[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION: EVALUATING
PRESENT REFORMS AND FUTURE CHALLENGES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CAPITAL MARKETS,
INSURANCE, AND GOVERNMENT
SPONSORED ENTERPRISES
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JULY 20, 2010
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-144
U.S. GOVERNMENT PRINTING OFFICE
61-848 WASHINGTON : 2010
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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
Subcommittee on Capital Markets, Insurance, and Government Sponsored
Enterprises
PAUL E. KANJORSKI, Pennsylvania, Chairman
GARY L. ACKERMAN, New York SCOTT GARRETT, New Jersey
BRAD SHERMAN, California TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas PETER T. KING, New York
CAROLYN McCARTHY, New York FRANK D. LUCAS, Oklahoma
JOE BACA, California DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts EDWARD R. ROYCE, California
BRAD MILLER, North Carolina JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia SHELLEY MOORE CAPITO, West
NYDIA M. VELAZQUEZ, New York Virginia
CAROLYN B. MALONEY, New York JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire JIM GERLACH, Pennsylvania
RON KLEIN, Florida JOHN CAMPBELL, California
ED PERLMUTTER, Colorado MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi BILL POSEY, Florida
CHARLES A. WILSON, Ohio LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
C O N T E N T S
----------
Page
Hearing held on:
July 20, 2010................................................ 1
Appendix:
July 20, 2010................................................ 41
WITNESSES
Tuesday, July 20, 2010
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange
Commission..................................................... 11
APPENDIX
Prepared statements:
Kanjorski, Hon. Paul E....................................... 42
Klein, Hon. Ron.............................................. 44
Schapiro, Hon. Mary L........................................ 46
Additional Material Submitted for the Record
Schapiro, Hon. Mary L.:
Written responses to questions submitted by Hon. Spencer
Bachus..................................................... 66
Written responses to questions submitted by Hon. Carolyn
McCarthy................................................... 72
Written responses to questions submitted by Hon. Ed Royce.... 73
OVERSIGHT OF THE U.S. SECURITIES
AND EXCHANGE COMMISSION:
EVALUATING PRESENT REFORMS
AND FUTURE CHALLENGES
----------
Tuesday, July 20, 2010
U.S. House of Representatives,
Subcommittee on Capital Markets,
Insurance, and Government
Sponsored Enterprises,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2128, Rayburn House Office Building, Hon. Paul E.
Kanjorski [chairman of the subcommittee] presiding.
Members present: Representatives Kanjorski, Ackerman,
Sherman, McCarthy of New York, Baca, Lynch, Scott, Maloney,
Bean, Klein, Perlmutter, Donnelly, Carson, Minnick, Adler,
Himes; Garrett, Manzullo, Royce, Biggert, Hensarling,
Neugebauer, McCarthy of California, Posey, and Jenkins.
Ex officio present: Representative Bachus.
Chairman Kanjorski. This hearing of the Subcommittee on
Capital Markets, Insurance, and Government Sponsored
Enterprises will come to order. Pursuant to committee rules,
each side will have 15 minutes for opening statements. Without
objection, all members' opening statements will be made a part
of the record.
Good morning. We meet today to consider the current
performance and future plans of the United States Securities
and Exchange Commission. When taking over the agency nearly 18
months ago, Chairman Schapiro faced considerable challenges,
perhaps none greater than restoring the Commission's reputation
in the wake of the collapse of sizable investment banks and the
revelation of the $65 billion Madoff fraud. This massive Ponzi
scheme made it undeniably clear that the Commission's
examination, oversight and enforcement programs had serious
weaknesses and required substantial reforms.
During her tenure and using the powers she already had,
Chairman Schapiro has pursued an ambitious results-oriented
agenda aimed at protecting investors and restoring confidence.
She has shaken up the Commission's senior management.
While she has already accomplished much, Chairman Schapiro
also faces many more hurdles in the coming months, especially
as she works to implement the Dodd-Frank Wall Street Reform and
Consumer Protection Act, which will become law tomorrow. This
statute grants the Commission many new powers and endows it
with significant new responsibilities. Today, Congress will
carry out its constitutional oversight mandate by closely
examining what the Commission has already done for better
protection of investors, to facilitate capital formation, and
to maintain fair, orderly, and efficient markets. We will also
begin comprehensive oversight of the Administration's
implementation of the new Wall Street reform law.
I believe that Congress must focus like a laser beam on
this issue by holding regulators accountable for their
performance under this landmark statute. As a result, this
hearing is the first of many that I intend to hold on issues
related to the new law.
Under the Wall Street reform law, the Commission will,
independently and in cooperation with other agencies, write and
police more than 100 new rules on issues like the sale of
derivatives, the fiduciary duty of broker-dealers, the
nomination of board directors by investors, and mandatory
arbitration clauses inserted into securities contracts.
Additionally, the law will require the Commission to
complete a score of studies under very tight deadlines.
This historic agreement also subjects credit rating
agencies to greater accountability through new liability
standards, and the Commission will issue rules that, among
other things, establish a system to prohibit issuers of
structured finance products from picking the entity that
provides the initial credit rating.
The statute further empowers the Commission to register and
oversee hedge fund managers and other private fund advisers.
Moreover, this landmark law aims to modify the structure of the
agency to make it more nimble and responsive to the ever novel
innovations of Wall Street.
In addition to the offices and other structural reforms
that it will uphold, the bill contains my proposal to require
an independent, external, comprehensive examination and
overhaul of the Commission. This overhaul effort will ensure
that a fresh look at the inner workings of the agency is taken
in order to help rectify any remaining problems and make sure
that the Commission and its partners can effectively and
efficiently detect and stop Wall Street fraudsters.
As we proceed today, we will undoubtedly review the recent
developments that have garnered eye-catching headlines on the
front pages of America's newspapers. For example, we need an
update about the structural reforms put in place after the
markets' temporary plunge on May 6th. We also need to shed more
light on last week's eye-popping $550 million settlement from
Goldman Sachs.
I, for one, am hopeful that this legal action will be the
first and not the last brought by the Commission against the
hucksters of Wall Street who spun toxic mortgages into golden
financial opportunities by hiding information or defrauding
investors by other means.
In closing, I look forward to hearing from Chairman
Schapiro on the reforms implemented by the Commission during
the last year; its pending initiatives; and most importantly,
on how the Commission expects to implement the many new powers
and authorities contained in the conference agreement to reform
the ways of Wall Street operation. Because too many Americans
have lost their retirement nest eggs, we cannot rest. We must
continue to work to improve the effectiveness of this support
in the agency.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, for 4 minutes.
Mr. Garrett. I thank the chairman.
I think there is a lot on the SEC's plate these days, and I
am pleased that we are having this hearing to do our proper
oversight and explore really the myriad of issues that are
important to the future of the markets.
Obviously, one of the top things on the SEC's to-do list,
since this bill will be signed into law soon, is to begin a
very aggressive and far-reaching set of rulemakings that is
called for in this 2,300-page financial regulatory bill. And of
the around 243 new rulemakings under the Dodd-Frank bill, there
is one estimate of 95 or more under the purview of the SEC. So
certainly concerns that the timetable for finalizing these
rules that the bill mandates is really not appropriate. It will
cause the SEC to move perhaps too quickly on items that should
be considered in a thoughtful and reasonable, responsible
manner.
