in securities or securities laws or 
the experiences of the SEC, but we do have the legal authority 
and ability to give experts better tools in which to accomplish 
a functional agency, and that we intend to do.
    So we are asking basically for a total and complete study 
of not only the SEC, but its related agencies, so that we can 
get an entire picture of what the securities requirements of 
the United States are vis-a-vis 2010 and then from there do the 
necessary adjustments and implementation of new laws to equip 
them with the capacity to perform at a much higher rate.
    I have to be honest to say that I was shocked because I 
heard a little of the discussion here in response to Mr. Royce 
about the need for lawyers, junkyard lawyers, MBAs, etc. I 
don't know what we need over there, but we don't need blind men 
leading the blind.
    A very simple question in the Madoff case would have 
resolved the whole problem when they were doing some of the 
examinations that they were doing. They just asked the one 
question, where are the securities, and they totally failed to 
ask what I think is the most obvious question that should have 
been hornbook law for any lawyer or investigator or Master's of 
Business Administration. They just didn't know what to ask. 
Having not asked the proper question, they got not only 
inaccurate, but incredibly wrong answers, and they relied upon 
them and cost victims an awful lot of money, and I think 
brought somewhat of a disgrace to the agency.
    That is in the past. We cannot change that. But we sure can 
change the future. And it is the clear intent of the 
subcommittee, while I am chairing it with its jurisdiction, and 
I believe there is no question that under Mr. Frank, the full 
committee, we are going to do everything necessary to give the 
tools to the leadership of the Securities and Exchange 
Commission to accomplish our end of good administration with a 
strong cop on the beat. That is going to be done.
    Now, what I wonder about, is why we do not hear more as the 
committee and the Congress about inadequacies such as existed 
for years in the SEC? Is there something we should do? We have 
the whistleblower implementation in the Act. But how about 
internal whistleblowers? What is wrong with people working in 
government who are observing what is happening. What is wrong 
with people who are clients of the agency who see what is 
happening?
    I do not get the calls. Every now and then, if I have a 
long involved conversation with a regulated individual, after 
several drinks or some other sort of relaxation, they will 
break down and start talking the truth. But when they are in 
their formal mode, they just do not respond the same, saying 
you have a problem over there, stovepiping, we have all heard 
of those things, here is what happened to me and here is how 
bad it is. Now, I have to be honest, recently, some have come 
forth that way and it has been very, very helpful.
    The reason we selected the witnesses here today, we know 
you have the expertise, the insight and the capacity to help us 
along this mode. May I urge you to grab the telephone, even in 
these processes, even in examining this draft legislation, if 
you see some ways we can strengthen it and make it fairer. We 
are not trying to just come down with a hard club. We are 
trying to do what is rational and reasonable, but at the same 
time not to dodge the responsibility of the Congress to 
oversight these areas of the government.
    So please feel free, I see my time has expired, but please 
feel free to call us to talk to us. I know you all know our 
staff very well. Get to know them even better if you will. We 
will appreciate it.
    Thank you.
    I now recognize my friend, the gentleman from New Jersey, 
Mr. Garrett, a frequent visitor on CNBC. That just proves I was 
up at 6:30 this morning watching Mr. Garrett.
    Mr. Garrett, you are recognized for 5 minutes.
    Mr. Garrett. I thank the chairman. Just to clarify my 
opening comments, I do appreciate the work that you have done 
on all of these areas we are talking about today. I guess my 
only wish is that they do just merit a subcommittee look, in my 
opinion, and probably the chairman might concur with me on that 
approach to doing these things so we can really delve into all 
the issues we look at. I do appreciate the hearing, the work 
you have done, and the information that we are learning today. 
I thank you.
    The ranking member went through the panel before with 
regard to the issue of the difference between the two 
standards. All right, let me just throw out to the panel a 
couple of questions.
    One is, there is talk about harmonization. Would someone 
just like to answer this question? When we talk about 
harmonization, does that always mean, maybe Mr. Maisel, does 
that necessarily mandate, require, that we get exactly the same 
standards?
    Mr. Maisel. I would suggest that for the same functions, 
regardless, for example, of how the customer pays for the 
service or the choice or the way they are served, that there be 
the same regulation, whether you are under the Advisers Act or 
the broker-dealer rules, and that is not the case today.
    Mr. Garrett. But how about this? Most of the panel here is 
talking about raising the standard to a higher standard, 
fiduciary standard. Could you, I will just throw this out, to 
say allow for different standards, fiduciary standard or the 
current standard for broker-dealers, but on this side of the 
broker-dealers simply change it in a way as far as additional 
disclosure requirements and ``transparency,'' and would that 
then get to some of the points that some of the other members 
on the panel addressed as far as what me as the personal client 
would be able to look at and say, well, now I know what I am 
dealing with here, but because the broker-dealers' 
responsibilities are slightly different, they are selling some 
of their products, they are getting commissions, and that sort 
of thing, could that address the problem?
    I will start there.
    Mr. Taft. Congressman, if your question is would there be 
other ways to raise the bar with respect to the products and 
services we provide to retail investors, other ways than 
harmonizing the fiduciary standard, the answer is yes, you 
could do that differently.
    Mr. Garrett. But still with a good result?
    Mr. Taft. Well, it depends what you do, but you could 
certainly engineer a good outcome.
    The other thing you can do, and it was picked up actually 
in Mr. Maisel's comments, is that, and I think this is the 
intention of a harmonized fiduciary standard, is have the same 
umbrella standard applying to all activities, but then tailor 
the duties and responsibilities when it comes to fulfilling 
that standard in a way that matches with the specific service 
being provided, okay?
    So, for example, you have heard unsolicited orders to sell 
or buy stocks should not be necessarily subject to the same 
requirements as the continuous discretionary management of a 
portfolio.
    Mr. Garrett. Mr. Maisel?
    Mr. Maisel. I would say that I agree with Mr. Taft. I think 
there are several ways to get there. At the end of the day, the 
basic consumer protections should be in place for similar 
services and functions that are provided, and the same 
obligations of the firm should be in place as well.
    Mr. Tittsworth. Mr. Garrett, I would just reiterate a 
couple of points. Number one, I totally agree, similar 
functions, activities, should be regulated the same way. I 
think everybody would agree that is fundamental fairness.
    I think the Administration's proposal to say brokers who 
are providing investment advice should have the same fiduciary 
standard under the Advisers Act as investment advisers, that 
makes sense. If they are doing what investment advisers are 
doing, let's treat them the same way.
    But I would also agree with Mr. Taft, not all broker-dealer 
activities are giving advice, and we are not suggesting that 
the fiduciary standard should apply to execution of securities 
transactions, underwriting or other important activities that 
broker-dealers are engaged in.
    Mr. Garrett. My time is going by quickly.
    Mr. Tittsworth, Mr. Royce was raising the issue as far as 
the problems and the chairman is also raising the problems that 
we have had at the SEC in the past. I know FINRA was out there. 
They would say, hey, we can handle this all. Some would argue 
on the other side of that the SEC hasn't done such a great job 
in what they have done and as far as the personnel necessary.
    How do we actually get that done with an entity that so 
many people have pointed to the legitimate mistakes in the past 
to handle that huge broad authority if you have them sweep in 
all of this larger number?
    Mr. Tittsworth. I guess I may not be able to give you all 
the answers you want, but I would suggest that the SEC missions 
are absolutely right. So whether you put them with the SEC or 
establish some new regulator or whatever, I think you must 
have: that protection of investors; maintaining fair and 
orderly markets; and facilitating capital formation. Those are 
the right missions. And I think it is partly a question of 
giving it the resources to do its job as fully as it can.
    Ms. Crawford. I would respectfully disagree. Resources are 
always important. You have to have them. But more important 
than that, you have to have a will to regulate.
    Just as the gentleman previously indicated, you can make 
all the rules and laws in the world, but if you don't have 
people who are willing to enforce them, then you have a problem 
that you haven't solved. And what we have seen at the SEC for 
the past few years is a lack of will to regulate. There are 
some things that can be done about that, but the SEC won't like 
it.
    Mr. Garrett. Thank you.
    Mr. Kanjorski. The gentlelady from California is recognized 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I am interested in the testimony that was filed with us 
from Ms. Crawford.
    Ms. Crawford, your testimony mentioned aiding and abetting 
liability. When the Stoneridge case was before the Supreme 
Court in 2007, Chairman Frank and Chairman Dodd filed amicus 
briefs supporting the plaintiff's position that third parties 
could be held liable for their participation in fraudulent 
financial disclosures to the SEC. The Supreme Court ruled 
adversely to the shareholders, removing any private right of 
action against so-called secondary actors.
    As you mentioned, the proposal before us clarifies aiding 
and abetting liability for the SEC, but does not create any 
private right of action for investors. Can you provide us with 
some additional information about secondary actors? You 
mentioned they are lawyers and accountants. How large a role do 
they play in corporate fraud when such fraud occurs? Why is it 
important that we allow investors to have private right of 
action? And what was the Stoneridge case's impact on investors? 
How much money or wealth is lost each year, now that investors 
are prevented from filing their own lawsuits against secondary 
actors?
    Ms. Crawford. You have asked a number of questions and I 
will take them in order.
    The first one is the role that accountants and others, 
lawyers, play in connection with the entire process. Their role 
is unbelievably large and unbelievably important. The 
transparency that is required to make our markets operate 
effectively really boils down to two things: transparency and 
the verbiage that is in the disclosure documents; as well as 
transparency and the numbers that are put before the investors. 
Accountants and lawyers are critical to that process.
    So to the extent there is wrongdoing on the part of an 
accountant or a lawyer who is engaged in that process, it is 
very unfortunate that they are not held liable for that 
wrongdoing.
    Why do we need aiding and abetting liability and why isn't 
it enough just to give this to the SEC? Because the SEC can't 
bring all of these cases. The SEC can't be everywhere at once.
    You in this room today are demanding a lot of the 
Securities and Exchange Commission, as you should. But the 
Securities and Exchange Commission cannot be the private lawyer 
for every defrauded investor in the United States. The only way 
that an investor can effectively enforce his or her claims 
against a secondary actor would be remove that language in the 
draft so that it is not restricted just to the SEC's 
enforcement.
    With regard to the decision in the Stoneridge case, we too 
at NASAA filed a brief and we were very dismayed at the outcome 
of the case, at the opinion of the Supreme Court, and it is 
extremely difficult to put a dollar figure on the amount that 
investors might have been able to recover had the case been 
decided differently. But I can tell you that it was a lot. We 
can try to provide numbers for you as best we can.
    Ms. Waters. Would it be safe to suggest that when many of 
these fraudulent schemes are being enacted, that it would be 
almost impossible to do them without some of the supporting 
actors such as lawyers and accountants? How do you present 
something? How do you record something? How do you report 
something? How do you document it? And those people have to 
know what is going on. Is that what you are suggesting?
    Ms. Crawford. Absolutely. It is impossible to conceive of 
CEOs and upper level management actually sitting down and 
putting these disclosure documents together. They of necessity 
must rely upon their accountants and lawyers to do that for 
them. Of course, they need to oversee the process, but the 
nitty-gritty details are left to the professionals. Those 
professionals need to be held accountable for any wrongdoing 
that they engage in.
    Ms. Waters. So you consider a private right of action 
extremely important?
    Ms. Crawford. Yes, ma'am.
    Ms. Waters. Thank you very much. I yield back.
    Mr. Kanjorski. The gentleman from California, Mr. McCarthy.
    Mr. McCarthy of California. Thank you, Mr. Chairman.
    In listening to the chairman's comments and also the 
questioning from Mr. Royce and Mr. Garrett, I would like to 
follow up a little on the SEC.
    I know in this bill it provides more money, but also just 
provides another study, and I am a little concerned by that. I 
am one who believes that structure dictates behavior. Mr. 
Ketchum, in part of the questioning you brought up stovepiping, 
the idea that you have people who set policy in one place and 
those inspectors in a whole other place.
    I guess my question, and I would like to start with Mr. 
Ketchum and go down the line, is does this really get the job 
done in the SEC? But specifically, what are some fundamental 
changes without waiting for a study that we can change to 
change the structure to actually perform better?
    Mr. Ketchum?
    Mr. Ketchum. Well, it is a great question, Congressman. I 
think points have been made with respect to diversity and skill 
sets. I think the point that you emphasized in your opening 
statement with respect to the bill, I wouldn't be pretentious 
enough to say I know exactly how to design the SEC. But I do 
know that the present environment in which the examination 
function doesn't have a direct accountability and in which the 
level of communication between that function and the two policy 
divisions from the standpoint of Trading and Markets and 
Investment Management is not good and should change.
    There should be greater accountability between the three 
divisions. Perhaps there should be a single person with 
responsibility for all three. But, one way or another, there 
needs to be the assurance that there is effective communication 
between the persons interacting with those industry sectors on 
a daily basis and the exam program.
    Mr. McCarthy of California. Should we wait until the study 
is done to make that move, or do you see any negative? I know I 
have H.R. 2622 that takes the office of inspection and 
examination and moves it back to the original function, 
location and division of investment management, trading and 
markets.
    Should we wait to have a study done, or could we not make 
that move now? Don't you think it would be more important to 
have that done?
    Mr. Ketchum. Well, Congressman, I have a great deal of 
faith in Chairman Schapiro. I think, as mentioned by Chairman 
Kanjorski before, she brings a very different focus and 
commitment to the SEC. I think she is looking very closely at 
organization now. I think you should definitely demand that 
there should be a conversation between Chairman Schapiro and 
this committee and subcommittee.
    I believe that a study may be useful, but I would give 
Chairman Schapiro a chance to work through, make her personnel 
decisions and make her organization decisions, and evaluate it 
after that has occurred.
    Mr. McCarthy of California. I would like to go down the 
row, if there are any ideas specifically as to what the SEC can 
do for a structural change, be it small or not, to make sure 
that we make a fundamental change there, not a study.
    Ms. Crawford. Congressman, I would just mention that one of 
the overarching problems at the Commission is regulatory 
capture. There is so much interplay with the top people on Wall 
Street, and many, many of the employees of the SEC go there to 
get the necessary experience to then get jobs on Wall Street. 
And I think that it has a chilling effect sometimes at the 
agency in terms of the staff's willingness to vigorously pursue 
wrongdoers.
    To the extent that you could address that, perhaps by 
limiting--or saying that an attorney who works for the SEC 
cannot go to work for a Wall Street firm for 1 year after 
departing the agency, or something like that, so that you don't 
have so much of a revolving door, that might go a long way 
toward addressing this regulatory capture problem.
    Mr. McCarthy of California. Thank you. Mr. Bullard?
    Mr. Bullard. I would reinforce Mr. Ketchum's point about 
leaving it to Chairman Schapiro. Just to give you an example of 
why, having lived under the problems of OC being separate from 
the Division of Asset Management, where I was, if you move that 
function into investment management, which is responsible for 
regulating investment advisers, and you also move the broker 
function to the Trading and Markets Division, you have 
separated what are functionally similar, as Mr. Taft pointed 
out, because many of those people are dual registrants.
    I think that there has to be a two-step process, and that 
is a major reorganization that is reflecting the actual 
functional and regulatory lines that the law draws, and those 
are generally kinds of retail sales issues. And I can tell you 
in investment management, the hardest thing to get done was 
something that we had to get sign-off on trading markets. Of 
course, it was always trading markets' fault. They might see 
the issue differently.
    The other recommendation I would make is that not only 
structure, but also money drives behavior, and I was greatly 
disappointed to see that the increased compensation being paid 
to SEC staff as of a few years ago went to salaries rather than 
bonuses. If you really want to change the behavior of the 
staff, then provide for an enforced mechanism of rewarding 
quality, rather than simply giving automatic salaries and 
increases to staff who may not be as productive as others.
    Mr. McCarthy of California. Mr. Taft?
    Mr. Taft. I have no comment, Congressman.
    Mr. Tittsworth. Congressman, I agree with my good friends 
Mr. Ketchum and Mr. Bullard. I would leave it to Chairman 
Schapiro. I think in her testimony before this committee on 
July 14th, she bullet-pointed seven or eight different things 
that she is doing that could enhance the SEC's ability to 
prevent future Madoffs from occurring.
    Mr. Maisel. The only comment I would have is I believe the 
harmonization work that has been discussed earlier could 
certainly contribute to moving away from a false demarcation 
about one activity versus another and I think would be a factor 
in some of these improvements.
    Mr. McCarthy of California. Thank you, Mr. Chairman. I 
yield back.
    Mr. Kanjorski. Thank you, Mr. McCarthy.
    We will now hear from the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I thank the 
witnesses for appearing. I especially would like to thank Ms. 
Crawford, a fellow Texan. Thank you for being here today. I am 
honored to know you have been appointed and reappointed as many 
times as you have.
    Ms. Crawford, I think that you are eminently correct. I 
really do believe that it is willpower that we are talking 
about. Mr. Ketchum, you spoke of a junkyard dog, a highly 
technical term. I understand it. But the unfortunate 
circumstance is that we have a lot of front yard dogs. When you 
have a front yard dog, you need a junkyard dog. Then you would 
need a system. You need something that is going to cause a 
front yard dog to behave like a junkyard dog.
    There is no question that the empirical evidence was before 
the SEC. Mr. Markopolos provided not only the evidence, he also 
provided the questions. He provided everything that a 
whistleblower could have provided. And the unfortunate 
circumstance is there was no one there who actually picked up 
on it and moved with it.
    I think, Ms. Crawford, what you said about allowing the 
private right of action to exist would have made a difference 
if Mr. Markopolos had the right to sue. If he could have sued, 
I think we would not have had the same ending that we are 
currently confronted with.
    Ms. Crawford, would you give me a brief response with 
reference to the right to sue as it would have related to Mr. 
Markopolos?
    Ms. Crawford. Well, it would have been extremely fraught 
with difficulty, and your assessment is correct. At the end of 
the day, he would not have been able to maintain a lawsuit.
    What we are talking about right now is the aiding and 
abetting of these frauds by others who were involved, these 
secondary actors. And what we believe would be very helpful 
would be to not just limit these types of actions to the SEC, 
but to allow private individuals to bring these suits.
    Mr. Green. Give me an example of a private individual. 
Would Mr. Markopolos have been a private individual?
    Ms. Crawford. He may well have been.
    Mr. Green. If he had the right to sue, what impact would 
that have had?
    Ms. Crawford. Well, it would have had a major impact, for a 
number of reasons. For one thing, it would have been a very 
public action that would have put pressure on the regulators to 
perhaps take another different look at the activities of Bernie 
Madoff, and of course if he recovered, we would not have had as 
many wasting of assets, although there would have been huge 
losses, no question about that.
    Mr. Green. Now, if we couple that with a stronger, more 
expanded whistleblower requirement, how would you see the 
whistleblower, expanding the power of someone who is within who 
is blowing the whistle, who is giving us intelligence, how 
would that be much more effective, if you could have your way 
with this?
    Ms. Crawford. Well, the problem isn't that people weren't 
coming to the Securities and Exchange Commission. They receive 
I think about 750,000 complaints a year. The problem is that 
they were ignoring them or at least not making good 
determinations with regard to those complaints that really 
needed to be followed up on.
    So, the whistleblower provisions are very good and helpful, 
but the problem is not with people who are reticent to 
complain. The problem is more that they are not getting the 
response of the agency presently.
    Now, I will say with regard to this question of the ability 
to file lawsuits, it is my understanding that while this has 
not yet been introduced in the House, there is a Senate 
provision, Senate 1551, called the Liability for Aiding and 
Abetting Act, that was recently introduced. State securities 
regulators support that Act, and it has many of the types of 
things you are concerned about, Congressman Green. So I would 
commend it for your consideration.
    Mr. Green. I thank you. I thank Chairwoman Waters for 
broaching the issue initially, because there is no question in 
my mind that the lack of willpower, coupled with the fact that 
there really weren't any penalties for failure to act, it is 
not that persons were necessarily engaged in aiding and 
abetting as much as it was that there was no penalty for those 
who decided that well, this really can't be the case. Assuming 
they were acting with the best of intentions, there were just 
no penalties. So if we don't have penalties, we obviously have 
to have some way to force the agency to look into these issues.
    Thank you, Mr. Chairman. I know that my time is up. I yield 
back.
    Mr. Kanjorski. Thank you.
    We will now hear from the gentlelady from Illinois, Mrs. 
Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman. I will move down 
here.
    Mr. Maisel, are there any outstanding issues, and we have 
had this discussion, in the latest draft bill that would place 
consumers in a worse position or might cause them more harm 
than they have today?
    Mr. Maisel. Yes. I believe in particular the language about 
without regard, acting in the best interests, we support on 
both investment adviser and broker-dealers. But tying it to 
without regard to the interest of the firm or the 
representative, is contrary to the Advisers Act, and I think 
one of the things that does work very well on the Advisers Act 
side and I think would be replicated somewhat as a result of 
this harmonization would be full and timely disclosure of 
information, including potential conflicts of interest, 
material conflicts of interest.
    So I think that I worry about the potential and we worry 
about a chilling. People would be afraid to provide investment 
advice if the point was so rigid or could be construed so 
rigidly that no other regard could be taken into account the 
other than the customers. There are always going to be 
different factors, and I think the key is to get information in 
the place of consumers at the right time so they can make 
informed investment decisions.
    Again, that would fall in the long-standing Adviser Act 
process, which I think is a very good and full disclosure 
regime.
    Mrs. Biggert. Thank you. We have been talking about the 
willpower and everything. Nobody has really mentioned the 
technology, and I think we had a hearing in the Oversight 
Subcommittee to talk about technology. I also serve on the 
Science Committee, and we now have the fastest computers in the 
world, and it just seems like maybe more investigations could 
have been done in a more timely fashion, instead of the 9 
percent a year or whatever it is. Is that a factor that should 
be addressed?
    Mr. Ketchum?
    Mr. Ketchum. Congresswoman, I think you make a great point. 
I know Chairman Schapiro has spoken quite strongly about the 
need to upgrade technology at the SEC. It is a focus at FINRA. 
We need to be in an environment where we effectively can manage 
the records of a broker-dealer and do as much preparation as 
possible away from site, and also ensure that all regulators 
are effectively communicating together.
    I know this is a point that Ms. Crawford is concerned with 
as well. We can't have situations where complaints are coming 
in to one of us and the rest of us are not aware of it. We 
can't have situations where we are identifying problems with 
respect to a particular firm and others are not aware of it. We 
need to find ways to ensure our technology systems share better 
and our technology systems are better able to mine information 
with respect to the industry.
    So I think your point is a great one.
    Mrs. Biggert. I have heard about the big stacks of paper 
that are around everywhere. We try in our office to be a 
paperless office, but it is not possible. As you see on all 
these desks, all the paper.
    But the other thing is the need to have technology that 
talks to each other. That seems to be the hardest thing to deal 
with.
    Mr. Ketchum. I think it is a great point. It is really 
critical for us to be able to talk and effectively work through 
information that exists from a record standpoint from the 
brokers and investment advisers, and similarly to be able to 
have technology that is more transparent between regulators. 
Your point is really well taken.
    Mrs. Biggert. Is there any concern then with the 
transparency, that there might be people who would get into any 
proprietary information?
    Mr. Ketchum. You always have to be concerned from an 
information security standpoint. This should be sharing of 
information between regulators who both have responsibility to 
protect that information from a confidential standpoint, if it 
is public customer information, and have the responsibility to 
protect all information with respect to investigations of other 
regulators. Absolutely.
    Mrs. Biggert. Thank you. Just one other question. Is there 
a need for the industry and the SEC to really increase 
financial literacy and education to consumers, and do you have 
a quick way to do that? I know we have worked on it here. But 
it still seems like there is such a need.
    Ms. Crawford. Congresswoman, we work on that all the time. 
In fact I am very pleased to say, and I say this every time I 
have the opportunity, financial literacy and investor education 
programs begin with State securities regulators. Now it has 
been embraced by everyone from the President of the United 
States out, and that is a very good thing.
    The question for us today is to make sure that what we are 
doing is working, and we would love to talk with you about that 
going forward.
    Mrs. Biggert. Thank you very much. I yield back.
    Mr. Kanjorski. Thank you very much.
    Now, we will hear from Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman, and thank you for 
your work on this legislation.
    Ms. Crawford, thank you for being here. I want to chat with 
you just for a minute about State regulations.
    What size or the amount of assets under management by an 
investment adviser is currently under the responsibility of the 
State securities regulator?
    Ms. Crawford. Right now, it is $25 million assets under 
management or less. And what we are proposing to do, 
Congressman, and we hope that you will give this serious 
consideration, is raising that to $100 million. We have the 
infrastructure in place, we have the experience, and we are 
certainly willing to take that on.
    Mr. Cleaver. I am very much interested in that. In fact, I 
am going to chat with the chairman and the sponsor of the 
legislation, about perhaps some kind of an amendment. But I 
want to make sure that $100 million is in harmony with the 
inflationary rise over the time that was set and today. Was 
that a figure that you just came up with, or was it based on 
inflation?
    Ms. Crawford. Actually, Congressman, it wasn't so much 
based upon inflation as it was counting up the number of firms 
that fell within that group, the size of that universe. What we 
are seeking to achieve is to leave the SEC to address the big, 
big money managers, the big investment advisers, while we will 
take the bulk of the smaller ones. I know it is hard to 
believe, it is hard for me to believe sometimes, but $100 
million assets under management is actually pretty small.
    Mr. Cleaver. Yes, very small. I agree with you, and thank 
you.
    Mr. Tittsworth, to hang out a shingle that one is a 
financial planner requires what?
    Mr. Tittsworth. Nothing, as far as I know.
    Mr. Cleaver. Yes. Therein, said Shakespeare, lies the rub. 
David Letterman could just say I am a planner and go out and 
get clients and handle their money, and nothing is required.
    Mr. Tittsworth. There are no Federal competency standards 
for investment advisers, if that is what you are getting at.
    Mr. Cleaver. That is what I am getting at.
    Mr. Tittsworth. I would point out that certainly with the 
vast majority of people, you still have the question of who is 
going to give their money to David Letterman or to me if I hang 
out my shingle, and the vast majority of people that I know in 
our industry, in our profession, are highly educated. There are 
a number of designations, including chartered financial 
analysts.
    Mr. Cleaver. I understand that. But you would agree, and I 
want Ms. Crawford to respond to this, you would agree that 
there are some bad people in the world?
    Mr. Tittsworth. Yes, sir, I would agree with that.
    Mr. Cleaver. All right. So you are talking about the people 
who, like you, are trying to function inside some kind of moral 
code or ethical code, but you will also agree with me that 
there are people who with great intentionality would go out and 
do just the opposite in order to make money?
    Mr. Tittsworth. I agree with you, Congressman. And not to 
change the subject necessarily, but I would point out that 
Bernard Madoff certainly had a Series 7 stockbroker license; he 
had taken an examination. So that in and of itself does not 
necessarily prevent the wrongdoers from doing what they want to 
do.
    Mr. Cleaver. Yes, I know. I agree. Except that when we know 
that nothing is required to be a financial planner--there is a 
guy in Kansas City, Missouri, the district that I represent, 
and I couldn't believe it. I am driving by a little strip 
shopping mall and I see his sign out doing financial planning, 
real estate development. He doesn't even have his GED, but he 
probably has a bachelor's in ``crooktivity'' or something. But 
this guy is cleaning up, and it just troubles me.
    Ms. Crawford? I am not even sure he is being prosecuted. He 
is out of business now because so many people reported him when 
the real estate market crashed.
    Ms. Crawford. I just want to clarify that the term 
``financial planner'' doesn't really mean anything, just as you 
indicated, but if that person is giving investment advice and 
is receiving compensation for doing so, that person does have 
to be registered. A few years ago, the State securities 
regulators came up with an entry level competency exam for 
those folks. So if they are investment advisers, they fall 
within the regulatory regime.
    But you are so correct, Congressman. If they are just out 
there calling themselves a financial planner, sometimes it is 
difficult to get to them, depending on precisely what it is 
they are doing.
    Mr. Cleaver. Thank you. Mr. Maisel?
    Mr. Maisel. My comments don't relate to the bad actors, but 
I also do want to say that I also raise the point that if 
financial planning somehow is separated, financial planning is 
one of various investment advisory services today, and I think 
it could be counterproductive to the harmonization discussion 
if somehow financial planning or financial planning client gets 
some kind of uber protections.
    Again, I think it goes back to the point it shouldn't 
matter regardless of the type of broker-dealer service or 
investment advisory service, hopefully will be there a 
harmonized standard with the best interests and the rules of 
the road that we talked about, but not separating out one part 
of the industry.
    Mr. Cleaver. Yes. Thank you, Mr. Chairman.
    Mr. Kanjorski. Thank you. The gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thank you, Mr. Chairman.
    I guess I just have more general questions. Mr. McCarthy 
from California has some general changes to the structure 
within the SEC that he thinks will assist in enforcement and 
review and things like that. And I think that is great. I think 
it also starts at the top. If you have an Administration that 
says let the market take care of it, and buyer beware and the 
regulatory agencies don't really have a rule, they just get in 
the way, well, then you have, in my opinion, a lot of the fraud 
that was committed over the last 8 years by Stanford and by 
Madoff.
    Soon we have people who really do believe that regulation 
boosts certainty and trust in the marketplace, which I think we 
have with President Obama. My question to you is this, all the 
people who lost a bunch of money, either to Madoff or to 
Stanford or to some other of the Ponzi schemes, what recourse 
do they have now, or is there any?
    So I know SIPC is part of the conversation here. And I am 
not looking for an education on this, but are we making it any 
better for the people that we are investing in the feeder funds 
to have some protection here?
    I will start with you, ma'am. Does this bill help those 
folks in any way?
    Ms. Crawford. I am not familiar with any provisions in the 
bill that would address your question, Congressman. However, I 
will point out that in some jurisdictions, States are looking 
at the feeder funds, trying to determine whether or not they 
contributed to this problem and recoveries may be possible 
there.
    But I wouldn't want to mislead you into assuming that there 
is a magic bullet to the problem of the defrauded investors, 
because I personally think that there is not going to be a lot 
of money there and wouldn't want to lead you to think 
otherwise.
    Mr. Perlmutter. Mr. Ketchum?
    Mr. Ketchum. I would agree with Ms. Crawford. To your 
specific question, no. I don't believe there is anything in 
this bill that looks backward and addresses that issue. I would 
say that the SIPC provisions that are built in here are 
important steps to ensure the flexibility of how SIPC covers 
and its ability to cover investors going forward and it is a 
good thing.
    Mr. Perlmutter. Do you think we should have something in 
this bill that protects secondary and tertiary investors, if I 
invest in this guy over here in Boulder, Colorado, who then 
invests in something here that then invests in Madoff, should 
they have any protection or how are they protected? Those are 
the guys who are getting clobbered in this thing.
    I appreciate, we have to have better up-front watchdog kind 
of enforcement. But how do I, how do I help those guys at the 
back end of this thing? They are the little guys who were just 
wiped out?
    Mr. Ketchum. Well, I think where you can, as Ms. Crawford 
indicated, where you find complicity and serious failures by 
entities like feeder funds, they should be held accountable and 
they should be held actable monetarily. The key thing for all 
of us is to find these things more quickly before customers are 
exposed as they were in those tragic instances.
    Mr. Perlmutter. Thank you. Mr. Bullard, do you have any 
thoughts?
    Mr. Bullard. There are clearly a wide range of private 
claims that can be brought against Madoff, both Madoff feeder 
funds. And I think, to a large extent, they are fairly 
adequate. The concern I have had with CPIC, is that I think 
they are taking a position on what constitutes a loss, which is 
both unreasonable and not consistent with fundamental financial 
theory. But that doesn't seem to raise anyone's eye, and it is 
clearly addressed by the bill.
    I would say, though, that as far as this bill goes, Mr. 
Taft has suggested that it preempt State causes of action. That 
would significantly reduce the ability of investors to bring 
claims against investment advisors. I don't know whether he 
sees that as an implied preemption in the bill, in which case 
the committee certainly should make it clear in the legislative 
history that it does not preempt State law or if it is wishful 
thinking. But that would give a substantial hit to State 
claims.
    Mr. Perlmutter. Okay. Let me ask Mr. Taft, what do you 
think?
    Mr. Taft. Well, as I said in my testimony, we believe there 
is tremendous merit to having a harmonized Federal fiduciary 
standard that applies to everyone providing investment, 
personalized investment advice to individuals, so that no 
matter which door an individual investor walks into, they can 
be assured that they are going to receive the same protections 
they would receive if they walked in a different door.
    As to a Federal standard, the consistency, the clarity that 
it brings, we are not suggesting that exist to the detriment of 
the ability of State regulators to enforce that law. So I want 
to make it clear that we think State regulators play an 
important role, and they would have the ability to pursue 
wrongdoers who violate fiduciary standard.
    Mr. Perlmutter. Thank you. Thank you, Mr. Chairman.
    Mr. Bullard. To clarify, my point was about private claims, 
not State regulators claims. I didn't hear a response to that, 
but that is what I was getting at.
    Mr. Kanjorski. Thank you, Mr. Perlmutter. Now we will hear 
from the gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. I have been going in and out and I am sorry I 
have missed most of the testimony. I had an opportunity to read 
it.
    I have some people in northern Illinois who got caught up 
in some of these Ponzi scams, and we are always interested in 
knowing what, if anything, can be done to protect sophisticated 
investors from getting caught in something like that, and what, 
if anything, the Investor Protection Act of 2009 could do to 
help people who are sophisticated investors. Does anybody want 
to take a stab at that one?
    Ms. Crawford. Well, I will say this, and the statement has 
been made by Chairman Frank that the accredited investor 
standard is not working or, I am paraphrasing, but he said 
words to that effect.
    And when you look at the universe of people who were where 
defrauded by Bernie Madoff as well as Robert Stanford, they 
were so-called accredited investors, which means that they have 
a very large net worth and/or a very large income and are 
presumed to be, because of that, sophisticated.
    At some point, it may make good sense for the United States 
Congress to look at that concept. Should someone be presumed to 
be sophisticated simply by virtue of his or her wealth or 
income? That standard did not service very well recently, and 
there really is no reason to think that it will service very 
well going forward.
    Mr. Manzullo. Does anybody else want to take a stab at 
that? I know it is a little bit off the context, but it really 
is tied into it.
    Mr. Bullard. I will do it. I think there may be reluctance, 
to be really frank, about the question of sophisticated 
investors investing with someone like Madoff. But in my 
position, I can perhaps afford to be more frank.
    And my view is that in light of the Madoff scandal, a truly 
sophisticated investor would not have invested with Madoff. 
There were fundamental steps that any truly sophisticated 
investor should have made that would have led them not invest 
at least a substantial amount of their assets with Madoff. I 
think Madoff is ultimately a question of how we regulate those 
who don't take the steps, to some extent, to protect 
themselves. Exactly the same thing could be said of Stanford 
with respect to CDs being issued from a very small island in 
the middle of the Atlantic.
    So I think that is really the answer, and as my testimony 
suggests, I think the focus should be on retail investors, 
personalized advice and there has to be a point at which you 
draw the line and sophisticated investors would have to rely on 
the private claims that they have.
    Mr. Manzullo. The reason that I asked--
    Mr. Ketchum. I am sorry, I just agree with Professor 
Bullard. Two things to note. First, fraud standards remain the 
same no matter what the sophistication of the investor. 
Secondly, you are absolutely right. I think it deserves a 
careful analysis from a suitability standpoint at a minimum and 
perhaps from a fiduciary standpoint, with respect to what 
obligations are with regard to a range of institutional 
investors that don't have the level of sophistication that many 
other institutional investors do.
    And time and time again, there are instances in which those 
persons who are categorized by standards that have been built 
for other reasons by the SEC are brought into schemes where 
they suffer serious harm. So I think your point is correct. I 
think it deserves some careful look and study and perhaps a 
valuable part of the study that is a part of this bill.
    Mr. Manzullo. The fact that the SEC had actually looked at 
Mr. Madoff, given him a clean bill of health on a couple of 
occasions, wouldn't that lend credence to a sophisticated 
investor that the Madoff investment was solid?
    Mr. Bullard. It might. I would say it should not, given 
that would be nearly a floor. But just to give you a concrete 
example of steps that any sophisticated investor should take, 
one of the rules that I suggest for any investor is never send 
the check to the person who is making the decision about the 
check, and what that means is you always have to make sure that 
there is a separate third party who has custody, who is a 
different person from the one who is making decisions about the 
account.
    Mr. Manzullo. But there were people who had contacted 
independent brokers, and investment advisers, who said the best 
place to invest your money is with Mr. Madoff.
    And so I guess at what point, does the government get 
involved, when even the people who are supposed to be really 
sophisticated also may have relied upon some very poor 
information and gotten stung? Maybe I should just leave that as 
a rhetorical question and let it go at that and thank you.
    Ms. Crawford. Congressman, you might want to direct that 
question to the SEC.
    Mr. Manzullo. Well, they didn't even know about it. Their 
own internal investigation showed that when the whistleblower 
had contacted the lower echelon at the SEC, that it never made 
it all the way to the top. I guess my thought is, why didn't 
that man who testified here contact a Member of Congress or 
somebody in the Banking Committee, because we could have kicked 
it upstairs right away and worked on it. Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Manzullo. Now we 
are faced with a problem. The problem is we could continue with 
this panel or take a break for lunch and come back and catch 
panel 2 and panel 3, and I see all the disappointed faces of 
this panel to get excused now and I would not want to 
disappoint them. But since we are down to three members here, 
four members, it probably is a good chance to take a break. So 
what I want to do is express the thanks of the committee and 
the subcommittee for this panel's participation. We appreciate 
it. I was particularly interested with the flow of some of the 
testimony and the comments. We will not refer to the gentlelady 
from Texas at all, so we cause her no embarrassment.
    But all of you really were rather forthcoming, gave some 
very good insight in assisting us and coming up with 
conclusions, and, of course, you were willing to give critiques 
and criticism to the existing legislation, which you are always 
welcome to do.
    Again, you are not discharged from your responsibilities to 
communicate some of your hesitations with the legislation or 
how we can improve it, but we do want to give you our 
tremendous thanks for having participated.
    And at this point, we will discharge the panel. Thank you.
    We are going to recess the hearing until 1:00, when we will 
take panel number 2 and then shortly thereafter, panel number 
3. So no one try and escape from the committee room. Thank you, 
they are discharged. The committee stands in recess.
    [recess]
    Mr. Kanjorski. The full committee will reconvene, and I 
will introduce our second panel, which will discuss enhancing 
oversight of private pools of capital. Thank you for appearing 
before the committee today and without objection, your written 
statements will be made a part of the record. You will each be 
recognized for a 5-minute summary of your testimony.
    First, we have Mr. Stuart Kaswell, general counsel of the 
Managed Funds Association.
    Mr. Kaswell.