Never mind the question of whether some of these rules
should be considered at all. Of course, these concerns are
magnified because much of the rulemaking, especially in the
area of derivatives, must be done in a joint manner with the
CFTC, making that process even more complicated and ripe for
politically-based, rather than policy-based, solutions. So the
regulatory reform rulemaking is all in all in addition to the
number of major items that the SEC was already working on prior
to this, and one of these areas is the concept release on
market structure in which the Commission is examining a broad
array of issues related to the proper functioning of the
markets.
Now, among the issues the SEC is looking at is the concept
release, the role of high-frequency trading in today's market.
And recently, Chairman Schapiro has been quoted on a number of
occasions about our apparent concerns over the speed in which
orders are now electronically processed. Apparently, the
Commission is or will be reviewing whether some of these trades
proceed too fast.
I have some concerns with the Commission's focus in this
area. While it can be difficult for the human mind to fathom
the speed with which these transactions are processed, putting
some sort of artificial governors on the trade seems to me to
be a strategy that will likely produce a host of unintended
consequences, one of which is liquidity could be significantly
curtailed. Another could be increased, rather than decreased,
volatility. So those are issues to be addressed.
In a related note, I again want to highlight a portion of
my April 22nd letter on the market structure release. In the
letter, I express concern that the Commission's request for
comments respecting the interests of long-term and short-term
investors seems to focus on a perceived conflict between such
groups with little to no reference to the critical
interdependency between these groups and the overall equities
market structure. And I am hopeful that the tone of such
requests is not reflective of the SEC's analytical framework,
and I would urge the Commission to consider that should be
determined that additional rulemaking be required. The most
successful outcome would be one that benefits their synergistic
relationship as a whole.
In another item, in addition to that, that I have touched
on in the past and plan on exploring more going forward, is to
what extent union or civil servant protections are hampering
the Chairman's ability to properly discipline or fire SEC
employees who are either engaged in improper misconduct in the
workplace or simply not competent or simply lazy in their
pursuit of protecting investors from the likes of Bernie
Madoff.
As Governor Christie, in my home State of New Jersey, has
demonstrated so very well I think, everything needs to be on
the table as we reexamine issues that may be contributing to
overly costly or inefficient or ineffective government. The
taxpayers in my State, or the entire country, deserve nothing
less, and we cannot afford to do anything less.
Also, on this point of the Madoff issue, the Securities
Investor Protection Corporation, or the SIPC, is supervised by
the SEC. So I will be interested to hear from Chairman Schapiro
on what her thoughts are on whether it is just or appropriate
for the SPIC-appointed trustees to be pursuing so-called
clawback provisions from investors who have already lost
millions because of Madoff's fraudulent behavior and the SEC's
incompetence or inability to prosecute that behavior.
If the IRS, a Federal Government entity, relied on investor
statements to calculate taxes owed, shouldn't the investors be
able to rely on the IRS--or on the statements as well?
So, in conclusion, I don't envy Chairman Schapiro with the
number of issues that are on your plate. The ones I have
touched on here only are beginning to scratch the surface. And
I appreciate Chairman Kanjorski's comment with the regard to
the idea for future hearings and the like as far as oversight.
And that is why it is so important that we have this hearing
today.
So, I appreciate Chairman Schapiro coming today to testify.
Chairman Kanjorski. Thank you very much, Ranking Member
Garrett.
Now, we will hear from the gentleman from New York, Mr.
Ackerman, for 3 minutes.
Mr. Ackerman. Thank you, Mr. Chairman.
During the course of today's hearing, we will no doubt
discuss the role of the SEC in the wake of the passage of the
Dodd-Frank bill, the most significant financial reform
legislation since the Great Depression.
As Chairman Schapiro noted in her written testimony this
morning, once President Obama signs the bill into law tomorrow,
the SEC will become responsible for promulgating an enormous
number of new rules, creating five new offices, and undertaking
several studies, most of which must be completed within the
next year or two.
But this morning, I would like to discuss national
security. Three weeks ago, President Obama signed the
Comprehensive Iran Sanctions, Accountability, and Divestment
Act into law. This historic legislation expands the types of
transactions American firms are prohibited from entering into
with Iran so as to preclude selling Iran refined petroleum,
supporting Iran's domestic refining efforts or selling Iran
goods or services that assist in developing its nuclear sector.
The bill bans U.S. banks from engaging in financial
transactions with foreign banks doing business with the Iranian
military, from helping to facilitate Iran's illicit nuclear
programs, or from aiding Iran's support for terrorism.
The Act also holds U.S. banks accountable for actions by
their foreign subsidiaries. Accordingly, foreign firms whose
equity may be partially or fully held by U.S. funds or
investors are also subject to the new sanctions, including not
only those involved in Iran's energy sector but also those
foreign financial institutions doing business with key Iranian
banks or the Iranian military, as well as companies that sell
goods or services that facilitate human rights abuses by the
Iranian regime.
The sanctions are crippling. And the penalties for firms
determined to be in violation of these sanctions are equally
punitive. And they should be.
A nuclear Iran poses existential threats to the United
States and its allies and companies must be held accountable
for assisting Iran in its determination to develop nuclear
capabilities and shun the international community.
So what does Iran have to do with our capital markets? The
potential for American investors to suffer material losses if
their investments are in firms determined to be in violation of
new sanctions is very real. As Chairman Schapiro knows, the SEC
has a very important role to play under the Comprehensive Iran
Sanctions, Accountability, and Divestment Act. American
investors need to know if the companies and funds in which they
invest face potential and substantial Iran-related sanctions.
As the watchdog for our markets and exchanges, the SEC will
be tasked with ensuring that investors have ready access to
information pertaining to any potential sanctions the U.S.
exchange-listed firms and funds in which they have invested
will be subject to.
Madam Chairman, this morning I presented you with a letter
asking for your attention to these issues and assuring that
U.S. investors are forewarned about potential exposure to
significant losses. I would appreciate if you could address the
Commission's role under the Comprehensive Iran Sanctions,
Accountability, and Divestment Act this morning, and how the
Commission plans to empower investors placing their money with
firms involved in illegal transactions with Iran.
I thank you for your continued hard work to provide
confidence in the stability of our capital markets, and I yield
back the balance of my time.
Chairman Kanjorski. Thank you, Mr. Ackerman.
We will now hear from the ranking member of the full
committee, the gentleman from Alabama, Mr. Bachus, for 4
minutes.
Mr. Bachus. Thank you. Thank you, Mr. Chairman. I thank you
for holding the hearing which I think Mr. Garrett and I
requested.
This is actually the second oversight hearing; the first
one was last July, Chairman Schapiro.
And we appreciate you being here today.
Chairman Schapiro, I understand you inherited a Commission
with a tarnished reputation and significant personnel problems.
I think you have performed admirably, attempting to revitalize
the Commission's culture.
But clearly, as you have said, more fundamental
improvements are necessary. If there are legal impediments
preventing you from further transforming the agency,
particularly with the civil service laws, it is our hope that
we can use these oversight hearings to learn what measures can
be taken to manage the Commission more effectively and demand
high ethical and professional standards from its employees.
In the past 2 years, we have experienced the collapse of
Bear Stearns, Lehman Brothers, and ultimately the Consolidated
Supervised Entity Program, the breaking of the buck by the
reverse primary fund, the multibillion dollar Madoff and
Stanford Ponzi schemes, as well as numerous operational and
personnel problems identified by the SEC's Inspector General.
These very significant and recent failures give us all the more
reason to conduct aggressive oversight and to demand, along
with you, that the SEC be more accountable at all levels of the
agency.
What many of us find particularly troubling, and I know you
do, too, is that the majority of the SEC's problems were caused
by its failure to use its existing authority to protect
investors to address fraud and other sharp practices in already
heavily regulated areas of our capital market.
I want to conclude my statement today by saying this: As we
have seen with subprime lending, when everyone is in charge of
a problem, no one is in charge. Shared responsibility resulted
in inaction because the agencies were never able to agree on
what action to take or even recommend. We also saw that with
credit cards.
Now, we have the Dodd-Frank Act that the President will
sign into law tomorrow, and it gives numerous regulators, in my
opinion, vague new authorities to regulate various entities. So
you have all these rules and regulations that you are having
trouble enforcing, and now you have a whole other set of
regulations and rules.
For instance, as a result of this new legislation,
clearinghouses and so-called financial market utilities will be
required to process vast dollar amounts of derivative products.
And today, that is just between different entities. It doesn't
go in a clearinghouse.
Will they become the next ``too-big-to-fail'' entities? Is
there an implied government guarantee or even an explicit one
that they will not be allowed to fail? The SEC--or the CFTC is
the primary regulator of many of these clearinghouses and
financial market utilities today. Will that continue to be the
case? The Federal Reserve, in many cases, appears to be the
ultimate regulator of many institutions where you are the prime
regulator today. Will they be the regulator in charge if the
regulators cannot agree? And what is the role of the Financial
Stability Oversight Council as it relates to clearinghouses and
financial market utilities? Will they have an independent
regulatory role?
These questions and others may not be answered for years,
and therefore, the uncertainty that existed before this
legislation passed, if anything, will only increase.
Finally, this legislation increases the threat that the SEC
will create more uncertainty in our capital markets through the
exercise of new powers to reform practices that in no way
contributed to the financial crisis. The crisis was not caused
by arbitration agreements, corporate governance rules, or the
broker-dealer suitability standards. Nonetheless, the Act
requires the SEC to address these perceived problems.
Obviously, you are faced with a lot of questions, and one
of them is, are you ultimately in charge or do you have to work
with the other agencies, and who makes the final decisions? And
that is going to be something that is going to require
additional oversight and coordination, not only between the
Congress and your agency but between the agencies. Thank you.
Chairman Kanjorski. Thank you, Mr. Bachus.
Now, we will hear from the gentleman from California, but
before he starts, may I remind the members of the committee
that we have assigned time, and I hope that we would hold to
that time. A few of us have gone over that time this morning.
Let us hold to the 3 minutes that are allocated.
The gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you.
I would like to associate myself with the statements of Mr.
Ackerman. It is critical that the SEC make sure that investors
are aware of those corporate actions that would cause the
issuer to be subject to sanctions under the newly passed bill.
Many people have mentioned the Madoff case. I should point
out, that should have been detected in the first 15 minutes of
review, because the first thing that should happen when the SEC
gets a financial statement is, you look at the auditor's
report. And that would raise the issue, is the auditor large
enough to do the audit? Had that question been asked, Madoff
would have been detected in 15 minutes or so. And I would hope
that some basic reviews go on with financial statements filed
with the SEC by broker-dealers, investment advisers, etc. And
that should include the most basic question, and that is, who
is the auditor, and is that auditor qualified to do the audit?
I want to focus on credit rating agencies. The chairman has
excellent language in the bill that will be signed tomorrow
that, as I understand it, becomes effective immediately, but
there are two other aspects dealing with credit rating agencies
that really don't have effect until the SEC takes action. The
first of these is designed to make sure that credit rating
agencies are fair to municipal issuers. Right now, we have a
circumstance where bonds of corporate issuers get one set of
grades, municipal issuers another, and I think investors are
misled into thinking that the corporates are better. The fact
is when a municipal issuer defaults, its revenue stream
continues, and therefore, usually the bondholders are paid in
full; whereas, if you held bonds in Circuit City, you are aware
that when a corporation defaults, its revenue stream is ended
by the going-out-of-business sale. Municipalities and States do
not have going-out-of-business sales. They stay in operation
and continue to collect revenue.
Most importantly, are the provisions designed to make sure
that the issuer, particularly of structured investments, does
not select the credit rating agency? In October, I submitted in
this room an amendment to require the SEC to establish a panel
to select the credit rating agency. I ended up settling for a
hearing which now I don't think is necessary because Senator
Franken was able to get the core of my language and some
expanded language into the bill.
I want to make sure that the SEC is dedicated to the
objective of that amendment, which is whether you go with the
exact Franken language or not, that the issuer will not select
the credit rating agency.
I yield back.
Chairman Kanjorski. Thank you very much, Mr. Sherman.
Now, we will hear from the gentleman from California, Mr.
Royce, for 2\1/2\ minutes.
Mr. Royce. Thank you, Mr. Chairman.
There is a clear difference, I think, between the American
approach and the British approach in dealing with a calamity in
financial regulation. In the United States, we have a history
of tinkering around the edges. We add additional agencies when
a crisis comes.
In Britain, they are more open-minded about fundamentally
reorganizing an entity when it has failed. People lose their
heads there. They will even disband the agency altogether and
start fresh.
We have heard time and time again about the overlawyering,
the bureaucratic delays, the investigative ineptitude. We heard
that from our copulas here at the SEC. The fact that it took
the agency 16 years to uncover the Madoff Ponzi scheme and the
fact that had the financial tide not gone out, it probably
would have been until his death that was carried on, I think
shocks the members of this committee. And the fact that the SEC
had known about the Stanford Ponzi scheme since 1997. According
to the SEC's Inspector General, one SEC supervisor used her
work e-mail account on virtually a daily basis to conduct
business on behalf of the operator of a Ponzi scheme in
Arizona. These problems did not arise from simply a lack of
funding but rather a deeper, structural flaw within the SEC.
So how does Congress treat an agency that has performed so
poorly over the years? We reward it. The bill awaiting the
President's signature vastly expands the regulatory authority
without reforming the troubled agency, and under the bill, the
agency will promulgate 123 rules, conduct 32 studies, and
establish 7 new offices within the SEC.
This is in stark contrast, as I said, to the approach taken
by the Brits. As the headline in the Financial Times recently
noted, ``FSA to be Abolished in Osborne Shake-up.''
So, Ms. Schapiro, you have committed to at least begin the
reformation of the SEC, and I commend you for that. We spoke
last week about that. But time will tell whether real reform
can come from within the agency or whether we would be better
served taking a page out of England's playbook and
fundamentally restructuring this agency.
I look forward to your testimony. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Royce.
Now, we will hear from the gentleman from Massachusetts,
Mr. Lynch, for 1\1/2\ minutes.