   STATEMENT OF STUART KASWELL, EXECUTIVE VICE PRESIDENT AND 
        GENERAL COUNSEL, MANAGED FUNDS ASSOCIATION (MFA)

    Mr. Kaswell. Thank you, Chairman Kanjorski, Ranking Member 
Bachus, and members of the committee.
    I am Stuart Kaswell, executive vice president and general 
counsel of the Managed Funds Association. As you know, 
Congressman Richard Baker was invited to testify on behalf of 
MFA today, but weather-related delays in Baton Rouge kept him 
grounded. He sends his deep apologies for not being able to 
appear and sends his thanks to the committee for its 
invitation.
    MFA is the voice of the global alternative investment 
industry and is the primary advocate for sound business 
practices and industry growth for professionals in hedge funds, 
funds of funds and managed futures funds, as well as industry 
service providers. Hedge funds provide liquidity and price 
discovery to markets, capital to allow companies to grow or to 
improve their businesses and sophisticated risk management to 
investors, such as pensions, to allow those pensions to meet 
their obligations to their beneficiaries. MFA appreciates the 
opportunity to provide its views on the registration and 
investor protection legislative proposals from this committee 
and the Obama Administration.
    MFA is committed to playing a constructive role as the 
regulatory reform discussion continues. As investors, hedge 
funds have a shared interest with other market participants and 
policymakers in seeking to restore investor confidence in a 
stable and transparent financial system. These important 
objectives can, in part, be accomplished through a thoughtful 
approach towards the goal of establishing a smarter financial 
regulatory system, a system that enhances investor protection 
and market efficiencies through strong but fair oversight, 
regulation and enforcement, and the promotion of industry best 
practices like MFA's sound practices.
    With regard to the registration issue, MFA and its members 
support the general approach of requiring investment advisers, 
including those to all private pools of capital, to register 
under the Investment Advisers Act, which provides a 
comprehensive regulatory framework for investment advisers.
    In considering the appropriate regulatory framework, we 
believe it is important to establish a narrowly tailored 
exemption from registration for the smallest investment 
advisers that have a de minimis amount of assets under 
management and coordinate with, and not duplicate, State 
regulation of investment advisers.
    MFA believes that the approach taken in the draft 
proposals, notably requiring registration under the Advisers 
Act, is consistent with an intelligent approach to a complex 
issue. We also welcome the fact that the committee and 
Administration drafts both seek to preserve a de minimis 
exemption from Federal registration for advisers to all but the 
smallest of funds and would provide for confidentiality with 
regard to reporting systematically relevant information about a 
firm to the appropriate regulator.
    While MFA supports the general thrust of the draft 
proposals, I would like to spend a few minutes discussing some 
areas of concern where we believe the draft proposals can be 
improved.
    We believe that the proposed bills by imposing unnecessary 
overlapping regulatory requirements for commodity trading 
advisors, who are already registered with, and well regulated 
by, the Commodity Futures Trading Commission, is inconsistent 
with the goal of improving the current system of regulation.
    As I noted, while we appreciate that the proposals provide 
for the confidential treatment of certain reports, we would 
encourage Congress to consider the Federal Reserve's model of 
protecting bank information.
    We recognize and strongly support the fiduciary obligations 
that investment advisers owe their clients. We further 
recognize the SEC's challenges following the Goldstein decision 
and the need for additional legislation to clarify the SEC's 
authority.
    We believe there are different ways to address those 
concerns without expanding the definition of client so broadly 
that advisers would become subject to the irresolvable 
conflicts that would result if an adviser were required to 
manage a pooled investment in the interest of each individual 
investor.
    We support strong disclosure between counterparties, but we 
believe that there should be limitations on the information 
that an adviser is required to disclose to other market 
participants. For example, we believe that an investment 
adviser should not be required to reveal its proprietary 
trading strategies or other trade secrets.
    We believe that Congress should provide an appropriate 
transition period to implement the registration requirement.
    MFA also supports efforts to enhance investor protection 
and strengthen the authority of the SEC to enforce the Federal 
securities laws. I have a few suggestions. I will try to cover 
them quickly. We support giving the SEC authority to prohibit 
individuals who engage in improper conduct while associated 
with a broker-dealer or investment adviser, from being 
associated with any other securities industry participant.
    Investment advisers are subject to an existing, robust 
fiduciary standard with respect to their clients. We support 
extending that standard to broker-dealers and believe it is 
unnecessary for Congress to establish a new standard.
    I see I am just about out of time. We have a few additional 
points that are included in our written statement. Thank you, 
Mr. Chairman.
    [The prepared statement of the Honorable Richard Baker, 
president, Managed Funds Association, can be found on page 104 
of the appendix. ]
    Mr. Kanjorski. Thank you, Mr. Kaswell.
    Next, we have Mr. Douglas Lowenstein, president of the 
Private Equity Council. Mr. Lowenstein?