Mr. Lynch. Thank you, Mr. Chairman.
I want to thank Chairman Schapiro for attending the hearing
and helping us with our work, especially in light of the
recently passed reform bill, as well as the recent settlement
with Goldman Sachs totaling over $550 million.
Madam Chairman, last summer, we had an SEC oversight
hearing in Boston where I expressed the concern about the
resources that are available to the SEC to perform its duties
and fulfill its responsibilities. A look back at the SEC budget
reveals that while the financial markets were exploding in size
and in complexity, the SEC budget remained fairly flat and, in
some cases, actually shrank. I am pleased that the SEC receives
enhanced resources under the new bill, but it also gets a lot
of new responsibilities as well. So you have a tough row to
hoe. But I would like to work with you.
I had an opportunity to meet with some of the new heads of
the department that you have appointed in this new structure,
the Enforcement Division and the Division of Risk, Strategy,
and Financial Innovation. I am encouraged by the new
leadership. I am optimistic. But I also know you have a
tremendous task in front of you.
So I would like to hear in the hearing in your testimony
about how we are going to tackle that and get down to the real
mechanics. But thank you for attending, and I yield back the
balance of my time.
Chairman Kanjorski. Thank you, Mr. Lynch.
I will now hear from the gentleman from Texas for 2\1/2\
minutes, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman.
After our last hearing with the SEC Chairman, I think it
was made clear that, at least under the previous management,
the SEC did have the authority under the Consolidated
Supervised Entities Program to do something about the dangerous
levels of leverage at Lehman Brothers. Unfortunately, they
chose not to exercise that authority.
The situation was not dissimilar to that of AIG. We know we
had the former Director of the Office of Thrift Supervision,
who testified before the committee that OTS did have the
authority to properly regulate AIG, but again, they chose not
to do it.
In case after case, regulators had the authority to prevent
behavior that contributed significantly to our economic
debacle. Whether it was a matter of ignorance, negligence,
incompetence or frankly simply making a mistake, a very costly
mistake, we don't know.
And so many of us find it somewhat ironic that now the
financial regulatory bill that is awaiting the signature of the
President in many respects rewards regulators who missed and
contributed to the financial crisis with yet even more
regulatory authority and does little or nothing about
ignorance, negligence, incompetence, and simple mistakes.
Clearly, the SEC will be getting significant new authority
in addition to their tremendous workload. I have heard some
estimates of 95 new rulemakings, some say 123; 32 studies, 19
additional actions and reviews. Obviously, all of this new
authority and responsibility is against the backdrop of the
Lehman Brothers failure, the Madoff Ponzi scheme and the SEC
pornography scandal that revealed senior SEC officers clearly
had more time to view pornography than they did to police
security fraud.
I hope that the SEC is capable of improving its track
record while also taking on these new responsibilities.
Clearly, as we look around in our economy, one of the
greatest challenges we have to job creation is frankly not a
lack of capital; it is a lack of confidence. And I am curious,
with all this new regulatory authority that will be granted to
the SEC, how will the SEC handle the levels of uncertainty that
have been created by this new law?
Already, the Federal Reserve reports that public companies
are sitting on almost $2 trillion of cash and liquid
securities. We need to get that money out of the stands, onto
the playing field, and the actions of the SEC will bear greatly
upon that.
Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Hensarling.
Now, we will hear from the gentleman from Georgia, Mr.
Scott, for 1\1/2\ minutes.
Mr. Scott. Thank you very much, Mr. Chairman.
Welcome, Chairman Schapiro. You have quite a challenge
before you with our newly, about-to-be-signed, Wall Street
reform bill.
As you go about your testimony, I would be very interested
for you to sort of explain to us your interpretation of what
you see your role is under this new bill, particularly in
relationship to protecting our investors, stabilizing our
financial markets, how you are going to regulate over-the-
counter derivatives, and how you are going to rein in excessive
risk-taking.
And, of course, we want to know your concerns about the new
role and the concerns that you raise in terms of the
implementation of your impending expansion of your duties. But
I am particularly concerned that you express to us today how
you see your role playing out in the implementation of the Iran
Sanctions Act. You have a very critical role in that,
especially given the fact that the real meat and potatoes of
this sanctions bill is within the financial community, as well
as investments in their infrastructure of the importation and
of refined gasoline.
I look forward to your testimony. Thank you for being here.
Chairman Kanjorski. Thank you, Mr. Scott.
Now, we will hear from the gentleman from California, Mr.
McCarthy, for 2 minutes.
Mr. McCarthy of California. Thank you, Mr. Chairman. I
thank you for scheduling this hearing.
I look forward to hearing from the SEC Chairman about her
agenda, especially given the movement of the bill, the new
responsibilities and funding for the Commission.
As you know, Chairwoman Schapiro, I remain very interested
in how the SEC coordinates its inspections and examination
staff and the activities with the policymaking division of the
trading and markets and investment management. As you have made
internal changes, I am interested in an update on how you have
integrated processes to avoid the stove-piping.
In a similar vein, your post-Madoff reforms indicate a new
protocol in the New York regional office to better integrate
broker-dealer and investment advisor examinations with a goal
of having the most knowledgeable staff coordinating the exams.
I hope you will be able to address how this kind of cross-
training is working, and if so, how could it work across the
Nation so that we can better be able to examine and find the
Madoff scandals sooner and not be able to move forward?
I yield back the balance of my time.
Chairman Kanjorski. Thank you very much, Mr. McCarthy.
Now, we will hear from the gentleman from Indiana for 1
minute, Mr. Carson.
Mr. Carson. Thank you, Mr. Chairman, for holding this
important hearing today.
While we are continuing to see signs of an economic
recovery, it is critical that we take steps to prevent another
financial crisis of this depth and duration.
One of the most important things that the SEC can do to
help the economy towards sustainable growth is to be the most
effective market regulator, protecting investors while also
encouraging capital formation and investment. Undoubtedly, the
SEC has undertaken many reforms to protect the interests of
investors. And I hope that it will live up to its mandate of
protection.
As the economy recovers, it is imperative that we continue
to focus additional firepower on behalf of investors who might
otherwise lose their confidence in the integrity of these
markets.
Thank you, and I yield back.
Chairman Kanjorski. Thank you, Mr. Carson.
Now, it is my pleasure to introduce and welcome one of our
witnesses--our only witness this morning, the Chairman of the
Securities & Exchange Commission, Mary Schapiro.
Without objection, Madam Chairman, your written statement
will be made a part of the record. You are also recognized for
5 minutes to summarize your testimony. We will try to be a
little lenient because of, obviously, the indicated interest in
your statement.
So welcome to the subcommittee, and we look forward to your
statement.
STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S.
SECURITIES AND EXCHANGE COMMISSION
Ms. Schapiro. Thank you, Chairman Kanjorski, Ranking Member
Garrett, and members of the subcommittee. I appreciate the
opportunity to testify today on behalf of the Securities and
Exchange Commission.
When I testified before the subcommittee last year, we were
just emerging from an economic crisis that threatened our
financial system and the entire American economy. The markets
were still trying to regain a firm footing and confidence in
the institutions of government generally, and the SEC
specifically was shaken.
In response, we have embarked on a conscious effort to
become a more nimble and responsive regulator, updating our
rules, breaking down silos, and reinvigorating our enforcement
program.
I believe we have made substantial progress and have laid a
strong foundation for more progress in the coming years.
My written testimony provides an overview of the actions
and initiatives the SEC is taking to fulfill this mission, but
this morning, I would like to briefly highlight a few.
Internally, we set out to rebuild our culture and refocus
on our core mission. We hired new leadership across the agency,
streamlined procedures, encouraged a culture of collaboration,
and created a new division to improve our understanding of new
products, trading practices, and risks.
We substantially restructured our Enforcement Division,
creating specialized units to tackle the most complex types of
cases, and we eliminated a layer of management, redeploying
investigators to the front lines.
Similarly, our examination program, also under new
leadership, is in the process of restructuring.
While the numbers can never tell the whole story, the
changes are already bearing fruit. In Fiscal Year 2009,
compared to the previous year, the Enforcement Division more
than doubled the amount of civil penalties it obtained; more
than doubled the temporary restraining orders it sought; more
than doubled the number of formal orders of investigation it
issued; and more than doubled the amount of funds distributed
to injured investors, over $2 billion.
Further, thanks to our congressional support, we were able
to upgrade our information technology capabilities. One of the
first initiatives we launched was centralizing all our existing
tips and complaints into a new single searchable database. We
are in the midst of building an entirely new system to record
and track this information for the entire agency which we
expect to deploy later this year.
We are also building analysis and workload tools to better
prioritize, assign, and track this information. All of this
will allow us to more effectively identify valuable leads for
possible enforcement actions and compliance exams. Of course,
we are not just working to make the agency more investor-
focused, but the rules as well.
In the past year or so, we have proposed or finalized rules
designed to improve market stability, transparency, and
investor protection. We have adopted rules to provide greater
protections to investors who entrust their assets to investment
advisers; to strengthen credit quality, liquidity, and maturity
standards for money market funds; to create a stronger, more
robust framework for credit rating agencies; to curtail pay-to-
play practices by advisers; and we have proposed rules to
provide greater disclosure about target-date funds.
We have also taken steps to improve market structure and
functioning with proposals to address flash orders, dark pools,
and sponsored access.
Additionally, even before the market events of May 6th, the
SEC issued a concept release raising questions and seeking
input to improve price discovery and strengthen market
resiliency in our highly dispersed equity market. Immediately
after May 6th, we acted quickly to build upon existing rules
and protect investors in the process.
The Commission has approved and the markets have
implemented a pilot uniform circuit breaker program for S&P 500
stocks, and we have been working to expand the program,
proposing to include Russell 1000 stocks and certain exchange
traded funds.
We have published for comment proposed SRO rules designed
to bring order and transparency to the process of breaking
clearly erroneous trades.
And we recently proposed creating a new consolidated audit
trail to create a single repository of all order, trades, and
quotes. This is designed to give us a comprehensive view of
market activity; to aid investigations by the Enforcement
Division; and to significantly expedite market reconstructions,
such as that being undertaken in connection with May 6th.
And finally, we have begun to prepare for the significant
implementation requirements associated with financial
regulatory reform legislation. To hit the ground running, we
have established a streamlined process and created
interdivisional teams to address specific issues, and we are
developing estimates on how best to allocate resources for the
implementation effort.
I believe we have had a productive and active year. We have
improved personnel and technical resources and at the same time
proposed and implemented rules that will improve our financial
markets, provide additional transparency, and increase investor
protection and restore confidence.
We are ready and eager to build on the substantial progress
and, within the framework of financial reform, work to become
an even more effective agency in the year ahead.
I would be very happy to answer your questions.
[The prepared statement of Chairman Schapiro can be found
on page 46 of the appendix.]
Chairman Kanjorski. Thank you very much, Madam Chairman.
I will take the prerogative of the first questions. I
certainly welcome you to the subcommittee, and I daresay it is
my evaluation this will be your nicest appearance since we do
not--we are not going to be here testing what happened or what
breakup occurred through the years.
With that spirit in mind, and knowing how involved you were
in assisting this subcommittee and the full committee in
drafting the regulatory reform bill that the President will
sign tomorrow, can we extend our hand of cooperation to you
that as you develop your task force, your studies, and get the
responses back under the new authorities placed in your hands
under the bill, that we will have a very positive response and
coordination between this committee and yourself?
If you run across changes that should be made or are
obvious to you, but perhaps you may determine that you lack the
legal authority under the various acts, then you will work very
expeditiously to report to us and request that additional
authority?
Ms. Schapiro. Absolutely, Mr. Chairman. I actually
appreciate that invitation to work with the committee as we
work through many issues that are likely to arise over the
course of implementation.
Chairman Kanjorski. Today, I was asked by a reporter, what
is most the important thing that the Act will accomplish? You
know it is 2,400 pages, which is pretty heavy, and to a lot of
Americans, they think that has to represent a lot of nonsense
in a way because how can anybody compile something that is
2,400 pages that is meaningful? The fact of the matter is, as
you know, we have been working on this legislation for years,
and part of this legislation has been enacted several times by
this committee or the Congress, and we are just now having the
opportunity to put it into law.
All that being said, do you have any reservations as to
some shortfalls in the existing law? Is there anything we
should immediately start to work on to correct the shortfalls,
one being, as was pointed out this morning, again by a
reporter, on the budgetary problems? Are those budget problems
somewhat restrictive for you, and could that cause you some
difficulty?
Ms. Schapiro. As you know, the SEC sought self-funding the
way the FDIC, the OCC, the Fed and other bank regulators are
funded. And that was not accomplished in this legislation. But
we are extremely grateful for the flexibility that was added to
the budgeting process for the SEC that will allow us to
maintain a reserve fund that will help us fund some technology
projects that we think will be multiyear projects, as well as
having the ability to have matched funding and to present our
budget to Congress at the same time we present it to the
Administration. So, while it is not everything we had hoped
for, it is a significant step forward, and we are very grateful
for that.
Chairman Kanjorski. I recognize that we have established a
new council; that you are now a member of the Economic
Stability Council. We used to have another name for it, the
Systemic Risk Council. That being said, have you had an
opportunity to examine that section and particularly the
authority granted by what has been known as the Kanjorski
amendment, the amendment that I had offered that we create the
authority within that council to discipline organizations and
restrict organizations' operations and powers if they pose a
grave risk to the economic system of the United States? That
particular council, of course, is given the authority to do
many things, including to take apart existing organizations and
break them down to something below the level of ``too-big-to-
fail.'' Can you give us just a short expression of what you
think of that?
Ms. Schapiro. Sure. I think it is an incredibly powerful
tool that the Congress has given to the regulators collectively
with that particular provision and more generally with respect
to--I think it is called the Financial Stability Oversight
Council at this point. And I know that all of the regulators
are looking forward very much to getting together very soon and
starting to talk about how the council will operate, how we
will collect information, how we will carry out our
responsibilities as a council and as well as individually under
the new law. And I think we are quite humbled by the amount of
authority that we have.
Chairman Kanjorski. Thank you very much.
I see my time is about to expire.