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

    Mr. Lowenstein. Thank you, Mr. Chairman, and members of the 
committee. I appreciate being back here to testify and discuss 
the Private Equity Council's views on the proposed Private Fund 
Investment Advisers Registration Act of 2009. As I had 
previously testified before this committee, when applying the 
Obama Administration's systemic risk factors to private equity, 
it is hard to see how any particular PE fund could be 
considered to present a systemic risk.
    Indeed, in testimony last week before this very committee, 
Federal Reserve Board Chairman Ben Bernanke said he would not 
think that any hedge fund or private equity fund would become a 
systemically critical firm individually. Though he did add that 
it remains important for the systemic risk regulator to monitor 
the industry as a whole, and we agree. Precisely for that 
reason, and notwithstanding the lack of a nexus between private 
equity and systemic risk, we are genuinely supportive of 
requiring registration of advisors to private pools of capital.
    With respect to the specifics of the draft bill circulated 
last week, I have a few comments that I want to share with you 
and we covered in some detail in our written testimony. Section 
204(b)(7) of the draft would add to the Investment Advisers Act 
the requirement that registrants provide reports, records, and 
other documents to investors, prospective investors, 
counterparties, and creditors if the SEC determines such 
disclosure is necessary.
    We take no issue with requiring PE fund managers to 
disclose any and all information to the SEC regarding systemic 
risk, but this section's added authorization for the SEC to 
require registrants to make broad disclosures to third parties 
is unnecessary, problematic and will do little to advance the 
underlying objectives of the regulatory system. It is 
unnecessary because the Securities Acts of 1933 and 1934 
already impose a series of requirements obligating PE funds to 
make extensive disclosures to their investors.
    Additionally, the contracts that PE funds negotiate with 
their investors typically require the funds to provide even 
more information than is required by the 1933 and 1934 Acts.
    In short, given the highly sophisticated nature of our 
investors and our dependence on them for funding our 
investments, they have both the knowledge and the leverage to 
obtain the information they need to ensure they are fully 
protected. While the proposed law protects information provided 
to the SEC from disclosure under the Freedom of Information 
Act, the section has the perverse effect of neutering these 
critical confidentiality provisions by allowing the agency to 
compel disclosures to counterparties, creditors, and others.
    These disclosures could result in exposure of proprietary 
information and trade secrets to those with whom we compete. 
For example, this provision could easily result in the 
disclosure of highly sensitive material, nonpublic information 
about our valuation of a current or prospective investment, 
information that creates the potential for the counterparty to 
trade on that information or pass it along to another client. 
There is no public or systemic risk interest served, as far as 
we can tell, by this additional disclosure section, and we hope 
that you will consider removing it from the draft.
    We are also concerned about section 204(b)(3) of the draft 
which creates what we believe is a rather sweeping optional 
information-gathering authority for the SEC above and beyond 
the already extensive disclosures that are required by the 
Investment Advisors Act itself.
    Given the fact that the prior section of the draft already 
authorizes the SEC in consultation with the Fed to collect such 
information as it deems necessary or appropriate in the public 
interests for the protection of investors or for the assessment 
of systemic risk, it would seem that should be sufficient to 
carry out the goals of the statute.
    Finally, section 6 creates a venture capital exemption. I 
sympathize with the intent to offer relief to certain funds 
that may not have the resources or the infrastructure to absorb 
the administrative costs of a company registration, and which 
are also too small to create systemic risk individually or 
collectively. However, I think it will prove very difficult to 
define a venture capital firm and to distinguish these from 
most other investment firms. So I would suggest a simpler and 
perhaps even fairer approach would be to raise the threshold 
above which registration is required from $30 million to a 
level that Congress believes is appropriate.
    This would ensure the registration requirement captures the 
larger firms more likely to pose the systemic risk, regardless 
of whether they are classified as a venture capital fund or 
private equity fund or some other investment advisor. And it 
has the virtue of treating all small advisers in the same way.
    And, most importantly, it will help ensure the SEC can 
focus its scarce resources on overseeing those very firms, 
including those who are members of the Private Equity Council, 
that are most relevant to the public policy objectives that 
bring us here today.
    Thank you for inviting me. I look forward to answering any 
questions you may have.
    [The prepared statement of Mr. Lowenstein can be found on 
page 188 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Lowenstein.
    Next, we have Mr. James S. Chanos, chairman of the 
Coalition of Private Investment Companies. Mr. Chanos?

   STATEMENT OF JAMES S. CHANOS, CHAIRMAN, THE COALITION OF 
              PRIVATE INVESTMENT COMPANIES (CPIC)

    Mr. Chanos. Thank you, Congressman Kanjorski, Congressman 
Bachus, and members of the committee.
    My name is Jim Chanos, and I am testifying today as 
chairman of the Coalition of Private Investment Companies. I 
also run a $6 billion hedge fund. Thank you for the opportunity 
to testify.
    As I testified before at your Capital Markets Subcommittee 
earlier this year, CPIC supports legislation to provide 
increased Federal regulation of private investment funds. We 
support the draft legislation before the committee today with 
some additional enhancements that I will outline briefly.
    As this committee is aware, hedge funds and private pools 
of capital were not the source of the recent near meltdown in 
our financial system. The greatest threats to the world economy 
came from large, highly regulated, diversified investment and 
commercial banks, insurance companies, and the GSEs. 
Nonetheless, we recognize that you are working to expand and 
improve Federal oversight over the financial markets in which 
private funds play an important role. All significant market 
participants should participate in a regulatory framework that 
promotes transparency and accountability.
    The benefits and risk mitigating features of private funds 
for investors in our economy are well-known at this point. 
There, of course, are risks associated with private funds. 
These risks center on relationships among fund managers, 
investors and individual counterparties. In rare cases, like 
Long-Term Capital Management in 1998, a fund may grow to a 
size, amount of leverage, and interconnectiveness that presents 
systemic risks.
    CPIC has advocated that Congress develop a special stand-
alone private investment company act tailored to the unique 
characteristics and risks of private funds. In our view, 
statutes like the Investment Company Act and the Investment 
Advisers Act were designed to protect retail investors and are 
not the right fit for private funds.
    That said, the Administration's proposal and this 
committee's draft have chosen to develop private fund 
regulation oversight through amendments to the Adviser's Act. 
These proposals offer a way forward but only if they are 
sufficiently strengthened and tailored to private funds. To 
begin, both proposals require that private fund advisers 
register with the SEC under the Advisers Act and subject both 
the fund manager and the fund to SEC examination.
    The committee's draft, however, exempts advisers to venture 
capital funds from registration. We question whether a category 
of private funds should be relieved of SEC registration, 
recordkeeping and inspection, solely by virtue of its self-
proclaimed investment strategy. Indeed, Ponzi schemes and 
frauds can be run with any asset class, and the lines between 
different categories of private funds have tended to blur over 
time.
    Leaving the operations of some funds outside the regulatory 
purview based upon a stated investment strategy is an 
invitation for the growth of bubbles and frauds. The draft 
proposals grant broad general authority of the SEC to write 
rules in several areas, including disclosure to investors, 
counterparties, and creditors.
    We recommend providing more specificity such as requiring 
disclosures for a fund's valuation methodologies, the type of 
assets it holds, the existence of side arrangements and trade 
allocation policies. We also believe that Congress could help 
combat fraud and theft by statutorily requiring managers to 
keep all client assets with qualified custodians and requiring 
audits by public accounting firms overseen by the PCAOB.
    We commend the decision to explicitly direct the SEC to 
write rules relating to assessments of systemic risk. We 
support these provisions and also believe that any broader 
systemic risk regulation the committee develops should include 
private funds, depending upon their size, level of leverage, 
and interconnectedness.
    With respect to systemic risk oversight, private funds 
should not be subject to the same type of regulation as is 
necessary for a Bank of America, Citigroup or Goldman Sachs. 
But what is fundamentally important is that systemic risk 
entity has the overarching authority to obtain information from 
any market participant when necessary and without the predicate 
of an enforcement action.
    We would also urge the committee to consider whether it 
wants this new systemic risk regulator to apply the same 
disclosure contemplated in the Private Investment Act to the 
proprietary trading functions of all regulated financial 
institutions.
    Proprietary trading resembles many of the same features as 
hedge funds using high levels of risk and leverage. The metrics 
used to assess risk stemming from private fund activity can 
also be used to better understand the risks being taken by 
significant taxpayer-backed financial institutions.
    All of these provisions will benefit investors and private 
funds by enhancing regulators' ability to combat abuses while 
reducing systemic risk. CPIC is committed to working with you 
to build a better regulatory framework that will best serve all 
investors' interests.
    Thank you very much for this opportunity.
    [The prepared statement of Mr. Chanos can be found on page 
126 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Chanos.
    Next, we have Mr. Terry McGuire, co-founder and general 
partner of Polaris Venture Partners, and chairman of the 
National Venture Capital Association.

  STATEMENT OF TERRY McGUIRE, CO-FOUNDER AND GENERAL PARTNER, 
   POLARIS VENTURE PARTNERS; AND CHAIRMAN, NATIONAL VENTURE 
                      CAPITAL ASSOCIATION