Now, I recognize the gentleman from New Jersey, Mr.
Garrett, for his 5 minutes.
Mr. Garrett. I thank the chairman.
In opening where the chairman ended off, just along that
line, I, too, hear from constituents back home saying, how
could we possibly have understood that 2,300 or 2,400 page
bill, and I don't think we could. And I don't think anyone who
was there at 6 a.m. did. And that is probably why, I think it
was Senator Dodd said, just as Speaker Pelosi said with the
health care bill, we have to pass this bill in order to
understand what is in it. So we will only begin to understand
what is in this bill, not today, not tomorrow, but probably
years down the road and then following all of the regulations
that you will be promulgating as well.
And there is the problem, the lack of certainty that
Chairman Frank was talking about that would be created by the
bill is just the opposite; we are creating less certainty in
the marketplace and investors will remain on the sidelines for
an indefinite period of time as we begin to see how these rules
and regulations all play out.
One of the areas I touch upon was one that we had in the
hearing, I guess, the ranking member talked about we had a year
ago, with regard to the Madoff situation. As you know, the SEC
is siding with Irving Picard, the trustee in the Madoff
litigation--liquidation, I should say, on how investors' net
equity is to be calculated.
We have all heard about the SEC's having difficulty in
uncovering the fraud, albeit before you got there. Should
investors infer from your position that they should no longer
rely on the statements issued to them by their broker-dealer,
but should instead keep a running total of their net investment
in order to avoid the potential of a clawback provision later
on, should their broker-dealer ever be exposed in a Ponzi
scheme? If so, should we put some sort of statement, a little
asterisk on the statement in the future, so they understand
that these statements are really not what they seem to be, and
you are responsible for your own situation?
Ms. Schapiro. I don't think that is what is necessary, and
I don't think we should tell all investors they can't rely on
the account statements they receive from their broker-dealer.
The vast majority of broker-dealers operate honestly and well
within the confines of the law.
Mr. Garrett. But that is what we were telling these
investors, right?
Ms. Schapiro. The approach we have taken with respect to
Madoff quite generally is to bring together protections that we
think will help prevent, to the greatest extent possible,
another Madoff from ever occurring. So, for example, contained
in the Dodd-Frank bill is a requirement for broker-dealers to
be audited by a PCAOB-registered accounting firm and for that
accounting firm to, in fact, be overseen by the PCAOB. That
will help with the issue with respect to a no-name accounting
firm that is clearly not up to the task.
We at the SEC have approved rules that are in place
requiring that when an investment advisor uses any kind of an
affiliate to custody customer funds or assets, those have to be
subject to a surprise examination by a PCAOB-registered
accounting firm. And in certain circumstances, there also has
to be an independent SAS 70 report given. So we have tried to
build some structural protections into the system, as well as
all the reforms you have heard me recite so many times about
what the SEC is doing.
If I could just correct one thing you said, we did agree
with SIPC that the correct calculation was a money-in/money-out
net equity calculation, but we urged the court--and the court
has since confirmed that reading of the SIPA law--we did urge
the court to do it on a constant-dollar basis, so that earlier
investors in Madoff would realize the time value of their
money, as opposed to much more recent investors. The court
declined--didn't deny that, but the court did not specifically
take that under consideration yet.
Mr. Garrett. And I will close. My time is going by quickly
here. One, just to say that most who have come before the panel
recognize that no matter what we do here, we may find ourselves
in these situations down the road. And I guess that is what I
am talking about, is the next investor who is in a situation
like this, despite all the things we had in the past and have
in the future, really has to be watching out for themselves to
some extent still.
Can you just comment very briefly on what you are going to
do with regard to the 404(b) situation? You and I have talked
about this for the short period of gap time.
Ms. Schapiro. Yes. I am happy to let you know that our
exemption with respect to small issuers under 404(b) expired
last month. The Dodd-Frank bill contains a permanent exemption
from their having to comply with 404(b). We will make it quite
clear that during that interim, we do not expect compliance
with 404(b) by those companies that would otherwise be exempted
under the law.
Mr. Garrett. My time is up. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Garrett.
Now, we will hear from the gentleman from New York, Mr.
Ackerman, for 5 minutes.
Mr. Ackerman. Thank you, Mr. Chairman.
Madam Chairman, you certainly have a lot more on your plate
than ever was anticipated before, I think, with Dodd-Frank
coming into being, with the Iran sanctions being in existence
already for 3 weeks. There is an awful lot that you have to do
that was not initially anticipated at the time your agency was
officially formulated.
I want to concentrate on the Iran sanctions. How confident
are you that you will have everything in place within the
framework of the timetables?
Ms. Schapiro. Congressman, we are working on that right
now. We share your sense of urgency that we need to deal with
these matters. There are a couple of things that are required
of the SEC under the Iran Sanctions Act. One is that, like the
Sudan divestiture provisions that were done several years ago,
we need to write rules that make it clear that an investment
company cannot be sued for divesting itself of the stocks of
companies that deal in Iran. Those rules are being written and
I think are nearly completed, and we need to publish those and
move forward, and there is some disclosure also associated with
mutual funds and investment companies.
The second thing we need to focus on is the fact that, as
you said in your statement, there are punitive sanctions that
can be levied against companies that violate the Iran Sanctions
Act. That can create material contingent liabilities that would
need to be disclosed by public companies. So we need to work on
how we will do our disclosure review process in that regard and
how we will communicate with public companies about their
obligations in that regard.
And I would say, finally, I think we could do something to
help educate investors about the potential here for a company
to be sanctioned under this law and face very severe sanctions
and what that might mean for investments. So we need to work on
some sort of investor alert.
Mr. Ackerman. You suddenly wind up in the national security
business besides the investor protection business. And indeed,
every investor now, every American investor, finds herself or
himself in the national security business also and has a right
to be informed, first because of their probable individual
determination to protect this country and not wanting to invest
in a company that invests in a country or its economy that is
determined to do damage, material damage, to the United States,
but also to protect their investment from becoming sanctioned
because the company is sanctioned, and they are now losing
money.
If a company, under the rules that you will be
promulgating, is engaged in an activity that could potentially
lead to sanctions, that indeed could put a potential investor's
money at risk in that company. If the company is engaging in
potentially, that is risky business. Is that considered, in
your view, material information that has to be disclosed to
investors or potential investors?
Ms. Schapiro. I think our general approach would be that
where there is a real chance for a company to be sanctioned
under this Act, and it could create a material contingent
liability for that company, that is information that would have
to be disclosed. And we are working through these issues and
what kind of guidance we can give specifically on them right
now.
Mr. Ackerman. Let me cite a specific example. I am sure we
are not up to this yet, but it is specific. A company such as
Honeywell, Honeywell Corporation, they do substantial business
with the United States Government, and all companies doing
business with the United States Government, that have contracts
with the government, are prohibited from doing business with
Iran under the act, which puts Honeywell in that category,
because they maintain a subsidiary that conducts prohibited
business with Iran. Should Honeywell be required to disclose to
its investors and potential investors its business that it does
through its subsidiary with Iran and the potential risk that it
faces from the loss of their government contracts? And should
they be required in their advising potential investors and
current investors that portion of their business and profits
are at risk and express that as a percentage of their profits?