    Mr. McGuire. Chairman Kanjorski, Ranking Member Bachus and 
members of the committee. On behalf of the venture capital 
industry, I would like to thank you for the opportunity to be 
part of this important process. We understand the need to 
address the causes of the recent financial crisis, as well as 
eliminate regulatory gaps, so that our country is never 
surprised by massive financial failures again.
    Last week, the Capital Markets Subcommittee, chaired by 
you, Chairman Kanjorski, released a discussion draft focusing 
on risk related to private pools. We would like to express our 
sincere appreciation for the work of the subcommittee under 
your leadership and the leadership of Chairman Frank in 
drafting legislation that recognizes that venture capital firms 
do not pose systemic risks.
    We also appreciate your understanding that registering 
under the Advisers Act would place an undue burden on our 
industry. The legislative draft recognizes the important 
difference between entrepreneurial risks, which we take all the 
time, and financial systemic risks, which we do not.
    Our investment model is simple. We invest in startup 
companies run by entrepreneurs using capital from ourselves and 
our investors. We invest cash to purchase equity and hold that 
equity, working side-by-side with the management for 5 to 10 
years until the company is sold, goes public or fails. In the 
latter case, there is no multiplier impact of these losses.
    While we lose our capital, there are no derivative 
transactions or leverage that would lead to a ripple effect. 
The elements identified by the Treasury Department as 
contributing to systemic risks are not part of the venture 
capital model.
    We do not actively trade in the public markets. Our funds 
are not directly available to retail investors. While some of 
our investors are pension funds, under many State laws they are 
limited to the amount of money they can invest in venture 
capital. The number is often less than 5 percent in investable 
assets.
    We do not use long-term leverage or rely on short-term 
funding. We do not create third party or counterparty risks. 
Lastly, the venture capital industry is small, just a fraction 
of other pool investment funds. But, for more than 50 years, 
our collective wins have far outpaced our losses.
    Tremendous economic value has been created. Venture-backed 
companies say it counts for 12.1 million jobs and approximately 
21 percent of the U.S. GDP. Entire industries, including 
biotechnology, semiconductors, and now clean tech have been 
built upon venture capital. By exempting venture capital funds 
from registering under the Advisors Act, this committee has 
eliminated a significant burden on our industry.
    As you may know, the average venture capital firm employs 
less than 10 professionals, and the administrative staff is 
often a fraction of that. Registration could easily cost our 
firms hundreds of millions of dollars, which should be directed 
to growing new companies, rather than unnecessary compliance.
    Finally, venture capital registration would not provide the 
government with meaningful insight into systemic risks and 
would divert government resources. With that said, we do 
recognize the ongoing need for ongoing transparency.
    Today, venture capital firms provide information to the SEC 
that is publicly available when we seek to raise a new fund. 
This filing process, which involves the completing of a form 
which is known as form D, could easily be enhanced to include 
information that would provide greater comfort regarding 
systemic risks. An enhanced form D, let's call it form D-2, for 
venture firms could answer questions annually on the use of 
leverage, trading positions and counterparty obligations, 
allowing regulators to continue to exempt firms that pose no 
systemic risks.
    The D-2 solution could be a viable option because it does 
not require a lengthy regulatory process to test the definition 
of venture capital. It would cause firms to annually confirm 
that they are safe from systemic risks by responding to 
questions that reveal the nature of their investing activity. 
This would enable the SEC to quickly identify firms that do not 
meet the standard.
    This process would also accomplish the Administration's 
goals of providing transparency and eliminating regulatory 
gaps. It would do so without unnecessarily burdening the 
venture industry or the SEC. We look forward to discussing 
these recommendations further.
    We applaud the committee's intent to protect 
entrepreneurship and innovation. We stand ready to work with 
you to gain transparency as you require, without hurting our 
industry and the startup companies we support.
    I thank you for your consideration today, and I am happy to 
answer any questions.
    [The prepared statement of Mr. McGuire can be found on page 
211 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. McGuire.
    And thank you all, gentlemen, for your testimony. Notice I 
said ``gentlemen.'' There should be some young ladies sitting 
at that table too, so one of these days, we have to think about 
equality here.
    No, all things being said, I take it for granted that 
nobody really has concluded that the bill as presented is too 
harsh for acceptance, but you would like to sit in a role of 
being an assistant and helping us to protect even a finer bill; 
is that correct?
    Mr. Kaswell. That is correct. We applaud your efforts. We 
think there are opportunities for further enhancement, but we 
agree with the general thrust, that is right.
    Mr. Kanjorski. That is very good. The Congress doesn't hear 
that very often, so I thank you on behalf of the entire 
Congress.
    I have been trying to propel an idea to the industry that 
is we regulate or sit in judgment of and create regulatory 
implementation for, and that is that too often we miss the 
advice of the experts and do not recognize very clearly that we 
all, Members of Congress and members of this committee, are 
generalists.
    If I can extend to you--we all actually have telephones. If 
you call the gentleman from Alabama, he will get on that line 
and talk to you. Then he, in turn, will relate to us some of 
the objections you may have stated or, actually, make your 
argument a little more understandable.
    Mr. Bachus. Or not.
    Mr. Kanjorski. Or not. No, I have known Mr. Bachus for a 
long time, and he is going to be a very major player in trying 
to put this together. What this is, is an open invitation to 
you and your colleagues and your association members, etc., to 
please participate.
    If we have done something that can be improved and 
corrected upon, do not hesitate to do that. That is what we are 
here for. We are not here to play ``gotcha.'' We are not here 
to cost you a lot of money. Mr. McGuire, you mentioned it 
costing hundreds of millions of dollars to comply. That is the 
last thing we want to do.
    We do really want you to take those hundreds of millions of 
dollars out there and invest in companies, those that are north 
of Philadelphia by 100 miles and east of Pittsburgh by 200 
miles. If you get my measure, you can tell exactly where I am 
looking at that investment to occur.
    We spent actually a lot of time trying to put this together 
so we could accomplish something. I take for granted that we 
have been partially at least successful. We want to work as 
this process goes forward, and we think it can go forward in a 
relatively reasonable period of time to get this done.
    So without taking my full time, I am going to recognize the 
ranking member from Alabama to give his comments.
    Mr. Bachus. I thank the chairman.
    Venture capital, hedge funds, private equity, all of those, 
I guess, private pools of capital or whatever you call them, I 
think have served the country well, and they have been a 
valuable cog in our economy, and it is an economy that is 3 
times larger than the next biggest economy, which is the 
Japanese economy.
    I think it was this diversity and different approaches to 
adding wealth creating jobs is a strength of the American 
economy. And we don't, in America, take the one-size-fits-all.
    And as the chairman said, as we move forward on protecting 
investors, we do want your advice and input, because we don't 
want to put some restriction on what you do that is unnecessary 
and also limits your ability to aid the economy.
    Our economy--I go to high school students and I ask them 
what the largest economy in the world is. Most of them today 
say China. Yet our economy is bigger than the Japanese, the 
German, the British, the French, the Chinese, and the Japanese 
economy put together.
    We got there through choice and innovation and different 
approaches, and letting the market come up with, really, 
solutions. And our capitalistic market, it turned into a bad 
word, that and profits today, but I think they have generated 
tremendous wealth for the American people. Despite what we 
witnessed last year, I think we got ahead of ourselves on some 
of them.
    The securitization, the different derivatives, all those 
things were actually, I think, good products that were just 
abused. But there is nothing fundamentally unsound or 
fundamentally wrong with the product itself, but you can abuse 
anything.
    So I am just going to--I guess I will ask this, is 
registration with the SEC properly done, would that be a 
problem with any of the industry or you?
    Mr. McGuire. If I could make a comment, the truth of the 
matter is that the venture capital industry has been around for 
50 years. We certainly submit SEC forms, form D, as I 
mentioned. We are prepared to do additional disclosure.
    I do think, though, that the burden of the Advisers Act 
would be substantial and would be difficult for some of our 
members. Some of our members are very small places in districts 
such as yours. As I mentioned, the average has nine 
professionals. There are some, though, with two and three 
professionals.
    By the way, they are doing incredibly important work in 
companies that are coming from technologies generated from your 
local universities. And I think having an additional burden, 
the SEC burden, would not be helpful. In fact, over 50 years we 
have proven that, in fact, we are good citizens.
    Our model is pretty simple. It is old-fashioned. We invest 
in companies. We expect to have our equity in those companies 
for up to a decade, and we work hand-in-hand with those 
companies. So I think we have proven to be good citizens. We 
have proven that our model works. As you point out, it has made 
an enormous contribution to the competitive positioning of the 
United States.
    So I think it would be unfortunate if there was undue 
regulation. I don't think it would provide any particular 
insight into systemic risks. Things haven't changed in our 
business.
    It is true that technology is unrelenting, and it is always 
changing. But the way we practice venture investing has really 
been tried and true for over 50 years. We would hate to lose 
some of these venture capital investors because of these undue 
burdens.
    Mr. Bachus. I think you make a good argument. I think the 
burden ought to be on us to prove that there is a reason for--
even registration.
    Mr. Lowenstein?
    Mr. Lowenstein. Yes, I think that for anybody, even the 
largest private equity fund, to suggest that registration isn't 
in some ways burdensome is not reasonable. It clearly is 
burdensome. That is distinguished--in fact, for even the 
largest funds, that might requiring hiring 7 to 10 compliance 
people at a cost of several million dollars. But that is a 
reasonable cost to impose on the members we represent in the 
private equity world.
    I do think it is important and appropriate though to, as 
you go further down into the smaller firms--and there are about 
2,000 private equity firms, and most of us all know the big 
names in private equity--but there are small private equity 
firms all around this country. And imposing, in the same way 
that the VC funds have, would be a burden, I think would apply 
to virtually any small fund regardless of what it does. And 
that is why we suggest in our testimony, the touchstone for 
whether registration is there, isn't what you say you are, it 
is a--an assessment of your size and what you do and whether 
you create systemic risk.
    That is a reasonable standard. That is what this statute is 
all about. And so tying the registration to a reasonable 
targeting of registrants who actually are relevant to the 
underlying policy goals, I think, makes no sense. Just in the 
final point, as we say in our testimony, the characteristics of 
PE and the reality of what's happened would suggest that 
private equity wasn't relevant at all to the crisis.
    I could make a case that we shouldn't have to register. I 
think it is entirely reasonable to require us to register and 
then to calibrate that registration so that it is most tied to 
what we do and what is necessary for the SEC to carry out its 
oversight responsibilities.
    Mr. Bachus. And I don't think venture capital, in any way, 
contributed to the events of last year, did it?
    Mr. Chanos. If I could take a stab also, I would just point 
out as a practitioner, as someone who runs a fund day-to-day, 
much of what we are talking about here in the form of so-called 
burdensome compliance issues to register, if you are accepting 
pension fund money in large pools of capital, which almost all 
the reasonably large members of our different groups do, you 
are already doing most of that which is necessary for 
compliance under registration.
    So it would not be necessarily additive to what you should 
already be doing in your internal workings of your fund if you 
take pension fund money, ERISA money. That is something that is 
often lost in these discussions.
    Number two, we can talk about various different types of 
self-described funds and whether or not they were the source of 
systemic risk. And the hedge fund industry, I think was a model 
of actually warning people about systemic risk back in 2006 and 
2007.
    But we also understand that markets look forward. And who 
is to say which group of funds is not going to be issued 
prospectively as opposed to retrospectively. And I know that we 
can all hold ourselves out to be paragons, I think, in the 
investing world--but for the purpose of the public good, I 
think that our group, CPIC, says don't make many exemptions. 
Make it comprehensive, set minimum standards for capital or 
risk standards as Mr. Lowenstein said. But when a lot of people 
opt-out through self-description, you also open up the door to 
the less than 1 percent of the actors out there that may take 
advantage of that.
    Mr. Bachus. Mr. McGuire?
    Mr. McGuire. Yes. Let me comment on that. Let me be very 
specific. In my opening statement, I made the comment that 
there are essential criteria which have been defined by 
Treasury which define what are systemic risks. They include the 
use of leverage, they including public trading positions, they 
include counterparty transactions.
    Our model doesn't use any of those. Therefore, I am making 
an argument which is that any models that don't use those 
criteria which have been defined by Treasury are adequate for 
exception. Now I am not here to tell you which of these other 
organizations should be regulated. They, earlier on, said that 
they are happy to register. That is fine.
    We have never taken a position that registration works for 
our industry because, in fact, as defined by these risks, none 
of these apply to us. So why should we now start registering 
just because the others are registering?
    Mr. Kaswell. We also feel that there should not be 
regulatory gaps, that registration should apply to advisers to 
all private pools of capital with the exemption for only the de 
minimis based on the size of assets under management, not the 
nature of the operation.
    We are afraid it will create regulatory gaps, which we know 
has been one of the touchstones of the Administration's 
concerns here, and also we are concerned about the 
opportunities for regulatory arbitrage.
    One of the things we are worried about in the bill, and I 
mentioned this in my statement, is that it creates the 
possibility of overlapping regulation, if you are principally 
engaged on the future side and registered with the CFTC, the 
bill would take away an exemption that exempts you from the 
Advisers Act. We think that just creates duplication and is not 
warranted. Thank you.
    Mr. Bachus. Thank you.
    Mr. Kanjorski. The gentleman's time has expired. We will 
now hear from the gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman, thank you, Mr. 
Chanos. Thank you for being here. Thank you all for being here.
    In your testimony on pages 11 and 12, you say, ``In my 
view, one of the most important recommendations of the report, 
of the asset manager's committee, is that managers should 
disclose more details going beyond the Generally Accepted 
Accounting Principles regarding how their funds derive income 
and losses from financial accounting standards.''
    Now I agree with the need to disclose more details, but can 
you be a little more specific on the change, what kind of 
change will take place with the overall risk to the financial 
system?
    Mr. Chanos. I helped write that section for the President's 
Working Group and the manager's report, so I am familiar with 
it.
    What we suggested, and what my organization, CPIC, is 
embracing, is a level of disclosure beyond what we have right 
now under GAAP for the so-called level 1, level 2 and level 3 
assets. And these are the various classifications of financial 
assets under the accounting standards. Very briefly, level 1 
are things that have a very liquid national market, 100 shares 
of IBM, for example.
    Level 2 assets are those assets which are priced off 
something else, which uses the term observable inputs. So, 
typically, a bond that might trade at a spread to Treasuries 
would be, in some historical pattern, would be a level 2 asset.
    Level 3 assets are those which are the oxymoronic phrase 
unobservable inputs, and those are really subject mostly to 
management judgment and best guesses, quite frankly.
    And what we advocated--and I think is good policy for every 
financial institution, not just hedge funds, by the way, would 
be not only a disclosure of the various levels of assets at a 
point of time on the balance sheet, but also how much of your 
profits and losses, both realized and unrealized, in your 
financial statements, have come from the three classifications. 
That goes well beyond the current accounting standards, but 
that would have helped us in 2006 and 2007 in seeing just how 
much of the profitability of various different actors on the 
stage were dependent on hard-to-value assets or assets in which 
management had large discretion over the valuation.
    So, the President's Working Group committee, the managers, 
really, we did argue over that, exactly the point you 
highlighted. But we felt it was in the best interests of not 
only the hedge fund industry but the markets as a whole and 
regulation to shine more light in this area.
    I really applauded the President's Working Group committee 
to take that step and go beyond what we are doing now.
    Mr. Cleaver. I do as well. I am requesting a subjective 
response, probably, but whenever we begin to discuss in this 
committee requiring more detail, we run into very, very rigid 
resistance.
    You can predict it, it is coming, and it is going to, if we 
are told, if we do, that the Statue of Liberty will fall and 
the Washington Nationals would win the series, or all kinds of 
just unbelievable things will happen. Give me a response to 
what we have heard in here over and over again.
    Mr. Chanos. Well, I think that I would make the distinction 
between giving the information that your investors need to make 
good decisions about, for example, my fund, and that the 
industry feels that we could go a little bit further to telling 
our investors where we are making our money, how we are making 
our money, and also to tell regulators and enforcement 
individuals what they need to do to do their market policing 
and their market regulation.
    We do draw the line in telling the broad public, because 
you then do cross over into the proprietary trading 
information. And if I have to disclose my whole portfolio to 
the public every 90 days, I really don't have a business 
because, that is what I charge people for.
    But to regulators, to enforcement, and to our own 
investors, who have put their money in the fund, we think we 
should be as broad as possible and as detailed as possible. And 
I think that is just sound business and sound regulation. It 
doesn't necessarily compromise my ability or our members 
ability or members of these organizations' ability to make 
money as long as they know they have some safeguards over that 
information, that it stays in the proper regulatory framework.
    Mr. Cleaver. I agree. I think that is what the American 
public wants too. Mr. Kaswell?
    Mr. Kaswell. Yes, I just wanted to note that these 
principles are--as part of the President's Working Group 
recommendations--reflected in the MFA sound practices that we 
recommend as something for our members to consider. So I think 
we are not necessarily saying it should be a regulatory 
requirement--I am not sure we are going that far--but as far as 
what we think are sound practices for the hedge fund industry, 
we are very much on board.
    Mr. Cleaver. But you are not saying that they should be 
included in any regulatory form?
    Mr. Kaswell. Right, not at this stage. But we are saying 
this is something our firm should seriously consider doing, and 
we have it as an industry sound practice that we commend to our 
members.
    Mr. Cleaver. Thank you. My time has about run out.
    Mr. Kanjorski. Thank you very much, Mr. Cleaver.
    Now, the gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. I thank you, Mr. Chairman, and I thank the 
panel.
    Well, Mr. McGuire, you convinced me, although I was easy to 
be convinced, public coming in on this, as to why, as you 
described it, you would not be what this type of legislation is 
adept at trying to get at, which is systemically risk the 
institutions and, of course, you said a 50-year track record 
that we have before us.
    But I think those points that you make also seem to apply 
to your colleagues on your right, to an extent, well, going to 
the issue of--the one seminal issue which I always bring up is 
how do we get here in the first place. Mr. McGuire, you would 
argue that it was not venture capital firms. I would think 
others would argue that it was not the hedge fund industry as 
well. And if anyone disagrees with that--no.
    So, part of the problem, then--and I found some of the 
testimony quite interesting--part of the problem is, can you do 
sometimes more good, more harm than good, and can you sometimes 
be adding disclosure that may actually open it up if it is not 
crafted in just the right way as far as, Mr. Chanos, your 
comments, as far as disclosing your practices and your 
portfolio, what have you?
    So, that is one element that is a problem. And the other 
element, of the problem I guess, is that if you disclose 
information that becomes what someone indicated is duplicative, 
it is already out there anyway.
    And I guess the third problem, as far as disclosure is, if 
you do disclose, and maybe it is not duplicative--and that 
would be one of my questions to you is what information would 
you be receiving potentially that is not duplicative--that is 
just overwhelming to the system. I am sitting here thinking on 
the personal level as far as all of the information that we 
require in Congress as far as the disclosure on credit cards 
and what have you--and no one ever reads that--all of us who 
are involved in mutual funds and what have you--and we get the 
reports every 6 months and no one ever reads that.
    I am wondering we can--these aren't individuals here, but 
the Fed and the other regulators who look at this can, we would 
be giving them something they already have or information that 
is already overwhelming towards them. So if you would address 
those two points, duplicative information, new information, and 
whether there is an overwhelming factor. That is three points.
    Mr. Lowenstein. Let me take a quick crack at that and also 
link it back to the prior discussion.
    I think if you actually take a look at the draft 
legislation, it provides the SEC with a pretty broad mandate 
beyond even what's in the existing Advisers Act to collect 
information, as is necessary, appropriate, in the public 
interest for the protection of investors or for the assessment 
of systemic risk as the committee determines in consultation 
with the Board of Governors of the Federal Reserve. That is a 
pretty sweeping grant of authority to the agency and could, in 
fact, compel considerably more disclosure than we have today.
    I think the point that we have made all along, in answer to 
your question, is that what is helpful here is for the agency 
to be directed to calibrate the disclosure it requires based on 
the nature of what level of systemic risk you might present.
    So it is less about a one-size-fits-all regulation and more 
about a more focused effort to look at what are the differences 
between different private pools of capital; and are there 
differences, therefore, in the kinds of information we need to 
carry out the responsibilities under this Act, which I think 
are important and reasonable.
    Mr. Garrett. And part of those requirements is fixed 
criteria that they are looking at for someone who has capital, 
someone who is leveraging. But in this industry, you are really 
not looking, actually, at an industry that is overly leveraged, 
certainly not in comparison to where the problems come, 
certainly not in comparison to what we do in the government 
with GSEs.
    So, really, what are we looking at here, as far as a class 
of industry, a class of business that is potentially a problem 
area? Or, as one of you said in your statement, do we want to 
make sure that the SEC's resources are focused on those areas 
where they should be focused on. Is this an area we want them 
to be focused on? Or are there other, better places for them to 
focus on?
    Mr. Lowenstein. If I could comment, again, our practice is 
very simple--
    Mr. Garrett. Yes, well, yours shouldn't be. But I am 
wondering if they shouldn't be focused on at all. I am right 
there. I am also right there maybe to further than where the 
panel is, saying that maybe we should be focusing on some other 
area.
    I am down to my last 30 seconds.
    Mr. Kaswell. In some areas, we think there are 
opportunities for more disclosure. For example, amending ADV 
Part II, the information that goes to investors, we support 
providing information to investors on prime brokers, 
accountants, and custodians. We think that would be useful.
    We are supportive of providing reasonable information to 
the regulator. We get concerned about public disclosure. We 
don't want to have to disclose our trading strategies. We are 
concerned about providing too much information in the way of 
trade secrets to counterparties.
    We only deal with sophisticated investors. It is a very 
different market than the retail marketplace, and we want to 
keep it that way. We also favor raising the level of investment 
permitted so that we don't inadvertently become a retail 
product.
    Mr. Garrett. Can I go a little further?
    On another note, for 30 seconds, Mr. Lowenstein, I thought 
you made some sort of comment with regard to the auditing 
requirements--I think it was you, I made in my notes--with 
regard to making sure that the firms are audited by a PCAOB. 
Oh, I am sorry, Mr. Chanos. Okay.
    Mr. Chanos. We said that, too.
    Mr. Garrett. There you are. Everybody but Mr. Lowenstein. 
Okay.
    Mr. Kaswell. Funds should be audited by a PCAOB-regulated 
auditor.
    Mr. Garrett. Now, here is the problem, potentially, with 
that. Let me see what your response is.
    That is okay for the big guys who are probably already in 
that mix already. But if we are going to either carve out 
exemptions by class or if we are going to carve out exemptions 
by size, doesn't--or, class and not size, doesn't that cause a 
problem, then, for those industries that are just now going to 
look for higher-priced audits being done? And, really, the 
benefit of that is just marginal?
    Mr. Kaswell. Well, we favor a de minimis exemption for the 
truly small. But after that, when you are taking the 
investments from pension plans and so on, we think that a PCAOB 
audit is the appropriate thing to do.
    Mr. Garrett. What are the requirements right now if you are 
already doing a pension fund--handling a pension fund? What are 
the requirements, as far as any audits?
    Mr. Kaswell. I don't believe it is required.
    Mr. Chanos. It is not required. But you will get very 
little pension fund money unless you do it. It is a 
practicality.
    Mr. Garrett. It is standard practice, is what I thought, 
already. So maybe, once again, we might be adding something on 
that is actually--for those industries that are already doing 
it, we are not really adding it on, but we are just creating 
all that murky middle ground as to where that exemption lies. 
Is this for a class of business or size of business as you 
folks would have to do? And all we are doing is just adding 
more uncertainty. But the best practices out there--or the real 
practices out there, it is already being done.
    Am I right, understanding--
    Mr. Kaswell. I think that is true. We think that, in this 
environment, you should have a PCAOB audit. We think that is a 
threshold issue at this juncture.
    Mr. Garrett. Okay.
    Mr. Kanjorski. Thank you very much, Mr. Garrett.
    The overwhelming attendance on your side of the aisle there 
is--
    Mr. Garrett. They are all in the back room having coffee, 
waiting for--
    Mr. Kanjorski. Just going to run out here suddenly.
    Mr. Garrett. Suddenly, yes.
    Mr. Kanjorski. All right. Mr. Cleaver, do you have any 
further questions?
    Mr. Cleaver. No, Mr. Chairman.
    Mr. Kanjorski. Okay. Well, then we are going to give this 
panel a break.
    Thank you very much for coming by and giving us your 
observations. We thank you very much and appreciate it.
    And may I extend to you what I said before? If, as this 
process moves on over the next several weeks and couple of 
months and you have some more insights, please feel free to 
share those insights with the staff or myself or Mr. Garrett.
    Thank you very much for appearing.
    The committee will reconvene. I now introduce the third 
panel, which will discuss creating a Federal Insurance Office.
    Thank you for appearing before the committee today. And, 
without objection, your written statements will be made a part 
of the record. You will each be recognized for a 5-minute 
summary of your testimony.
    First, we have Ms. Janice Abraham, president and chief 
executive officer of United Educators Insurance, on behalf of 
the Property Casualty Insurers Association of America.
    Ms. Abraham?

 STATEMENT OF JANICE M. ABRAHAM, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, UNITED EDUCATORS INSURANCE, ON BEHALF OF THE PROPERTY 
         CASUALTY INSURERS ASSOCIATION OF AMERICA (PCI)

    Ms. Abraham. Thank you, Chairman Kanjorski, and Ranking 
Member Bachus. I am Janice Abraham, president and CEO of United 
Educators, a reciprocal risk retention group. We are owned and 
governed by 1,200 educational institutions that we insure, 
including colleges and universities, public and independent 
schools, educational associations, foundations, and cultural 
institutions.
    I am testifying today on behalf of Property Casualty 
Insurers Association of America, PCI, the leading P and C 
insurance trade association in the United States, representing 
more than 1,000 members.
    The home, auto, and business insurance industry is healthy 
and competitive, and the current system of regulating the 
industry is working relatively well. In the past 5 years, our 
insurance companies have weathered Hurricanes Katrina, Rita, 
and Ike, in addition to handling our regular claims, without 
having to ask for a government bailout. We are not broke, we 
didn't cause the current financial crisis, and we don't need a 
duplicative system of Federal oversight that may ultimately 
increase costs to consumers.
    PCI supports responsible regulatory reforms that reflect 
principles of good insurance regulation. We understand the need 
for a Federal insurance office with three primary roles: first, 
to support harmonization of State insurance regulations; 
second, to have a seat at the table during international 
negotiations regarding insurance issues; and third, to develop 
an expertise within the Federal Government to advise both 
Congress and the Administration on insurance issues.
    While PCI has not taken a position on the Federal Insurance 
Office, our members have a number of questions and concerns 
about the ONI and FIO discussion drafts. PCI appreciates some 
of the changes made in the FIO draft. However, the proposed 
Federal Insurance Office still goes far beyond the limited 
scope of the original bipartisan congressional bill by you, 
sir, and Representative Biggert and several other committee 
members. Instead, it creates an office with extremely broad 
scope and powers that could lead to very costly duplication of 
State insurance oversight.
    I will underscore four critical concerns that are more 
fully detailed in my written testimony.
    First, there are virtually no limits in the bill on the 
types or volume of information the FIO may demand. While 
gathering information might sound like an innocuous activity, 
it can impose extraordinarily high costs and burdens on 
insurers, especially small insurers who must comply with data 
requests.
    State regulators have some accountability in the 
information that they gather since they do so in pursuit of a 
regulatory function with the responsibility of insuring the 
solvency and stability of the marketplace. The FIO has no such 
balancing accountability or mission. Instead, the proposed 
language directs the FIO to require mandatory information 
reporting to ``monitor all aspects of the insurance industry.'' 
This is an incredibly broad directive, duplicating what the 
States already effectively implement.
    PCI appreciates your leadership, Representative Kanjorski, 
in dropping the explicit grant of subpoena authority from the 
ONI proposal. This is a significant improvement. However, to 
avoid inefficient duplication of reporting requirements, the 
FIO should look to State insurance regulators or other public 
sources to obtain information it needs for its analysis. If the 
information needed is not available through these public 
sources, we suggest the data requests be voluntary, not 
mandatory.
    Second, the FIO may exclude small insurers from its 
mandatory reporting requirements, but the exclusion is 
discretionary and undefined.
    Third, the FIO proposal dropped critical due process 
protections that are standard administrative procedures and 
included in your congressional bipartisan bill, although we do 
appreciate that it reflects an improvement on the ONI proposal.
    Fourth, and perhaps the most important concern, the scope 
of FIO goes far beyond the bipartisan congressional bill, with 
the potential to lead to mission creep and greater duplicative 
and costly oversight. Specifically, the new proposal would have 
the officer monitor all aspects of the industry and to have any 
additional related authority that Treasury wants to give it. We 
recommend refocusing the Federal Insurance Office on its unique 
role in international trade issues, liaison, and advisory to 
the Federal Government, as specified in the bipartisan 
congressional bill, as well as coordination to harmonize State 
insurance regulations.
    In conclusion, PCI appreciates the committee's hard work 
and diligent consideration of this issue, especially the joint 
leadership of Representatives Kanjorski and Biggert on the 
original, widely supported, bipartisan proposal. PCI has strong 
concerns about the current legislative FIO draft but 
appreciates the improvements on the ONI proposal and looks 
forward to working with the committee on addressing the 
remaining concerns consistent with the past committee 
leadership.
    Thank you very much, sir, for your consideration.
    [The prepared statement of Ms. Abraham can be found on page 
89 of the appendix.]
    Mr. Kanjorski. Thank you, Ms. Abraham.
    Next, we will have Mr. David B. Atkinson, executive vice 
president and vice chairman of RGA Reinsurance Company, on 
behalf of the Reinsurance Association of America.

   STATEMENT OF DAVID B. ATKINSON, EXECUTIVE VICE PRESIDENT 
     REINSURANCE GROUP OF AMERICA (RGA), ON BEHALF OF THE 
            REINSURANCE ASSOCIATION OF AMERICA (RAA)

    Mr. Atkinson. Thank you, Mr. Chairman. As you said, my name 
is David Atkinson. I am testifying today on behalf of not only 
my company, Reinsurance Group of America, Integrated (RGA), but 
also the Reinsurance Association of America, or RAA, a trade 
association representing life, property, and casualty companies 
that specialize in reinsurance.
    Simply put, reinsurance is insurance for insurance 
companies. By spreading risk among many companies around the 
world, reinsurance plays a critical role in maintaining the 
financial health of the insurance marketplace and ensuring the 
availability of insurance for U.S. citizens and businesses. My 
company, RGA, is the largest U.S.-based life reinsurer, the 
second-largest life reinsurer in North America, and the third-
largest in the world.
    I am pleased to appear before you today to provide the 
RAA's perspective on Congressman Kanjorski's legislation to 
create a Federal Insurance Office. We applaud the committee's 
interest in and we strongly support this legislation, and are 
especially grateful for Congressman Kanjorski, his leadership 
on this important issue.
    We also applaud the Administration's acknowledgement that 
international aspects of the reinsurance business require 
Federal involvement to address the needs of the U.S. market as 
well as to assist and support U.S. companies doing business 
abroad. Encouraging the participation of global reinsurers in 
the U.S. market is essential, because reinsurance provides the 
much-needed risk-sharing capacity for life, property, and 
casualty risks in the United States. Without reinsurance, 
insurance prices would increase and the availability of 
insurance would decrease.
    The current State-based system is primarily focused on 
regulating market conduct, contract terms and rates, and 
protecting consumers. None of these objectives apply to 
reinsurance, which is purely a business-to-business 
transaction. Instead, reinsurance regulation focuses mainly on 
financial solvency so that reinsurers can meet their 
obligations to their insurance company customers.
    The RAA supports a reinsurance regulatory system that would 
create a single national regulator with a single set of rules 
focused on efficient and effective solvency regulation. We also 
support a process for the national regulator to evaluate and 
recognize non-U.S. regulatory regimes to boost international 
reinsurance transactions.
    We believe a Federal Insurance Office is necessary to 
assist Congress and the Federal Government in making better 
decisions regarding international insurance policy and in 
enforcing international reinsurance agreements uniformly across 
the United States. Public policy issues are frequently raised 
at the Federal level which could have a significant impact on 
the reinsurance business, yet there is no Federal agency tasked 
with understanding the insurance industry. The Federal 
Insurance Office would fill this void.
    The RAA believes it is critical that the Federal Insurance 
Office coordinate Federal efforts and establish Federal policy 
regarding global standards for international insurance matters. 
Currently, the U.S. voice is marginalized because of the 
fragmented nature of the current State system and the lack of a 
single national regulator with authority to speak on behalf of 
the United States. As a consequence, global insurance standards 
are evolving with minimal U.S. input. Furthermore, uniform 
application of these global standards in the United States is 
unlikely, since identical regulations would have to be adopted 
in each individual State. We suggest that the legislation be 
amended to make it clear that the Federal Insurance Office has 
the authority to represent the United States in all relevant 
international organizations on insurance issues.
    The RAA also strongly supports the authority of the Federal 
Insurance Office to preempt State insurance measures that are 
inconsistent with international insurance agreements and that 
disadvantage non-U.S. reinsurers. It is critical that the 
Federal Insurance Office be empowered to ensure these 
international agreements are uniformly upheld throughout the 
States and that companies are not subject to dual and perhaps 
conflicting regulation. This is a significant step forward in 
creating a more efficient and effective regulatory system in 
the United States and enhancing U.S. dealings with foreign 
governments and regulatory bodies.
    Now, in our drive to open the U.S. market to non-U.S. 
reinsurers, it will be important to not put U.S. reinsurers, 
such as my company, at a disadvantage in their home market. 
Preserving a U.S. presence in the U.S. reinsurance market 
should be a guiding principle of the Federal Insurance Office 
legislation.
    Finally, the Federal Insurance Office must ensure a level 
playing field in the United States for both U.S. and non-U.S. 
reinsurers alike.
    Thank you for the opportunity to testify. The RAA looks 
forward to working with members of the committee on this very 
important issue.
    [The prepared statement of Mr. Atkinson can be found on 
page 97 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Atkinson.
    Next, we have Mr. Dennis Herchel, assistant vice president 
and counsel of Massachusetts Mutual Life Insurance Company, on 
behalf of the American Council of Life Insurers.
    Mr. Herchel?

  STATEMENT OF DENNIS S. HERCHEL, ASSISTANT VICE PRESIDENT & 
COUNSEL, MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, ON BEHALF 
        OF THE AMERICAN COUNCIL OF LIFE INSURERS (ACLI)

    Mr. Herchel. Thank you.
    Mr. Chairman, Ranking Member Bachus, and members of the 
committee, on behalf of the American Council of Life Insurers, 
I would like to thank you for the opportunity to appear here 
today to discuss the industry's position on the newly proposed 
Federal Insurance Office.
    We support creating this office in the Department of the 
Treasury. As we testified last year on the Office of Insurance 
Information proposal, we believe this office would be 
enormously beneficial to Congress as it considers issues that 
are vitally important to our business and would facilitate the 
handling of international insurance matters and would provide a 
means for--
    Mr. Bachus. Mr. Herchel, could you pull the microphone up a 
little closer? Just grab it and pull it up. And I guess it is 
on. You have to turn them on.
    Mr. Herchel. It was on. I am sorry.
    The events of the last 12 months have only heightened the 
need for this office. The financial crisis illustrated the 
problems associated with the lack of insurance industry 
expertise at the Federal level.
    As you know, for some time now, the ACLI has advocated for 
the creation of a Federal regulatory presence. In light of the 
recent crisis and the legislative proposals and response, and 
short of Congress enacting an optional Federal insurance 
charter, we believe it is imperative that Congress establish 
this office.
    As proposed, the office would be the Federal Government's 
repository of insurance industry information and expertise and 
also act as the U.S. international representative on insurance 
issues. It would not have any supervisory or regulatory 
authority.
    In addition, we believe the office should be elevated in 
status so it can participate actively and effectively with 
Federal financial industry regulators, including the systemic 
risk regulator, under any new systemic risk regulatory 
structure. This will ensure that actions affecting insurers are 
taken only after a systemic risk regulator has had direct 
consultation and coordination with the office.
    The Administration's systemic risk regulation proposal 
places the Federal Reserve Board in the position of ultimate 
systemic risk regulator. The Board would be given broad 
authority to determine which companies pose systemic risk, 
designate them as Tier 1 financial holding companies, and 
exercise sweeping regulatory powers over those companies and 
their subsidiaries. This includes authority to require 
increased capitalization and changes in management activities.
    This power is tempered only slightly, as the Board is 
required to consult and coordinate with the Federal functional 
regulator of a Tier 1 company or its subsidiary before 
instituting any action or proceeding against it. Since there is 
no Federal functional insurance regulator, there would be no 
equivalent consultation or coordination when it comes to Board 
decisions affecting Tier 1 companies that are insurers or 
insurance subsidiaries.
    Since the Board is a banking regulator and has virtually no 
insurance regulatory expertise, we believe this is an 
inappropriate result. The Board is required to coordinate with 
other banking regulators even though it has strong expertise in 
that area. The fact that it would not be required to act 
similarly when it comes to insurers is a contradiction of sound 
regulatory policy.
    Insurance is a highly regulated industry. Insurers that do 
business in more than one State are supervised by a functional 
regulator in each one. Insurers are subject to a strict 
financial solvency regime. Establishing a systemic risk 
regulatory system that ignores this is an imprudent approach 
for the Federal Government to take and will result in 
unintended negative consequences.
    We believe one solution is to give the office a role 
equivalent to that of Federal functional regulators when it 
comes to dealing with the Board on all aspects of systemic 
regulation. The Board should be required to coordinate and 
consult with the office whenever Board supervisory or 
enforcement action is directed at an insurer. The office should 
be required to act as an intermediary between the Board and the 
insurer's domestic State regulator regarding any proposed Board 
action. And the office should be given a seat on the proposed 
Financial Services Oversight Council. These and other changes 
in the office's status will vastly improve any regulatory 
regime ultimately enacted by Congress.
    We also support amending the proposal in a number of ways 
to effectuate the role originally envisioned by the office.
    First, it should be made clear that the office's preemption 
authority will never be used in a way that results in a 
solvency regulation gap, nor should preemption result in any 
material, unfair discrimination against any U.S. insurer. While 
we do not believe use of preemption should be withheld if it 
can't be used to realize the benefits provided under mutual 
recognition agreements, it should not be used to disadvantage 
domestic U.S. companies. We support a clear administrative due 
process to any preemption action to ensure prevention of these 
undesirable outcomes.
    Second, it is important that a report of the funds 
appropriated to the office be used to secure and retain 
personnel with insurance industry experience and expertise. In 
order for the office to be successful, it will be necessary to 
staff it with personnel who are well versed in the workings of 
the industry.
    Third, clarification that the office has no general 
supervisory or regulatory authority over insurance companies is 
important. As drafted, the proposal contains ambiguous language 
that could cause confusion on this issue, so a clear statement 
of this intent should be included in the final bill.
    There are some additional recommended changes outlined for 
you in my written testimony, so I won't take the committee's 
time listing them again here.
    Mr. Chairman and members of the committee, we believe the 
need to establish this office is self-evident and, with the 
addition of these changes we have outlined, fully support 
enactment of the proposed substitute to H.R. 2609. Thank you 
for giving us the opportunity to present our views, and we look 
forward to working with you as this legislation moves forward.
    [The prepared statement of Mr. Herchel can be found on page 
161 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Herchel.
    We will now hear from Mr. Spencer Houldin, president of 
Ericson Insurance Advisors, on behalf of the Independent 
Insurance Agents and Brokers of America.
    Mr. Houldin?

 STATEMENT OF SPENCER M. HOULDIN, PRESIDENT, ERICSON INSURANCE 
   ADVISORS, ON BEHALF OF THE INDEPENDENT INSURANCE AGENTS & 
                   BROKERS OF AMERICA (IIABA)

    Mr. Houldin. Thank you, Mr. Chairman.
    Good afternoon. My name is Spencer Houldin. I am pleased to 
be here today on behalf of the Independent Insurance Agents and 
Brokers of America. Thank you for the opportunity to provide 
our association's perspective on proposals to create a Federal 
Office of Insurance.
    IIABA has long supported State regulation of insurance. 
And, especially during this difficult economic time, State 
insurance regulators have effectively ensured that insurers are 
solvent, that claims are paid, and that consumers are 
protected. State insurance regulation has a long and stable 
track record of accomplishment, especially in the areas of 
solvency regulation and consumer protection, but its benefits 
and merits have never been more apparent.
    While State regulation is certainly in need of improvement, 
the economic crisis has highlighted serious deficiencies 
associated with creating an optional Federal insurance 
regulatory system. When financial services entities are 
permitted to select a regulator of their choice, they will 
select the path of least resistance and what best serves their 
business interests. That choice may not be what is in the best 
interest of the consumer.
    Although we strongly support State insurance regulation and 
would oppose any effort to undermine that system, we recognize 
the benefits that can achieved by establishing a nonregulatory, 
informational office at the Federal level. It is imperative, 
however, that any statute authorizing the establishment of an 
insurance information office be designed carefully and with the 
proper safeguards and not set the stage for Federal insurance 
regulation.
    We support the Insurance Information Act as introduced in 
May but have significant concerns with several of the revisions 
unveiled in a recent discussion draft. The OII legislation 
introduced just several months ago was a carefully constructed 
and thoroughly vetted, bipartisan proposal with broad support 
in what is often a highly splintered insurance market. We 
strongly hope any legislation adopted by this committee will 
closely resemble the original bill.
    There are several critical elements of the original version 
of OII that are, at a minimum, essential to any legislation 
that creates a Federal insurance information office. 
Specifically, any proposal should make clear that the office 
does not possess supervisory or regulatory authority over the 
business of insurance. We also believe the information 
gathering provisions of any proposal should ensure that the 
office does not collect information available elsewhere, and 
include important protections governing how certain data maybe 
obtained and utilized.
    In addition, the discussion draft would have the unintended 
effect of enabling this office to require Main Street insurance 
agents to produce data and information upon demand. We, 
therefore, urge the committee to revise the definition of 
``insurer'' so that it applies, as it should and is likely 
intended, only to insurers and reinsurers and not small 
businesses.
    At the very least, we believe that this office should be 
required to establish an exemption to the submission 
requirements for all covered entities meeting the minimum size 
threshold, instead of only permitting the office to do so. 
Explicitly requiring such an exemption would ensure that small 
agencies and insurers are not unduly burdened by informational 
demands.
    Any legislation should also include clear and meaningful 
administrative provisions for handling preemption, and we urge 
the committee to establish safeguards that would apply in those 
instances when the office is considering whether a State law 
should be preempted. We believe that these changes would ensure 
that the scope and power of this office are limited in focus 
and would eliminate any concern of regulatory mission creep.
    Our main concern and focus is ensuring that the office does 
not operate as a de facto Federal insurance regulator or serve 
as a precursor to Federal insurance regulation. It has 
repeatedly been stated that such an office is not meant as a 
step towards Federal regulation. Our conditional support for 
this concept is tied directly to these commitments. Therefore, 
any overt or subtlest efforts to make the insurance office look 
more like a regulatory body or set it up to become a forerunner 
to Federal regulation would force us to vigorously oppose any 
such proposal.
    State insurance regulation has a strong track record of 
regulating insurers and protecting consumers, and it has been 
particularly successful over the last year. Using targeted 
legislation to establish a nonregulatory insurance information 
office with limited and defined responsibilities would 
strengthen State regulation while also filling the void of 
insurance expertise that currently exists at the Federal level 
and remedy many of the problems faced by the insurance industry 
participants in the global economy.
    Thank you.
    [The prepared statement of Mr. Houldin can be found on page 
168 of the appendix.]
    Mr. Kanjorski. Thank you very much, Mr. Houldin.
    We will now hear from Ms. Therese Vaughan, chief executive 
officer of the National Association of Insurance Commissioners.
    Ms. Vaughan?

   STATEMENT OF THERESE M. VAUGHAN, CHIEF EXECUTIVE OFFICER, 
     NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

    Ms. Vaughan. Thank you, Chairman Kanjorski, Ranking Member 
Bachus, and members of the committee. Thank you for inviting me 
to testify today.
    My name is Terri Vaughan, and I am the CEO of the National 
Association of Insurance Commissioners. Prior to joining the 
NAIC, I was a professor of insurance and actuarial science at 
Drake University. I also served as the Iowa Insurance 
Commissioner from 1994 to 2004 and as the NAIC president in 
2002. I am pleased to be here today to offer the NAIC's 
perspective on establishing a Federal Insurance Office.
    To address a Federal Insurance Office, we must first offer 
this context: State regulation of insurance has a proven track 
record of stability and effectiveness even in the face of great 
financial strain, having shepherded the U.S. industry through 
the recessions of the 1890's, the bankers panic of 1907, the 
Great Depression, and the dramatic credit crisis of the past 
year.
    In light of this track record, particularly when compared 
to other aspects of the financial services industry, we 
strongly urge that any efforts to improve insurance regulation 
build on the proven legacy of State oversight and tread 
carefully when considering any amount of Federal preemption.
    Having said that, certain fundamental improvements to 
State-based regulation may require targeted Federal assistance, 
and we are not adverse to this when appropriate. We worked 
closely with Congressman Kanjorski, Congresswoman Biggert, and 
others on H.R. 2609, which would create an Office of Insurance 
Information. That proposal was carefully crafted to protect 
effective State supervision while achieving two fundamental 
goals: first, increasing insurance knowledge and access to 
insurance sector information at the Federal level; and, second, 
enhancing international cooperation on insurance regulatory 
issues.
    The proposed Federal Insurance Office Act generally 
preserves those two goals but has discarded a number of the key 
provisions from the original OII proposal that are critical to 
preserving the strong State regulatory system and, therefore, 
critical to our support.
    In particular, we urge that any Federal Insurance Office 
not be empowered with day-to-day supervisory authority over 
insurance. Additionally, we have recently offered members of 
this committee a number of substantive suggestions which 
restore the protections embedded in the original OII 
legislation. Our written statement goes into greater detail, 
but today I will focus on a few key points.
    While insurance regulatory information and expertise has 
always been available directly from the States and collectively 
through the NAIC to those in Washington, a formal Federal 
interface is appropriate. However, this interface should 
provide a two-way, reciprocal flow of information, enabling 
insurance regulators to have equal standing with our Federal 
counterparts and access to information on federally regulated 
parents and partners of State-regulated insurers.
    To avoid unnecessary expense and resources, any Federal 
Insurance Office should serve as a conduit for, and not a 
replacement of, the extensive information collected by the 
States, both individually and nationally through the NAIC. The 
recent financial crisis and our experience with AIG illustrates 
the need for financial regulators, whether State or Federal, to 
have in place a clear system for sharing information about 
complex institutions.
    A key goal of legislation to create a Federal Insurance 
Office should be to enhance international cooperation on 
insurance regulatory issues without displacing the existing 
critical role of the States as the functional regulators in 
these discussions. Any binding discussion at the international 
level should respect and reinforce the States' authority to 
regulate insurer solvency and protect insurance consumers and, 
therefore, should be limited to agreements of regulatory 
equivalence or mutual recognition. These types of agreements 
serve to level the playing field for U.S. and non-U.S. insurers 
without preempting States' ability to prescribe the rules of 
the game for solvency and consumer protection.
    Such equivalence seeks to harmonize treatment of insurers 
operating globally, but it does not require jurisdictions to 
give up sovereignty over their standards over minor 
differences. As such, any preemption of a State law stemming 
from an international agreement should be limited to 
reconciling material or substantive differences in treatment.
    Strong capital and solvency protections have been embedded 
in State regulation of insurance and are a critical reason that 
insurers have weathered the financial downturn relatively 
better than other types of financial institutions. Our solvency 
system is national in scope. All 50 States are now accredited 
by the NAIC utilizing the same risk-based capital and baseline 
solvency standards. As such, State solvency regulation should 
be excluded from any possible preemption by a Federal Insurance 
Office.
    Mr. Chairman, we support the goal of creating a National 
Insurance Office to serve as a resource for the Federal 
Government and a conduit for the States. But we will continue 
to strongly oppose any efforts to use such an office as a 
precursor to establishing a Federal insurance regulator, and we 
continue to have significant concerns with the current proposal 
before this committee.
    We have offered substantive changes in good faith to 
improve the proposal, and we look forward to continuing to work 
with you on this effort and on the many other critical issues 
before this committee.
    Thank you for the opportunity to testify, and I would be 
happy to answer your questions.
    [The prepared statement of Ms. Vaughan can be found on page 
273 of the appendix.]
    Mr. Kanjorski. Thank you, Ms. Vaughan.
    And finally, we will hear from Mr. J. Stephen Zielezienski, 
senior vice president and general counsel of the American 
Insurance Association.
    Mr. Zielezienski?