Ms. Schapiro. I guess I would be a little uncomfortable
giving any kind of definitive answer and interpreting the law
vis-a-vis the facts and circumstances.
But I will tell you that we have experience through our
Office of Global Security Risk of looking at these kind of
issues in the context of the state sponsors of terrorism, for
whom we also require certain levels of disclosure. And I would
say that under that kind of analysis, where there is a
subsidiary relationship that pushes us towards a view that
there is maybe a material relationship, that would have to be
disclosed. But I guess I would like to think about it more
carefully before I opine on that particular set of facts.
Mr. Ackerman. Thank you, Madam Chairman.
Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you very much, Mr. Ackerman. Now,
we will hear from the gentleman from Alabama, Mr. Bachus.
Mr. Bachus. Thank you, Mr. Chairman. Chairman Schapiro, the
Dodd-Frank Act creates what I would call maybe a nightmare
scenario for American businesses that will have to wait for
years to find out what the rules of the road are on derivatives
while the SEC and the CFTC complete multiple joint rulemakings
mandated by the bill. Of course, the derivatives market is a
$600 trillion market, and prior to this legislation, a lot of
those derivatives were between parties. They weren't cleared.
My understanding is that many of these, if not all of them,
will be required to be cleared through clearinghouses, or at
least a great percentage of that.
Do you have any timetable with how long you think it may
take to come up with these rules and regulations? I know with
Gramm-Leach-Bliley and the Commodity Futures Modernization Act,
it took up to 5 years to complete the joint rulemaking.
Ms. Schapiro. To the extent there are actual deadlines in
the statute--and there are for many of the rulemakings--it is
our goal to meet those statutory deadlines while at the same
time trying to have as robust a notice and comment process as
we can because we recognize the Congress has entrusted to us
the responsibility for fleshing out the congressional goals
that are contained in the bill and that we will need lots of
input from market participants, investors and others about what
those specific contours of the regulations need to look like.
In fact, we are meeting today with the CFTC to talk through how
we might jointly conduct our notice and comment and
collaboration process where people come in and tell us what
they think and why they want rules done a particular way, or
what the burdens and hardships are for them so that we can
leverage our staff resources, and we can also move as quickly
as possible at the same time to try to get as many of these
rules in place as possible.
So we are committed to both speed and expedition, but also
to a deliberative process that allows us, as the two agencies
work together, to get to the right results so that we don't
hold up the markets, and we don't cause unnecessary
uncertainty.
Mr. Bachus. Do you see any of these clearinghouses being
designated as--or either of the financial market utilities
being designated--or considered may be a better word as ``too-
big-to-fail?''
Ms. Schapiro. I think what is important that came out of
the bill from our perspective as a regulator of clearinghouses
is that the Federal Reserve Board will really serve as a second
set of eyes to help us identify the risks of the
clearinghouses. And they can, in fact, determine that the SEC
or the CFTC's prudential requirements are not sufficient, and
then the council would step in and have a conversation and a
debate and discussion about whether the prudential or other
requirements have to be raised. There is no question that these
will be enormously important centers of both financial
stability and financial risk. But we in the CFTC both have a
long history of oversight of clearinghouses, and the
clearinghouses have very robust and largely successful risk
management systems in place over a many year period, whether
you are looking at the securities clearinghouses, the options
clearinghouses or the futures markets.
So I have a pretty high level of confidence that we will be
able to continue our oversight with the additional support of
the Fed and the council but in a way that takes the best of
what these enterprises are already capable of doing in terms of
risk management.
Mr. Bachus. The Federal Reserve does have what I would call
veto power over some of your regulations, does it not? Were you
the primary regulator?
Ms. Schapiro. They do have the ability, if they believe
that our requirements are insufficient, to work with the
council, the Financial Stability Oversight Council at large.
And the Council can impose upon the SEC and the CFTC or another
primary regulator to adopt standards, different standards or
higher standards.
Mr. Bachus. All right. Will the Council have any regulatory
supervisory duties or will they--
Ms. Schapiro. No. I think that the routine day-to-day
supervision continues to be carried out by the primary
regulators--SEC, CFTC, OCC, FDIC.
Mr. Bachus. Just one final question. The discount window
emergency funding would be available if these clearinghouses
were designated as ``too-big-to-fail,'' is that correct?
Ms. Schapiro. I don't believe that discount window access
is contemplated, but I guess I would have to go back and look
at where things landed. But emergency assistance is possible.
Mr. Bachus. Okay. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Bachus. We
will now hear from the gentleman from California Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman. You have a lot of
responsibilities under this new Act. Part of it is section
939(f) dealing with credit rating agencies. How dedicated are
you to creating a system with regard to structured financial
products so that the issuer does not select the credit rating
agency?
Ms. Schapiro. As you know, Congressman, I have long been
interested in the idea of a wheel system or the potential for a
self-regulatory organization to make the assignment of the
credit rating agency to the issuer or some mechanism that tries
to make the bond that creates this profound conflict of
interest between the issuer, investors and the credit rating
agency.
I can't speak for the Commission, which would obviously
have to vote ultimately on whatever rules we propose. But we
are very committed, I can tell you, to the study that is
contained in the statute that would have us study the potential
for a third party selection agent of some sort, third party
assignor of--
Mr. Sherman. Are you as dedicated to the rulemaking as you
are to the study?
Ms. Schapiro. Oh, absolutely. And as you know, we have done
multiple levels of rulemaking even before I came to the SEC to
try to deal with the conflicts of interest of credit rating
agencies, the due diligence process, the problems of rating
shopping, the problems of investors not being able to
understand the track record and performance of particular
ratings. And some of those rules have actually very recently
gone into effect. We get lots more rulemaking authority under
this bill, and we will--
Mr. Sherman. This is not just rulemaking authority. This is
a statute that requires you to adopt a rule.
Ms. Schapiro. Absolutely, and many of those rules within 1
year. We are keenly aware of that.
Mr. Sherman. This one gives you 2 years.
Ms. Schapiro. The study does, yes.
Mr. Sherman. And then not just the study. But then you are
supposed to--are you going to be back here 2\1/2\ years from
now saying, ``We did the study, and that is all we have to
do?''
Ms. Schapiro. No.
Mr. Sherman. Or are you going to be adopting a rule that
ends this--
Ms. Schapiro. I think the statute actually requires us at
the conclusion of the study to go ahead and establish some sort
of system for assigning ratings for structured finance
products.
Mr. Sherman. And I am not going to micromanage exactly
which system that is, although Senator Franken's amendment has
details that my amendment did not have that I commend to you.
Do you think you can get it done in less than 2 years?
Ms. Schapiro. I will make lots of people very unhappy when
I go back to the building if I were to promise that because we
have so much on our plate. But we will move expeditiously. We
have multiple tracks obviously that we are proceeding with. We
have 20 studies to do.
Mr. Sherman. Let me shift to build on Mr. Ackerman's
questions. Two years ago, the SEC established a Web tool to
allow investors easy access to a list of companies who, in
their public filings with the Commission, disclosed that they
conduct business with countries who sponsor terrorism. Needless
to say, the companies didn't like that, told you that it was
imperfect, and you pulled the Web site. Can companies get you
to abandon anything you do just by showing it is imperfect? Or
you can always make it better. But is this Web site going to be
back up?