 STATEMENT OF J. STEPHEN ZIELEZIENSKI, SENIOR VICE PRESIDENT & 
     GENERAL COUNSEL, AMERICAN INSURANCE ASSOCIATION (AIA)

    Mr. Zielezienski. Thank you, Chairman Kanjorski, Ranking 
Member Bachus, and members of the committee. I appreciate the 
opportunity to be here today to discuss the establishment of a 
Federal Insurance Office, as contemplated in Chairman 
Kanjorski's discussion draft.
    While the discussion draft does not create the national 
regulatory option AIA has long advocated, we support the 
Federal Insurance Office because it accomplishes two major 
goals that I would like to explore today: increasing Federal 
insurance expertise; and empowering the United States in 
international negotiations on prudential insurance matters.
    First, the important role of insurance in our economy 
compels the need for Federal insurance expertise. Insurance 
contributes 2.4 percent to the annual GDP and directly or 
indirectly employs 1.5 million hard-working Americans. And the 
unique focus of property casualty insurers on reducing societal 
risk has saved many lives, prevented countless injuries, and 
avoided billions of dollars in economic losses.
    We believe that the Federal insurance office should be led 
by an assistant secretary appointed by the President and 
confirmed by the Senate. By having this position filled by a 
presidential appointee, the head of the office will be 
recognized here and abroad as an important senior government 
official with insurance sector responsibilities.
    In its role as Federal insurance expert, the discussion 
draft also envisions that the office will identify regulatory 
gaps that might contribute to systemic risk and recommend 
whether any insurer should be subject to additional regulatory 
scrutiny. We agree that these are key functions.
    The office should start from the premise that the property 
casualty sector has weathered the current crisis and remains 
strong overall today primarily because these are generally low-
leveraged businesses, with lower asset-to-capital ratios than 
other financial institutions, more conservative investment 
portfolios, and more predictable cash outflows that are tied to 
insurance claims rather than on-demand access to assets.
    Given this dynamic, the office should facilitate 
understanding of the insurance regulatory model and ensure that 
the industry and its customers are not adversely affected by 
the application of inappropriate bank-centric regulatory 
standards.
    I don't mean to imply that our insurance regulatory system 
is perfect. In fact, Treasury has called it ``highly 
fragmented, inconsistent, and inefficient.'' Despite the best 
of regulatory intentions, States are inherently limited in 
their ability to resolve issues that go beyond their borders. 
But until Congress decides to establish a national regulatory 
alternative, a result the AIA would welcome, the expertise 
promised through the Federal Insurance Office is essential to 
prevent unintended consequences.
    We would also urge the office to focus its monitoring 
activities on unregulated or lightly-regulated products or 
activities that could present broader systemic risk. This 
approach would allow the office to analyze the industry through 
the prism of risk aggregation and counterparty exposure 
generated by nontraditional products or activities rather than 
simply by company size.
    We also strongly urge this committee to provide a seat for 
the Federal Insurance Office on any systemic risk council that 
is established so that the council gains a Federal stakeholder 
offering a national perspective on insurance issues.
    Second, the discussion draft grants the Federal Insurance 
Office authority to set national policy on prudential aspects 
of international insurance matters and to represent the United 
States before the IAIS. The office's international authority 
complements separate power given to the Treasury Secretary to 
negotiate international insurance agreements.
    These are critical functions, given that the U.S. 
Constitution grants the Federal Government exclusive power to 
conduct foreign affairs. Both the discussion draft and the 
Treasury White Paper document ongoing frustrations with the 
inability of the United States to negotiate authoritatively 
with foreign counterparts on pressing insurance issues.
    The most oft-cited example of the need for robust U.S. 
involvement is the EU Solvency II initiative. Solvency II is 
moving forward, while the current U.S. insurance regulatory 
system remains fragmented among 57 separate jurisdictions. The 
ability of U.S. insurers to remain globally competitive may 
well rest on Federal engagement on this prudential issue in 
every relevant forum as it evolves and to have our financial 
regulatory system deemed equivalent on a national level.
    Indeed, we believe that the discussion draft compels the 
conclusion that the office can preempt State insurance measures 
that are inconsistent with international agreements concluded 
on behalf of the United States to the extent those agreements 
involve financial supervision.
    Let me close by thanking the committee again for 
circulating Chairman Kanjorski's discussion draft and for 
engaging in an open dialogue on the substantial merits of a 
strong Federal Insurance Office. Establishing such an office, 
properly empowered, represents a key step in ensuring that the 
critical role of insurance is recognized at the national level 
and that the Federal Government retains the ability to preserve 
a viable private insurance market and maintain U.S. 
competitiveness in a changing global economy.
    Thank you.
    [The prepared statement of Mr. Zielezienski can be found on 
page 280 of the appendix.]
    Mr. Kanjorski. Thank you, Mr. Zielezienski.
    I thank the panel for their testimony. We have a few 
questions. I will take mine initially to begin with, and then 
we will get the other members in.
    If I had to summarize what I have just heard in the opening 
statements, 50 percent of you love it and 50 percent of you 
hate it. I could concede that maybe that means we should do it.
    I think it is fair to say it has stiffened considerably 
from its original introduction. It has also changed its name 
from ``National'' to ``Federal.'' It is not intended to do 
anything that is regulatory in nature; I think that should be 
made clear to everyone. It is, however, something that has been 
requested for various reasons from the Administration and 
others that we make the changes.
    But I want you all to know that they manufacture that thing 
called a telephone that allows you to every now and then ring 
us up, either myself or the staff or even the other side of the 
aisle, if you will, to give us some good critiques of what is 
in there, how it could be changed in a better light.
    On the other hand, do not just call to make a compelling 
argument to tone it down or dumb it down because that won't be 
very successful. I think it is already dumb enough, so what we 
really want to do is try to smarten it up. And that is where we 
will ask members of the panel to participate with us.
    I, quite frankly, thought that it was going to be so great 
today that we would just have a roar from the panel, no 
statements necessary, and we would go on to unanimous passage. 
I expected my colleague on the right here to just announce his 
bipartisan support of the legislation, that it would be all 
over and we would lock hands and sing. But I think I am now 
looking at the gentlelady from Illinois, and she is not too 
happy. Now I am in trouble. So we will go down and take the 
legitimate criticisms that are there and see what has happened.
    Actually, if I had to ask a question now, those who think 
they can favor the legislation as is, could you show your 
hands?
    Thank you, Mr. Cleaver.
    And those who are absolutely abject opponents of the 
legislation as it presently is?
    Okay. And we have two neutrals. Is that it? Maybe yes and 
maybe no?
    Ms. Abraham. I am not sure where you counted, whether--in 
your 50 percent.
    We think there are good reasons to have a Federal Insurance 
Office. I articulated those: a seat at the table on 
international issues; and harmonization of State regulations. 
We think there needs to be expertise. We are concerned about 
the breadth, the scope, and the potential for mission creep. 
And those are concerns. And we think there can be areas where 
your stated goals can be articulated. I am concerned about 
small insurance companies, small to mid-sized companies.
    So we understand why this is needed. We think the intent is 
strong. But there are very specific issues and concerns that we 
have that we think can be addressed. And I articulated those in 
my testimony, my written testimony. So I am not agnostic, not a 
flag bearer, but very willing to work with you on making 
improvements to this, sir.
    Mr. Kanjorski. We do appreciate that. And, believe me, we 
do want to work on that, and we will.
    Ms. Abraham. Thank you.
    Mr. Kanjorski. But you have to admit that we are 
successful--did somebody say--oh, yes, your testimony said that 
50 of the States have now joined in. That is amazing. We are 
getting some people to stand up and be counted, are we not? So 
we are slightly successful there. Maybe we can get some other 
activity and finding out what can happen both in State 
regulation as it impacts on potential Federal regulation. That 
would be very healthy.
    But we are not trying to sneak an end run here. We are 
really--and I think everybody agrees with at least this whole 
idea that a Federal Government devoid of adequate information 
on the insurance industry, as large as it is, is really a great 
risk to our system of systemic risk in the future if we do not 
have: one, an understanding; and two, a methodology to handle 
it.
    Right now, it almost was a complete disaster with AIG 
insofar as it was not the insurance part of the business that 
went awry, it was the financial products part of the business, 
but the insurance part almost got dragged in. Because, as you 
recall, there was a request to allow the utilization of about 
$30 billion in assets to support the counterparty positions of 
AIG in Europe, and the regulator in New York actually gave the 
authority for that to happen. Luckily, circumstances and events 
passed beyond the authority being exercised. But if it had been 
exercised, it probably would have precipitated the largest 
financial disaster for the insurance industry in the history of 
the country. And whether it could have been stopped is an open 
question when I discuss with people.
    And now, Professor, if you will give us a shot on that?
    Ms. Vaughan. Well, thank you, Chairman Kanjorski.
    I was not around at the time. I was safely ensconced in Des 
Moines, Iowa. But my understanding is that there were extensive 
discussions among the regulators. And, actually, I think the 
story around AIG is a very positive one, because the States got 
very organized. They had constant communication, regular 
conference calls. They had a game plan for what was going to 
happen so that there was going to be action taken by all States 
at the same time if it was necessary. They agreed on what that 
was going to be.
    And in terms of the request by New York to use the money, 
my understanding is that it still had to go through some 
approval processes in other States and that had not yet--they 
hadn't agreed to that.
    So it is not entirely clear to me that would have happened. 
In fact, I like to use that as an example of the strength of 
our system, in that New York, I do not believe, could have 
unilaterally taken that money. I think they would have had 
others that would have had to look at it and decide whether 
that was a good idea or not. And that is a good thing.
    Mr. Kanjorski. I would hope that in the future--and I know 
I am over my time--that we don't have little entities in far-
off countries like London carrying on adventures in the 
insurance industry that, in my estimation, were never intended 
to be engaged in by insurance companies.
    But to the tune of, I think, your testimony is that the 
counterparty positions held by AIG Financial Products in London 
was $7.8 trillion. How that ever happened, to that size and 
magnitude.
    And the fact that we obviously now know that we have not 
had a sufficient system to have that disclosed within the 
system, whether we could call that systemic risk or for some 
other purposes, we just cannot afford to continue or to allow 
that to happen in the future. Luckily, it did not precipitate 
the type of disaster, perhaps, that could have occurred, but I 
do not know how we meet that challenge.
    Anyway, I have exhausted my time, and I guess I will move 
to my friend from New Jersey--incidentally, a recent television 
star in his own right.
    Mr. Garrett. If you were up at 6:00 this morning.
    Mr. Kanjorski. That is right. I was viewing it at 6:30 in 
the morning. That is the point. I have just been mentioning 
that so that everybody knows I was up at 6:30 in the morning 
watching Mr. Garrett on TV.
    Mr. Garrett. Thank you.
    To the panel, Ms. Abraham, one of your opening comments 
just struck me when you read it. It said, ``We are not broke, 
we didn't cause the current financial crisis, and we don't need 
a new Federal oversight that may ultimately increase the costs 
for consumers.''
    I don't know if you were sitting in the rows before the 
other panel who was here. They could probably have said the 
same things, the hedge funds and the venture capital: They 
weren't broke, they didn't cause a problem, and they don't need 
any oversight. But, gee, almost everybody, except for a man 
there, sitting at the panel said they were all willing to have 
the Federal Government step in and oversight them anyway.
    Ms. Abraham. Well, I didn't mean to say we didn't need 
oversight. What I said is, we already have oversight. We have 
good oversight in the State system. And what we are concerned 
about is duplicative oversight or conflicting oversight, so 
that the Federal Government is asking for information that is 
already produced, already given to the State regulators. So 
that is what I meant by ``we have oversight.'' I think we have 
extensive oversight.
    Mr. Garrett. Actually, I was going to jump to that in a 
minute, but you brought it up, so I will raise it out to other 
people, as far as the duplication of information.
    And, Ms. Vaughan, you can chime in here, or others.
    The information as far as that is already being collected 
by the States and then through the NAIC, is there other 
information that would be going to this new entity that is not 
going to the NAIC or not going to--yes, not going to the NAIC 
right now? And, if so, what?
    Ms. Vaughan. I would say that is a good question to ask the 
Treasury, is what other information they might envision in 
this. I have a hard time imagining that there would be issues 
that are needed in order to understand the risk posed by the 
insurance industry that the insurance regulators wouldn't 
already be asking and gathering information about.
    We periodically go to our companies and say, give us 
information on this. Because of the environment that we are in 
right now, there is a new thing that we highlighted that we 
want to gather information on. I would say we could certainly 
do the same thing in working for a Federal insurance office, if 
they want to work through us.
    What we would really like to get to is a partnership, where 
they come to us, we go to them, we have good communication. We 
think we can make something like that work.
    Mr. Garrett. Thank you.
    I only have a couple of minutes.
    Another question that you brought up that raised a point--I 
will let you chime in on this. Maybe you can answer this 
question as well. She also said, we ultimately don't want to 
increase costs for the consumers, so maybe this goes to the 
question of collecting information and more information.
    Has anybody on the panel--are there are groups or entities 
that have gone out there and looked to see, if we do do this, 
either in this version or the other version, whether or not 
this actually raises costs to the consumers?
    Ms. Abraham. I think one of the concerns--just to jump in 
quickly--to Dr. Vaughan is, because the scope is so broad, we 
don't know what we would be asked for. We already supply to 50-
plus different regulators information. I have no doubt that if 
we would require additional information, we would have to hire 
additional staff in order to compile the information and send 
it in, in addition to what we already do. So it is the broad 
scope. It is the unlimited mandate that is of deep concern to 
us.
    Mr. Garrett. Does anybody know of information on the 
studies as far as whether this raises costs or maybe lowers 
costs? I can see that argument being made.
    No? Okay.
    Just another general--Mr. Atkinson?
    Mr. Atkinson. If I could just comment on that.
    If we get into international negotiations with foreign 
regulators, they may well come up with some items of 
information they require from U.S. companies to get comfortable 
with our situation. So that is one area we don't know about, 
but it is a possibility.
    Mr. Garrett. Mr. Herchel?
    Mr. Herchel. Thank you.
    One point that was made about oversight, I think of this 
office as not just being one of oversight but also one of 
gathering information and developing expertise at the Federal 
level. So not to say that there won't be some oversight that 
will be taking place, but I think there is a dual purpose 
there.
    Mr. Garrett. On that line as far as oversight, one question 
is the issue of solvency, which to me is the issue when it 
comes to insurance regulation. Everything else is secondary to 
that.
    Does anyone want to chime in on the thought that this 
language is tight enough or too broad as to giving the Fed the 
authority to get into the area of solvency? A, should we--and I 
can imagine your answers--and, B, whether the language is on 
point or goes in different directions?
    Ms. Vaughan. I would say the concern--one of the concerns 
we have about the language is the ability of the office to 
enter into international insurance agreements is not 
constrained in the sense that it should be focused on the kinds 
of agreements that reflect our own solvency system. That is one 
of the things we want. We have a system that works. Let's not 
go out and make agreements and let people come in under weaker 
solvency systems.
    Mr. Garrett. For the folks who are proponents of this, 
generally speaking, on the other side--I will close on this--do 
you see that as an issue? Do you see the language could be 
tightened up to address those concerns? Or shouldn't it be 
tightened up?
    Mr. Herchel. We have concerns about making sure that our 
solvency regime stays intact so that we can withstand the 
trials and tribulations as we go through. However, we think 
there probably has to be some type of flexibility there for 
this Federal insurance office to be able to sit at the table 
and try to understand different issues on an international 
solvency basis.
    But in our testimony, you will see that we have caveats in 
there about making sure that we don't create any type of 
solvency gap. We don't want to have any unfair discrimination 
amongst foreign insurers and domestic insurers and things of 
that nature. Maybe we are saying it in a little different way 
than the NAIC today, but we recognize that is an important 
issue. But we don't want to necessarily completely take the 
whole discussion off the table for this Federal office.
    Mr. Zielezienski. I think we read the language ``prudential 
measures'' to be coextensive with the term ``financial 
regulation.'' I think if you look at other titles of the 
Administration proposal, particularly title II, which deals 
with stricter capital standards on so-called Tier 1 financial 
holding companies, all of the measures that are identified as 
prudential standards are things that you would expect in a 
solvency regulatory regime.
    So if one of the purposes of this legislation is to help 
the United States engage effectively at the international level 
and be at the table when Solvency II discussions evolve to make 
sure that not only are we well-represented but that, when the 
equivalency determinations get made--and European spokespersons 
have said they are going to be made at a national level, not a 
State-by-State level--that they have the ability to carry that 
out.
    Mr. Garrett. Okay. I thank the panel.
    Thanks, Mr. Chairman.
    Mr. Kanjorski. Thank you, Mr. Garrett.
    Now we will hear from the gentleman from Missouri, Mr. 
Cleaver. I am sorry--Mr. Scott. I avoided an assault there.
    Mr. Scott. That is okay. When you get me confused with Mr. 
Cleaver, you have gotten me confused with a tremendous 
gentleman, a scholar, and a great American. Thank you.
    Allow me to pose a few questions here, because I just want 
to make sure we are clear here.
    Is this a Federal Office of National Insurance we are 
proposing? Is it a Federal Office of Insurance Information or 
is it a Federal Insurance Office?
    There are a variety of different terminologies that we have 
been throwing around with what this is. But, most definitely, I 
hope that we will come to the conclusion that this is not a 
precursor to a Federal charter for insurance.
    What disturbs me about the plan also is the words in this 
as I read it that states there will be preemption power over 
State insurance matters in this. So I think we ought to really 
make sure we are moving down a road that we have fairly clearly 
mapped out and that we don't have unintended consequences.
    Let me start with you, Mr. Houldin, if I may. You are with 
the Independent Insurance Agents & Brokers of America. You have 
consistently been a strong supporter of State regulation of 
insurance and an opponent of Federal regulation, optional or 
otherwise, is that correct?
    Mr. Houldin. That is correct.
    Mr. Scott. Do you see a danger here? We all know that 
everything is not perfect. Let me ask you, how would you 
propose modernizing or reforming the State system for the 
benefit of the consumer?
    Mr. Houldin. That is a great question, Congressman. Thank 
you.
    The State system has proven to be extremely efficient; and, 
using targeted Federal legislation, I think we can make that 
State system better. We look at the surplus bill that recently 
passed the House, the NARAD bill which you have recently 
introduced, which would make agent licensing more efficient. 
And the original OII bill from Chairman Kanjorski is a good 
piece of legislation. It brings data and information to the 
Federal Government, and it does solve some preemption problems. 
This current draft legislation goes a little bit further than 
that and starts to bring in regulation and supervision of the 
industry, so we have a problem with that. But using targeted 
Federal legislation to enhance the State system in our opinion 
is the best of both worlds.
    Mr. Scott. Let me ask you, are you familiar--I am sure you 
have read this--with the preemption language in this?
    Mr. Houldin. Yes.
    Mr. Scott. How do you interpret this? If this new Federal 
insurance office is granted broad preemption authority, and 
let's say foreign insurers are able to operate under different 
rules, would this create a potential harmful environment for 
the consumer?
    Mr. Houldin. We certainly have concerns that the preemption 
in the new draft goes a little bit further and may put the 
foreign companies in different consideration than the domestic 
companies. The original draft or original OII only treated when 
there was a difference and put everybody on a level playing 
field. We are afraid this new language may have gone too far 
and made it unlevel.
    Mr. Scott. And with this new preemption authority, is there 
a real concern that all of the insurance companies domiciled, 
let's say, in a certain State would be significantly 
disadvantaged by these international companies?
    Mr. Houldin. It certainly could happen when the 
international companies are going to be given different 
treatment and play by different rules. Certainly.
    Mr. Scott. Now, so that we know for sure, what is your 
major concern? What is your major concern with Federal 
regulation?
    Mr. Houldin. Well, with Federal regulation on this 
particular bill and where it goes, our major concern is that 
the bill goes beyond just information and preemption and it 
gives regulatory authority to Treasury.
    We also have a concern in that the definition of insurer in 
the bill is anybody who engages in the business of insurance. 
That would bring mainstream agents like myself, mom-and-pop 
shops, into the fold. So we think there should be some 
exemptions to exempt smaller businesses and insurers.
    Mr. Scott. I just want to note for the record in the White 
Paper that the President submitted, he says in the last 
sentence here, ``Given the importance of a healthy insurance 
industry to the well-functioning of our economy, it is 
important that we establish a Federal Office of National 
Insurance.''
    Do you worry that this kind of language would be a 
precursor to Federal control? Especially when it says within 
Treasury and that we develop a modern regulatory framework for 
insurance.
    Mr. Houldin. Certainly, that concerns us. It was nice to 
see that the Blueprint left out Federal regulation of insurance 
completely and just talked about this particular office. We do 
need to make sure we don't have mission creep through this 
bill. That is exactly what the original OII was intended to do.
    Mr. Scott. Thank you very much, Mr. Houldin.
    I yield back the balance of my time. Thank you.
    Mr. Kanjorski. Now, we will hear from the gentleman from 
Alabama, Mr. Bachus.
    Mr. Bachus. Thank you, Mr. Chairman.
    Normally, I would not ask you all to give me a yes-or-no 
answer, so I am going to give you another choice, and that is, 
you can answer ``yes,'' ``no,'' or ``I don't have an opinion.'' 
How about that?
    My first question is, State regulation--this is just a 
statement. You tell me whether you agree or disagree with this 
statement, or you don't have an opinion.
    State regulation of insurance functions is significantly 
better than Federal regulation of securities and banking over 
the past 5 or 10 years. How many think it did a better job of 
regulating the State--okay.
    How many of you think it did a worse job?
    How many of you don't have an opinion?
    Okay. To the three who said that you don't have an opinion 
on whether State regulation of insurance was better than 
Federal regulation of, say, securities or financial services, 
what were the failures of State regulation of insurance?
    I will start with Mr. Atkinson. What do you see as the most 
significant failure? I can give you 100 failures of Federal 
regulation of banking and securities.
    Mr. Atkinson. I wouldn't say they are failures. They are 
probably inefficiencies and frustrations and so forth. It is 
not a very fast system. Things evolve very, very slowly. We are 
30 years behind most developed countries in our regulations.
    Mr. Bachus. The bottom line, how did that affect customers? 
Was it increased--
    Mr. Atkinson. Increased price is probably the main thing.
    Mr. Bachus. Was it increased over what the costs were, like 
the insurance in other countries?
    Mr. Atkinson. The products are not too comparable between 
countries. Each country has their own regulations which dictate 
what kind of products are available.
    Mr. Bachus. I can't think of any instance where someone 
didn't have an insurance contract, they contracted for 
insurance, and it paid off. Were there any instances where that 
didn't happen?
    Mr. Atkinson. There have been insolvencies. We do have a 
State guarantee system that backs up--
    Mr. Bachus. So there were no losses?
    Mr. Atkinson. Insolvency regulation has worked well. It has 
been a success.
    Mr. Bachus. They didn't in banking and securities?
    Mr. Atkinson. I am not that close to banking, but 
certainly, reading the papers, there have been huge problems in 
banking and securities.
    Mr. Bachus. We talk about inefficiencies in insurance, 
driving up the cost to consumers. National regulation in 
banking, has that brought down the cost to consumers of 
different banking fees? Does anybody have an opinion?
    Okay. Do you think that national regulation of financial 
services products or securities, do you think that offered the 
type of protection it should have? Anybody?
    It was a pretty profound failure, wasn't it?
    I am just trying to figure out how, after what we witnessed 
the last 10 years, we would want to say that national 
regulation would do a better job than State regulation. To me, 
clearly, the answer to that first question was that the States 
did a much better job of regulating insurance than the Federal 
Government did of regulating securities, investments, and 
banking.
    Let me say this--and I appreciate those who came down on 
both sides. Maybe you all would elaborate in a letter to me why 
you don't have an opinion as to which worked best.
    Mr. Atkinson. I am just not that familiar with Federal 
regulation of banking.
    Mr. Bachus. But you read the papers.
    Mr. Atkinson. But there is also State regulation of 
banking, and I don't know where the failure lies, perhaps it is 
at both levels.
    Mr. Bachus. We were talking about State regulation of 
insurance.
    Mr. Atkinson. Right. So I don't know that either has a 
license to be better than the other.
    Mr. Bachus. Let me ask you this: International insurance 
agreements, that has quite an appeal to me, that we need an 
office that can negotiate those. But does the Federal 
Government have better expertise to know whether those 
agreements will protect insurance customers in those States?
    Ms. Abraham. One of the issues that we are concerned about 
on this is to ensure that, if preemption does occur, that there 
is due process associated with it. So there can be a full 
hearing through the judicial process to understand what the 
preemption means, the impact on the States and the consumers, 
obviously. So we are concerned that preemption can occur. And 
as the draft proposal currently stands, there isn't that due 
process. We think that is very important. So we would encourage 
as this evolves, that is built into any final legislation that 
is put forward.
    Mr. Bachus. I would think there is something worse than not 
having an international insurance agreement, and that would be 
having a bad one that impacted customers negatively.
    Mr. Atkinson. The whole reason for this measure is to build 
expertise at the Federal level, and it may take years; and it 
may also take more than a few years to negotiate our first 
international insurance agreement, and probably prudently so.
    Mr. Bachus. I am really asking questions. I am seeking to 
better educate myself. Thank you.
    Mr. Kanjorski. Mr. Zielezienski wanted to respond.
    Mr. Zielezienski. There are a couple of responses, one in 
the context of international insurance agreements. The U.S. 
Government is the only one that can do that, vested solely with 
the foreign affairs power by the Constitution. The fact of the 
matter is these international agreements are being concluded 
between other countries every day, and every day we don't sit 
at the table is another day lost.
    Mr. Bachus. A lot of those international agreements have 
turned out fairly badly for some of our companies.
    Mr. Zielezienski. And, to date, there has been no ability 
or authority on behalf of the Federal Government to conclude an 
agreement on insurance matters.
    Mr. Bachus. I am not sure that is all bad. I understand it 
is bad on occasion. I give you that. There are legitimate 
cases. With reinsurance, there have been some tremendous 
problems. I do think last year's legislation went about where 
it should have, and I am afraid that this year's legislation 
may be an overreach.
    Thank you.
    Mr. Kanjorski. Thank you very much.
    Now, we have the gentleman from Missouri, Mr. Cleaver.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Let me thank all of the witnesses for being here, but 
particularly Mr. Atkinson. Thank you for being here.
    I will just restate something that the chairman stated 
earlier. You are from the Reinsurance Group of America, RGA. 
The business journals, which actually was started in Kansas 
City by Mike Russell and ``Doc'' Worley, Bill Worley, but now 
they are all over the country and one is in St. Louis, the St. 
Louis Business Journal said that people get you confused with 
the RCGA as well, which is a civic, economic development 
oriented organization; and if you come near the Potomac, the 
RGA is the Republican Governors Association. I am not mad or 
anything. I am just saying that is what people think, 
particularly on this side. So it may be of some value for you 
to help us clear up some things, particularly about 
reinsurance.
    How would your member organizations differ from some major 
company like AIG?
    Mr. Atkinson. Well, first of all, we are specialists in 
life reinsurance, so we pay money when people die. We only pay 
life insurance companies, and all of our negotiations and 
dealings are with life insurance companies. We also are a buyer 
of reinsurance ourselves. We deal with other life insurance 
companies behind us. The net effect of all this is, when 
someone famous with a lot of insurance dies, no single company 
is put in jeopardy. The claim is spread around, with sometimes 
as many as 40 or 50 companies paying a share of a large claim.
    On top of that, we work with a lot of companies on new 
products, new ideas in the industry, and help to further the 
process, speed up the process of innovation and lower the price 
of insurance over time because of that.
    Mr. Cleaver. So AIG, which is ``too-big-to-fail,'' would 
not be in any way or should not be confused with your group. 
You are not ``too-big-to-fail?''
    Mr. Atkinson. We do insure AIG. But one thing to note about 
our business, too, we charge premiums each year, and we pay 
claims each year, and those largely offset. So there is not a 
lot of money tied up somewhere that could evaporate.
    Mr. Cleaver. You said that right now, the multi-State 
system of insurance regulation is cumbersome.
    Mr. Atkinson. Yes, it is.
    Mr. Cleaver. And extremely inefficient.
    Mr. Atkinson. Look at things like new product 
introductions. You have to file your product in every State. 
Every State has different things they want changed on your 
application and your policy wording. It is a nightmare. It 
takes up to a year sometimes to get 1 product approved in all 
50 States.
    Mr. Cleaver. So you would be opposed to a 50-State system?
    Mr. Atkinson. That is just the way it is today. I think 
U.S. companies are used to dealing with that. It is a 
frustration. It is an inefficiency, but it is livable.
    Mr. Cleaver. What would you do to correct it? To make it 
more livable?
    Mr. Atkinson. I don't know that you can do anything. When 
you have insurance regulated at the State level, you are going 
to have at least 50 different voices with different ideas, and 
sometimes they can come together and adopt a uniform 
regulation. Even there, there are usually some tweaks in each 
State.
    Mr. Cleaver. I got a BlackBerry message a few minutes ago 
from someone who said to me, you guys should not do anything to 
help AIG, assuming that is what is going on here. That is why I 
wanted to get some clarity.
    I have no other questions, Mr. Chairman. Thank you.
    Mr. Kanjorski. Thank you very much, Mr. Cleaver.
    Next we will hear from the gentleman from California, Mr. 
Royce.
    Mr. Royce. Thank you. Thank you, Mr. Chairman.
    Well, one of the biggest failures I think was AIG in our 
recent history, and the securities lending division was 
overseen by the various State insurance regulators. Now, that 
portion of AIG has cost the taxpayers dearly, and no one here I 
don't think is arguing that there aren't problems with State 
regulations or Federal regulations. We understand there are 
problems with both, and it is getting to a solution of this I 
think we are focused on.
    One of the particular problems with AIG in terms of their 
insurance contracts over the Government-Sponsored Enterprises, 
Fannie Mae and Freddie Mac, was the government intervention 
directly in the market, in the sense that we prevented 
regulators from regulating Fannie and Freddie for safety and 
soundness.
    I carried legislation on the behalf of the Federal Reserve 
to try to do something about this, but it was defeated over an 
argument that it would be injurious to affordable housing if we 
didn't have those zero down payment loans, if we didn't have 
those 50 percent requirements for Fannie and Freddie to hold 
that much subprime in their portfolios, and it was AIG that 
made the bet or insured this. So when Fannie and Freddie went 
down, when that $1 trillion was lost, AIG lost that money as 
well. But a lot of that money, again, was the securities 
lending division over seen by the various State insurance 
regulators, so they miss THAAD too.
    As I mentioned in my opening statement, the European Union 
continues to move closer to passing the Solvency II directive 
which will create one market for insurance throughout all of 
Europe. Another aspect of Solvency II is meant to increase the 
global cooperation effort by bringing equivalent regulators 
from around the world into closer consultation with each other.
    Unfortunately, we have not held up our end of the bargain. 
The various State insurance regulators simply do not have the 
authority to negotiate with foreign regulatory bodies on behalf 
of the U.S. market. As a result, the regulators in the EEU will 
not recognize U.S.-based firms under the oversight of the 
various State regulators.
    So I would ask Mr. Atkinson, are you concerned that our 
regulatory model will punish U.S.-based institutions trying to 
operate overseas, and what are steps likely to be taken by EEU 
regulators against U.S. firms should they follow through on our 
violation of that agreement?
    Mr. Atkinson. I wouldn't use the word ``punish,'' but we 
have been disadvantaged by our situation for some years now in 
many of the leading countries that we operate in. We have had 
to set up subsidiaries and capitalize those subsidiaries, 
rather than deal directly from our U.S. base. So that has 
created a lot of extra costs.
    Mr. Royce. If I could interrupt, Mr. Atkinson, that was in 
a situation where we as a Nation have 50 separate regulators, 
but France didn't have 50 regulators for every province, so 
they took some decisive action then. But now the EEU is all one 
market, because they have decided instead of having 50 
regulators, they are going to have one world-class regulator. 
But they are looking at the United States and saying we have an 
agreement for equivalency on regulation, and you are going to 
be in violation of it unless you figure out a way to have a 
regulator that can effectively regulate and stop things like 
AIG from happening in the future. So your observation on that?
    Mr. Atkinson. Well, the way around that is you set up 
another company in another jurisdiction and operate it in 
harmony with the local laws. Like I said, it is not a good way 
to do business, but it is a way to do business.
    Mr. Royce. As I noted in my opening statement, the current 
State-based regulatory system is highly fragmented, it is 
inconsistent, and it is inefficient. That is the judgment of 
the Treasury Department. It costs consumers and makes our 
regulatory model weaker.
    What will a Federal insurance regulator do that the 
proposed Federal insurance office cannot? Could I ask if Mr. 
Herchel has any observation on that?
    Mr. Herchel. Yes, Congressman. I think there is a big 
difference between the legislation that is in front of this 
committee today and an optional Federal insurance charter would 
call for. What we are just talking about here today is about a 
Federal insurance office that is going to have information 
gathering potential and expertise so they can consult with the 
systemic regulator or other Members of Congress to make sure 
that there is a knowledge base about the insurance business and 
also on the side with reinsurance, as an example, with respect 
to international agreements.
    You are correct that these rules will not have any way of 
regulating the business of insurance in the United States. This 
office would not have any role in taking care of product 
development or product approvals, which is some of the issues 
that national insurance companies, insurance companies that do 
business across the country do; have nothing to do with market 
conduct requirements; have nothing to do with agency licensing 
issues, making sure that products are distributed appropriately 
throughout the States; and also the financial standards that 
are applicable to those companies, what reserves they have to 
have in place and how they invest their assets that they take 
in.
    Mr. Royce. Mr. Zielezienski, you wanted to comment on this?
    Mr. Zielezienski. Yes. You have heard today, I think, from 
a variety of panelists that the Federal insurance office won't 
be a regulatory body. Adopting an optional Federal charter 
would create that national regulator that we lack today.
    On the issue of the fragmentation and inconsistency and 
inefficiency that pervades the State system today, that would 
be eliminated in favor of a strong set of uniform national 
standards that would apply to those who were federally 
chartered.
    If the bill follows your legislation, that focus would be 
squarely on financial solvency and market conduct, where it 
ought to be. And I have no doubt that under such a system, even 
if it replicated the standards that are at the State level 
today on financial solvency, that would be judged to be 
equivalent.
    Mr. Royce. Thank you, Mr. Zielezienski.
    Now, we will hear from the gentlelady from Illinois, Ms. 
Bean.
    Ms. Bean. Thank you, Mr. Chairman, and to all of the 
witnesses who are testifying before us today.
    First, I just want to point out in reference to my 
colleague from Alabama's questions about State versus Federal 
oversight, my colleague from California did point out some of 
the failures at the State level relative to AIG. I would like 
to add to that McKenzie & Company found that State regulation 
creates an added cost of over $13 billion in inefficiency to 
the industry, which does get passed on to the consumers.
    Also relative to banking oversight that came up as part of 
his questions to the panel, two-thirds of the subprime loans 
that were originated came from nonbanking, State-regulated loan 
originators. So, that clearly had a lot to do with the overall 
financial crisis.
    But moving forward, I have a question for the NAIC. As you 
know, the National Insurance Office Act was included in the 
Obama Administration's June proposal for regulatory reform. The 
Treasury proposal further called for modernization of our 
insurance regulatory structure, stressing the need for 
``increased national uniformity through either a Federal 
charter or effective action by the States.'' The Treasury also 
recognized the failures of the State-based system, stating, 
``Our current insurance regulatory system is highly fragmented, 
inconsistent and inefficient.''
    My question to you is, since June, what actions have the 
State commissioners and the NAIC taken to create a uniform 
system of insurance regulation?
    Ms. Vaughan. Thank you very much, Congresswoman Bean.
    First of all, let me say that I have to respectfully 
disagree with Treasury's statement that the structure is highly 
fragmented, inconsistent, and inefficient. In fact, we have a 
highly coordinated system, and we work very hard through the 
NAIC to be coordinated. And I think history demonstrates that 
we have been coordinated and have done a pretty good job, 
certainly in the environment we are in.
    We do recognize that there are things--
    Ms. Bean. Specifically what have you done?
    Ms. Vaughan. Specifically what we have done, in September 
we adopted, we came up with a new proposal for modernizing our 
reinsurance regulatory structure. That is something that--
    Ms. Bean. So a proposal. Anything else?
    Ms. Vaughan. Boy, I would have to go back and look at all 
of the various things. We work constantly, and I would be happy 
to answer your question in more detail in writing.
    Ms. Bean. Okay.
    Ms. Vaughan. After I have a chance to--
    Ms. Bean. And what authority does the NAIC or any State 
commissioners have to enforce, number one, the collection of 
information from non-insurance affiliates like an AIG, or to 
enforce any kind of commitments out of a proposal towards 
consistency in rules?
    Ms. Vaughan. What authority does the NAIC have, or does the 
State have?
    Ms. Bean. Or does any individual State commissioner have to 
actually make sure that: number one, collection of information 
happens; or, number two, that there is commitment to consistent 
rules that States will follow through?
    Ms. Vaughan. Yes. We have laws in the States that call for 
companies to report information to the NAIC, so we collect that 
information and that is grounded in State law.
    Ms. Bean. So some States?
    Ms. Vaughan. Normally, all States require that the 
companies file. That is one of our accreditation requirements, 
that companies file their financial information with the NAIC, 
and that is what creates our financial database.
    Second, the interpretation and enforcement of laws in the 
States are the responsibility of the State insurance 
regulators.
    So I am not sure that I understand the question exactly.
    Ms. Bean. Okay, let me move on to some other questions with 
some other folks.
    We just heard the NAIC say they have a proposal to create 
further coordination. I guess I would ask Mr. Herchel and Mr. 
Atkinson, do you believe or should anyone here have any 
confidence that after 140 years of efforts by the NAIC to 
create uniform rules and their failure to actually have that 
happen, that a new proposal was going to change that?
    Mr. Herchel. Congresswoman, I have been working in the 
insurance arena for decades now, and I have been working with 
the NAIC, and I have a lot of respect for the insurance 
regulatory community. They are very dedicated and work very 
hard.
    But what we found is that there are constraints on how far 
they can go. The NAIC is a great organization, puts together 
great proposals and model laws and model regulations.
    Ms. Bean. To shorten up your answer so I can get to other 
questions, you don't have a lot of confidence that anything is 
going to be any different than it has for 140 years?
    Mr. Herchel. I hope we move on, but it is going to be a 
tough road for them.
    Ms. Bean. Mr. Atkinson?
    Mr. Atkinson. I would add, it is hard. As diligent and 
dedicated as the NAIC and its members are, how do you get 
unanimous agreement from so many players?
    Ms. Bean. From 50 different bodies.
    Mr. Atkinson. But we are encouraged that they are trying 
hard. In fact, their latest proposal recognizes the need for a 
Federal role in international reinsurance matters.
    Ms. Bean. I would like to ask Mr. Zielezienski as well?
    Mr. Zielezienski. We have said this pretty often, it is not 
the fault of the State regulators, but the fact is you have to 
navigate 50 different political environments. If the NAIC 
produced a perfect model law, you still have to go to the State 
legislatures and get it passed, and our experience has been 
there is always going to be those inconsistencies, and, again, 
it is not their fault. That is just the way it is.
    Ms. Bean. Again, you don't have confidence that this is 
going to change that. I appreciate that.
    I would like to ask Mr. Zielezienski another question, 
which is essentially that the Treasury proposal included six 
principles of reform for insurance reform. It included, and I 
will just summarize: effective systemic risk regulation; strong 
capital standards that specifically matched capital allocation 
with liabilities; meaningful and consistent consumer 
protections for insurance products and practices; increased 
national uniformity, which we just spoke about; to improve and 
broaden regulation of insurance companies and their affiliates; 
and international coordination.
    Specifically, you have already said that we don't have 
confidence that what we are doing today addresses the national 
uniformity issue. Does it provide meaningful and consistent 
consumer protection for insurance products and practices 
nationally?
    Mr. Zielezienski. I think ``meaningful'' is subject to 
interpretation. But consistent, I think the answer is no. One 
of the frustrations for companies is that you have to deal with 
requirements that may differ and different definitions of 
consumer protection. Some may view different aspects of 
regulation as providing consumer protection, when actually they 
are inhibiting solvency regulation.
    Ms. Bean. If I could ask another question, do you believe 
the National Insurance Office can potentially monitor systemic 
risk within the insurance industry without a seat on the 
Financial Services Oversight Council?
    Mr. Zielezienski. No.
    Ms. Bean. Given the significance of the insurance industry 
in our financial system, do you think this office would be 
better served by an individual that is appointed by the 
President and confirmed by the Senate to serve a set term in 
office, compared to serving more or less as a subordinate to 
the Treasury Secretary?
    Mr. Zielezienski. Yes, I have testified to that, that I 
believe the person ought to be viewed as much as an equal, 
absent the regulatory responsibilities that the discussion 
draft doesn't provide.
    Ms. Bean. Thank you. I yield back.
    Mr. Kanjorski. The gentlelady from Illinois, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    I do have some concerns with the discussion draft that was 
circulated late last Thursday. Obviously, it has been mentioned 
that it is almost identical to the Administration's proposal, 
except the subpoena power has been removed. I am afraid that 
the new draft moves away from what I thought was really a great 
bipartisan bill that I worked on with you, Mr. Chairman. So, I 
just have a few questions and a few comments.
    The new discussion draft requires that insurers provide 
that the new Federal Insurance Office with any information that 
it requests, and our bill sets up an Office of Insurance 
Information that made providing information beyond what is 
already provided to the State regulator voluntary. So there is 
a mandate versus voluntary.
    Then I really worry about the mandatory requirement 
unfairly imposing significant costs and burdens, particularly 
on the smaller and medium-sized insurers.
    Also, the draft could allow agreements entered into the 
USTR, and this concerns me that the head of the Federal 
Insurance Office would be able to preempt State law. We have 
already had agreements under GATT and worked with the WTO, and 
insurance was included in some of these agreements and there 
has been a carve-out of domestic laws to protect the consumer 
and the policyholder. The Treasury has an international office 
now that is already engaging in talks with trading partners, 
aimed at beefing-up the insurance part at the market, informed 
markets. Some have been informal, like the U.S.-China Joint 
Commission. Others are a little more formal.
    My question would be, I believe there are existing trading 
agreements, both bilateral and multilateral, that involve 
insurance. Am I correct in that? Does anyone say no to that?
    Well, then, would this new office require States to comply 
with these agreements and could States opt out? Anybody willing 
to take a shot at that? Mr. Atkinson?
    Mr. Atkinson. Where we are today, the U.S. Government can 
negotiate, but they can't follow through on any agreement 
because they have no power. There is no credibility for a U.S. 
negotiator where we are today. The EEU knows that no matter 
what the United States says, the States control the outcome. So 
there is no way to implement it.
    Ms. Abraham. One of the issues, I agree with your statement 
that there is potential for preemption. I did mention earlier 
the need for due process to hear that. One issue I was 
specifically concerned about, Representative Biggert, is the 
collateralization issue. We are quite concerned about that, 
because this allows particularly small to medium-size insurance 
companies to be able to be confident that when they have claims 
to pay, when they have a judgment, that the collateral be 
there, the payment will be there from the reinsurance companies 
that are not U.S. reinsurance companies. These are foreign or 
non-domestic reinsurance companies.
    We would be very concerned that there would be a preemption 
of the State collateral rules, and that particularly small-to-
medium companies would be left disadvantaged, unable to collect 
on the collateral if that would go away.
    So it is a concern we have, and one we appreciate your 
attention to.
    Mrs. Biggert. Okay. Because it could erode consumer 
protections and decrease competition and really harm U.S. 
insurers or the reinsurers or raise the cost of insurance for 
consumers. Let me go on to one other thing I wanted to get to, 
and my time is running out.
    If you could just give me one or two or two or three issues 
that are different in this draft versus the Office of Insurance 
Information that you have concerns about. I will start down 
here.
    Mr. Zielezienski. I will highlight one which I think we can 
all agree on, and that is to the extent there is an information 
collection function by the office, that it needs to ensure that 
data is gathered from existing sources. I think we can all 
agree that the best thing to do is create an efficient system 
of collecting that information, and protecting that information 
is also key as well. I think my concern is that should be a 
little bit tighter.
    Mrs. Biggert. Ms. Vaughan?
    Ms. Vaughan. Yes. First, the language that would limit the 
scope of international agreements to those that are 
substantially equivalent to regulation in the States, we think 
that is very important; second, the possible stay of 
preemption; And, third, the two-way information sharing, 
including sharing information through the NAIC.
    Mrs. Biggert. Mr. Houldin?
    Mr. Houldin. Two things. One, the definition of 
``insurer,'' not to include everybody engaged in insurance, 
including Main Street agents. Secondly, just the overstep of 
their regulatory and supervisory authority that it gives the 
office.
    Mrs. Biggert. Thank you.
    Mr. Herchel. A couple of things that we want to make sure 
are part of this process is making sure that the Federal 
Insurance Office is a member of the council, and the other 
thing is to make sure that they are on parity with other 
Federal regulators with respect to consulting and coordinating 
with the systemic risk regulator.
    Mrs. Biggert. So that would be either the FOI or the OII?
    Mr. Herchel. The FOI.
    Mr. Atkinson. I think the current proposal also works 
pretty well for the reinsurance market. As part of that, I 
think we do want to be at the table talking about collateral 
requirements, talking about capital requirements, talking about 
reserving requirements, all of the factors that enter into 
solvency. But I would just like to emphasize, the ability to 
preempt State laws when needed is absolutely necessary because 
you cannot negotiate in good faith unless you can actually 
follow through.
    Mrs. Biggert. Ms. Abraham?
    Ms. Abraham. Retrieving information from established 
sources, from the existing State regulators or other public 
sources; voluntary submission of information, not mandatory; 
and a very distinct carve out for small insurance companies are 
things that are very important to us.
    Mrs. Biggert. Thank you.
    Thank you, Mr. Chairman. I yield back.
    Mr. Kanjorski. Thank you very much.
    I see no other questions are pending or members present. So 
that being the fact, I am going to thank the panel for having 
been here and call to the panel's attention that some members 
may have additional questions for this panel which they may 
wish to submit in writing.
    Without objection, the record will remain open for 30 days 
for members to submit written questions to today's participants 
and to place their responses in the record.
    Before we adjourn, the following written statements will be 
made part of the record of this meeting: The National 
Association of Mutual Insurance Companies; the National 
Association of Insurance and Financial Advisers; the Financial 
Services Institute; and the National Association of Small 
Business Investment Companies. Without objection, it is so 
ordered.
    The panel is dismissed and this meeting is adjourned.
    [Whereupon, at 3:32 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            October 6, 2009


[GRAPHIC] [TIFF OMITTED] T5810.001

[GRAPHIC] [TIFF OMITTED] T5810.002

[GRAPHIC] [TIFF OMITTED] T5810.003

[GRAPHIC] [TIFF OMITTED] T5810.004

[GRAPHIC] [TIFF OMITTED] T5810.005

[GRAPHIC] [TIFF OMITTED] T5810.006

[GRAPHIC] [TIFF OMITTED] T5810.007

[GRAPHIC] [TIFF OMITTED] T5810.008

[GRAPHIC] [TIFF OMITTED] T5810.009

[GRAPHIC] [TIFF OMITTED] T5810.010

[GRAPHIC] [TIFF OMITTED] T5810.011

[GRAPHIC] [TIFF OMITTED] T5810.012

[GRAPHIC] [TIFF OMITTED] T5810.013

[GRAPHIC] [TIFF OMITTED] T5810.014

[GRAPHIC] [TIFF OMITTED] T5810.015

[GRAPHIC] [TIFF OMITTED] T5810.016

[GRAPHIC] [TIFF OMITTED] T5810.017

[GRAPHIC] [TIFF OMITTED] T5810.018

[GRAPHIC] [TIFF OMITTED] T5810.019

[GRAPHIC] [TIFF OMITTED] T5810.020

[GRAPHIC] [TIFF OMITTED] T5810.021

[GRAPHIC] [TIFF OMITTED] T5810.022

[GRAPHIC] [TIFF OMITTED] T5810.023

[GRAPHIC] [TIFF OMITTED] T5810.024

[GRAPHIC] [TIFF OMITTED] T5810.025

[GRAPHIC] [TIFF OMITTED] T5810.026

[GRAPHIC] [TIFF OMITTED] T5810.027

[GRAPHIC] [TIFF OMITTED] T5810.028

[GRAPHIC] [TIFF OMITTED] T5810.029

[GRAPHIC] [TIFF OMITTED] T5810.030

[GRAPHIC] [TIFF OMITTED] T5810.031

[GRAPHIC] [TIFF OMITTED] T5810.032

[GRAPHIC] [TIFF OMITTED] T5810.033

[GRAPHIC] [TIFF OMITTED] T5810.034

[GRAPHIC] [TIFF OMITTED] T5810.035

[GRAPHIC] [TIFF OMITTED] T5810.036

[GRAPHIC] [TIFF OMITTED] T5810.037

[GRAPHIC] [TIFF OMITTED] T5810.038

[GRAPHIC] [TIFF OMITTED] T5810.039

[GRAPHIC] [TIFF OMITTED] T5810.040

[GRAPHIC] [TIFF OMITTED] T5810.041

[GRAPHIC] [TIFF OMITTED] T5810.042

[GRAPHIC] [TIFF OMITTED] T5810.043

[GRAPHIC] [TIFF OMITTED] T5810.044

[GRAPHIC] [TIFF OMITTED] T5810.045

[GRAPHIC] [TIFF OMITTED] T5810.046

[GRAPHIC] [TIFF OMITTED] T5810.047

[GRAPHIC] [TIFF OMITTED] T5810.048

[GRAPHIC] [TIFF OMITTED] T5810.049

[GRAPHIC] [TIFF OMITTED] T5810.050

[GRAPHIC] [TIFF OMITTED] T5810.051

[GRAPHIC] [TIFF OMITTED] T5810.052

[GRAPHIC] [TIFF OMITTED] T5810.053

[GRAPHIC] [TIFF OMITTED] T5810.054

[GRAPHIC] [TIFF OMITTED] T5810.055

[GRAPHIC] [TIFF OMITTED] T5810.056

[GRAPHIC] [TIFF OMITTED] T5810.057

[GRAPHIC] [TIFF OMITTED] T5810.058

[GRAPHIC] [TIFF OMITTED] T5810.059

[GRAPHIC] [TIFF OMITTED] T5810.060

[GRAPHIC] [TIFF OMITTED] T5810.061

[GRAPHIC] [TIFF OMITTED] T5810.062

[GRAPHIC] [TIFF OMITTED] T5810.063

[GRAPHIC] [TIFF OMITTED] T5810.064

[GRAPHIC] [TIFF OMITTED] T5810.065

[GRAPHIC] [TIFF OMITTED] T5810.066

[GRAPHIC] [TIFF OMITTED] T5810.067

[GRAPHIC] [TIFF OMITTED] T5810.068

[GRAPHIC] [TIFF OMITTED] T5810.069

[GRAPHIC] [TIFF OMITTED] T5810.070

[GRAPHIC] [TIFF OMITTED] T5810.071

[GRAPHIC] [TIFF OMITTED] T5810.072

[GRAPHIC] [TIFF OMITTED] T5810.073

[GRAPHIC] [TIFF OMITTED] T5810.074

[GRAPHIC] [TIFF OMITTED] T5810.075

[GRAPHIC] [TIFF OMITTED] T5810.076

[GRAPHIC] [TIFF OMITTED] T5810.077

[GRAPHIC] [TIFF OMITTED] T5810.078

[GRAPHIC] [TIFF OMITTED] T5810.079

[GRAPHIC] [TIFF OMITTED] T5810.080

[GRAPHIC] [TIFF OMITTED] T5810.081

[GRAPHIC] [TIFF OMITTED] T5810.082

[GRAPHIC] [TIFF OMITTED] T5810.083

[GRAPHIC] [TIFF OMITTED] T5810.084

[GRAPHIC] [TIFF OMITTED] T5810.085

[GRAPHIC] [TIFF OMITTED] T5810.086

[GRAPHIC] [TIFF OMITTED] T5810.087

[GRAPHIC] [TIFF OMITTED] T5810.088

[GRAPHIC] [TIFF OMITTED] T5810.089

[GRAPHIC] [TIFF OMITTED] T5810.090

[GRAPHIC] [TIFF OMITTED] T5810.091

[GRAPHIC] [TIFF OMITTED] T5810.092

[GRAPHIC] [TIFF OMITTED] T5810.093

[GRAPHIC] [TIFF OMITTED] T5810.094

[GRAPHIC] [TIFF OMITTED] T5810.095

[GRAPHIC] [TIFF OMITTED] T5810.096

[GRAPHIC] [TIFF OMITTED] T5810.097

[GRAPHIC] [TIFF OMITTED] T5810.098

[GRAPHIC] [TIFF OMITTED] T5810.099

[GRAPHIC] [TIFF OMITTED] T5810.100

[GRAPHIC] [TIFF OMITTED] T5810.101

[GRAPHIC] [TIFF OMITTED] T5810.102

[GRAPHIC] [TIFF OMITTED] T5810.103

[GRAPHIC] [TIFF OMITTED] T5810.104

[GRAPHIC] [TIFF OMITTED] T5810.105

[GRAPHIC] [TIFF OMITTED] T5810.106

[GRAPHIC] [TIFF OMITTED] T5810.107

[GRAPHIC] [TIFF OMITTED] T5810.108

[GRAPHIC] [TIFF OMITTED] T5810.109

[GRAPHIC] [TIFF OMITTED] T5810.110

[GRAPHIC] [TIFF OMITTED] T5810.111

[GRAPHIC] [TIFF OMITTED] T5810.112

[GRAPHIC] [TIFF OMITTED] T5810.113

[GRAPHIC] [TIFF OMITTED] T5810.114

[GRAPHIC] [TIFF OMITTED] T5810.115

[GRAPHIC] [TIFF OMITTED] T5810.116

[GRAPHIC] [TIFF OMITTED] T5810.117

[GRAPHIC] [TIFF OMITTED] T5810.118

[GRAPHIC] [TIFF OMITTED] T5810.119

[GRAPHIC] [TIFF OMITTED] T5810.120

[GRAPHIC] [TIFF OMITTED] T5810.121

[GRAPHIC] [TIFF OMITTED] T5810.122

[GRAPHIC] [TIFF OMITTED] T5810.123

[GRAPHIC] [TIFF OMITTED] T5810.124

[GRAPHIC] [TIFF OMITTED] T5810.125

[GRAPHIC] [TIFF OMITTED] T5810.126

[GRAPHIC] [TIFF OMITTED] T5810.127

[GRAPHIC] [TIFF OMITTED] T5810.128

[GRAPHIC] [TIFF OMITTED] T5810.129

[GRAPHIC] [TIFF OMITTED] T5810.130

[GRAPHIC] [TIFF OMITTED] T5810.131

[GRAPHIC] [TIFF OMITTED] T5810.132

[GRAPHIC] [TIFF OMITTED] T5810.133

[GRAPHIC] [TIFF OMITTED] T5810.134

[GRAPHIC] [TIFF OMITTED] T5810.135

[GRAPHIC] [TIFF OMITTED] T5810.136

[GRAPHIC] [TIFF OMITTED] T5810.137

[GRAPHIC] [TIFF OMITTED] T5810.138

[GRAPHIC] [TIFF OMITTED] T5810.139

[GRAPHIC] [TIFF OMITTED] T5810.140

[GRAPHIC] [TIFF OMITTED] T5810.141

[GRAPHIC] [TIFF OMITTED] T5810.142

[GRAPHIC] [TIFF OMITTED] T5810.143

[GRAPHIC] [TIFF OMITTED] T5810.144

[GRAPHIC] [TIFF OMITTED] T5810.145

[GRAPHIC] [TIFF OMITTED] T5810.146

[GRAPHIC] [TIFF OMITTED] T5810.147

[GRAPHIC] [TIFF OMITTED] T5810.148

[GRAPHIC] [TIFF OMITTED] T5810.149

[GRAPHIC] [TIFF OMITTED] T5810.150

[GRAPHIC] [TIFF OMITTED] T5810.151

[GRAPHIC] [TIFF OMITTED] T5810.152

[GRAPHIC] [TIFF OMITTED] T5810.153

[GRAPHIC] [TIFF OMITTED] T5810.154

[GRAPHIC] [TIFF OMITTED] T5810.155

[GRAPHIC] [TIFF OMITTED] T5810.156

[GRAPHIC] [TIFF OMITTED] T5810.157

[GRAPHIC] [TIFF OMITTED] T5810.158

[GRAPHIC] [TIFF OMITTED] T5810.159

[GRAPHIC] [TIFF OMITTED] T5810.160

[GRAPHIC] [TIFF OMITTED] T5810.161

[GRAPHIC] [TIFF OMITTED] T5810.162

[GRAPHIC] [TIFF OMITTED] T5810.163

[GRAPHIC] [TIFF OMITTED] T5810.164

[GRAPHIC] [TIFF OMITTED] T5810.165

[GRAPHIC] [TIFF OMITTED] T5810.166

[GRAPHIC] [TIFF OMITTED] T5810.167

[GRAPHIC] [TIFF OMITTED] T5810.168

[GRAPHIC] [TIFF OMITTED] T5810.169

[GRAPHIC] [TIFF OMITTED] T5810.170

[GRAPHIC] [TIFF OMITTED] T5810.171

[GRAPHIC] [TIFF OMITTED] T5810.172

[GRAPHIC] [TIFF OMITTED] T5810.173

[GRAPHIC] [TIFF OMITTED] T5810.174

[GRAPHIC] [TIFF OMITTED] T5810.175

[GRAPHIC] [TIFF OMITTED] T5810.176

[GRAPHIC] [TIFF OMITTED] T5810.177

[GRAPHIC] [TIFF OMITTED] T5810.178

[GRAPHIC] [TIFF OMITTED] T5810.179

[GRAPHIC] [TIFF OMITTED] T5810.180

[GRAPHIC] [TIFF OMITTED] T5810.181

[GRAPHIC] [TIFF OMITTED] T5810.182

[GRAPHIC] [TIFF OMITTED] T5810.183

[GRAPHIC] [TIFF OMITTED] T5810.184

[GRAPHIC] [TIFF OMITTED] T5810.185

[GRAPHIC] [TIFF OMITTED] T5810.186

[GRAPHIC] [TIFF OMITTED] T5810.187

[GRAPHIC] [TIFF OMITTED] T5810.188

[GRAPHIC] [TIFF OMITTED] T5810.189

[GRAPHIC] [TIFF OMITTED] T5810.190

[GRAPHIC] [TIFF OMITTED] T5810.191

[GRAPHIC] [TIFF OMITTED] T5810.192

[GRAPHIC] [TIFF OMITTED] T5810.193

[GRAPHIC] [TIFF OMITTED] T5810.194

[GRAPHIC] [TIFF OMITTED] T5810.195

[GRAPHIC] [TIFF OMITTED] T5810.196

[GRAPHIC] [TIFF OMITTED] T5810.197

[GRAPHIC] [TIFF OMITTED] T5810.198

[GRAPHIC] [TIFF OMITTED] T5810.199

[GRAPHIC] [TIFF OMITTED] T5810.200

[GRAPHIC] [TIFF OMITTED] T5810.201

[GRAPHIC] [TIFF OMITTED] T5810.202

[GRAPHIC] [TIFF OMITTED] T5810.203

[GRAPHIC] [TIFF OMITTED] T5810.204

[GRAPHIC] [TIFF OMITTED] T5810.205

[GRAPHIC] [TIFF OMITTED] T5810.206

[GRAPHIC] [TIFF OMITTED] T5810.207

[GRAPHIC] [TIFF OMITTED] T5810.208

[GRAPHIC] [TIFF OMITTED] T5810.209

[GRAPHIC] [TIFF OMITTED] T5810.210

[GRAPHIC] [TIFF OMITTED] T5810.211

[GRAPHIC] [TIFF OMITTED] T5810.212

[GRAPHIC] [TIFF OMITTED] T5810.213

[GRAPHIC] [TIFF OMITTED] T5810.214

[GRAPHIC] [TIFF OMITTED] T5810.215

[GRAPHIC] [TIFF OMITTED] T5810.216

[GRAPHIC] [TIFF OMITTED] T5810.217

[GRAPHIC] [TIFF OMITTED] T5810.218

[GRAPHIC] [TIFF OMITTED] T5810.219

[GRAPHIC] [TIFF OMITTED] T5810.220

[GRAPHIC] [TIFF OMITTED] T5810.221

[GRAPHIC] [TIFF OMITTED] T5810.222

[GRAPHIC] [TIFF OMITTED] T5810.223

[GRAPHIC] [TIFF OMITTED] T5810.224

[GRAPHIC] [TIFF OMITTED] T5810.225

[GRAPHIC] [TIFF OMITTED] T5810.226

[GRAPHIC] [TIFF OMITTED] T5810.227

[GRAPHIC] [TIFF OMITTED] T5810.228

[GRAPHIC] [TIFF OMITTED] T5810.229

[GRAPHIC] [TIFF OMITTED] T5810.230

[GRAPHIC] [TIFF OMITTED] T5810.231

[GRAPHIC] [TIFF OMITTED] T5810.232

[GRAPHIC] [TIFF OMITTED] T5810.233

[GRAPHIC] [TIFF OMITTED] T5810.234