Ms. Schapiro. I have to tell you that this Web site was
both put up and taken down long before I came to the SEC, so my
understanding of it is that the way it was developed, anytime
one of the State sponsor of terrorism countries were mentioned,
the company's name turned up on the Web site even if they
weren't, in fact, doing business in that country, but it was
mentioned in passing.
So I think it was an imperfect tool. To your broader
question, ``Can companies get us to back down on things,'' I
don't think that is--
Mr. Sherman. The real question here is, are you going to
put the tool back up with or without improvements?
Ms. Schapiro. I would have to look at the tool.
Mr. Sherman. I fear that on this one, the companies have
shown you that it is too difficult to be perfect, and therefore
you should do nothing, which suits them just fine.
Ms. Schapiro. I think you know me well enough and the
record of the SEC over the last 18 months shows that ``do
nothing'' has not been in our vocabulary.
Mr. Sherman. On this one, we have no Web site. We need the
Web site. And then it is up to the investor to click, go read
the report, and they may say, ``We have decided not to do
business in Sudan because it is a state sponsor of terror.''
Ms. Schapiro. I would be happy to look.
Mr. Sherman. It is a research tool, not a device that makes
the decision. Just because you Google a company's name and the
word ``Iran'' doesn't mean Google refuses to do the search. It
also doesn't mean Google is telling you what they are doing.
And likewise, the Office of Global Risk Management was designed
to protect investors, and I would hope that the SEC would move
forward to issue regulations to ensure companies disclose
activities involving state sponsors of terror. It is long past
time for those regulations to be issued.
Chairman Kanjorski. Thank you very much, Mr. Sherman.
Mr. Sherman. Thank you.
Chairman Kanjorski. Now, the gentleman from California, Mr.
Royce.
Mr. Royce. Thank you, Mr. Chairman. Yes, I was going to ask
about this issue that I think you are familiar with. The
Richmond Fed did an estimate, and they said there were about
$25 trillion in liabilities, 28 percent of all financial
liabilities that were covered by the Federal financial safety
net. And basically, the concern that this raised was that such
an expansion of the safety net probably has weakened a lot of
market discipline.
This was back at the end of 2008 that they did their study.
But they said that has to contribute to instability in the
financial sector. The question really is, how can policymakers
focus on credibly scaling back that safety net and making its
boundaries transparent and basically thus creating, again,
market discipline in the equation when the assumption becomes,
``too-big-to-fail'' is the way we are headed towards these
large institutions.
Some of your testimony brought up some additional questions
that I would ask. There has been this discussion as to whether
these private firms, these equity firms or hedge funds can pose
a systemic risk. They tend to be much smaller in size. They
tend to be much less in leverage. They don't overleverage much
compared to the bigger financial institutions. They certainly,
until now, held up well during the recent financial crisis.
They didn't receive any bailouts.
But as you know, the Systemic Risk Council will be able to
deem a nonbank financial company systemically important. And
with that designation comes that special treatment by the
government, which includes a level of support, at least for
those who loan to these institutions should these entities run
into trouble. The counterparties, the creditors are going to
anticipate that you have that government support there. We have
had debate in this committee over whether this special
designation will lead to a competitive advantage. We have seen
studies where basically larger firms are going to be able to
borrow at 1 percent less if they are deemed systemically
important.
But over the years, as I said, the level of support under
our financial system has grown. It has grown exponentially
during the last few years. Now it is $25 trillion, apparently.
And going forward, I think it is important to understand where
that line is drawn and how inclusive that government backstop
is. And that brings us to the question, a simple designation by
the regulators that a given institution or industry will fall
inside that government support system or outside can have
tremendous consequence. Mr. Bachus had asked you specifically
about clearinghouses, and I thought that answer was
illuminating.
So I will ask you a question going to these private firms,
do you believe this industry in general can pose a systemic
risk? And following up on Mr. Bachus's question, do you believe
a clearinghouse could pose a systemic risk? I think the
clearinghouses solve a lot of transparency problems. But on the
other hand, it opens up some additional problems. And lastly, I
had some questions for the record that I will leave you with.
But could I have your response? Thank you.
Ms. Schapiro. Let me just say, we have actually been flying
pretty blind about private funds and hedge funds, as they are
more popularly called, because we don't even have good even
basic census data about the number of hedge funds, about the
extent of their activities in the market, about the impact to
their trading activities, about their leverage or their
governance structure or the people who are--
Mr. Royce. I am all for you getting to that information.
But the question is, deeming them systemically significant. Are
there some that you think would--
Ms. Schapiro. That leads me to, I guess the response that
is really not clear, whether as a whole this industry is
systemically important, whether there are individual
institutions that are.
Mr. Royce. I understand your point, but let me go to my
last point. Are you worried at all about this Federal backstop
and the way it keeps building and the way that it displaces
market discipline?
Ms. Schapiro. I am concerned about the Federal safety net,
and I am concerned about market discipline. My fear is that we
didn't see a lot of market discipline over the last several
years, and whether that is attributable to the presence of the
Federal safety net or attributable to the wishful thinking on
the part of lots of people who are running businesses, I can't
say. But I do think that it will be very important for the
Council to consider these issues about where the lines are
drawn. I agree with you.
Mr. Royce. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Royce. The
gentleman from California, Mr. Baca.
Mr. Baca. Thank you, Mr. Chairman, and Mr. Ranking Member.
Thank you for being here. As we all know, oversight and
accountability has to play a major role in what is going on,
and we are about ready to sign the Dodd-Frank bill that will do
a lot of this. But in doing so, I would like to state that over
the past decade, we have seen our staffing levels at the SEC
drop below adequate standards and your technology capacity was
lacking. Past funding limitations have been cited as one of the
reasons for these shortfalls along, of course, with your
oversight and accountability. The Dodd-Frank bill sets out a
new funding process for the SEC, and while it will still be
subject to congressional approval, it will be considered
separate from the President's general budget request. In your
view, and I state in your view, will this change do anything to
ensure that the SEC's funding needs are met on a consistent
basis?
Ms. Schapiro. Thank you, Congressman. I do think that these
steps are helpful to us for sure, and I am very grateful for
them. Most importantly, the ability for us to take $50 million
of registration fees and put those into a reserve fund not to
ever exceed $100 million will allow us to fund some of our
longer-term technology projects with certainty that if our
appropriation diminishes or doesn't increase to the extent we
need it to, we can at least continue those projects. Or if we
operate for very long periods of time under continuing
resolutions, that money will help tide us over so we don't have
to shrink our staff during those periods.
So I think they are very helpful. They are not everything
that we would have hoped for with self-funding but I think they
are very constructive and I am very appreciative to have those.
Mr. Baca. Thank you.
Another question I have, a couple of weeks ago, there was
an article in The Washington Post about the PCAOB and its
effectiveness over the past decade. In my view, the Board has
struggled to find its way over the past 8 years, failing
adequately to assist in situations like the ones that helped
cause the collapse in 2008. Currently, the positions of
chairman and the two board members are vacant. In your
testimony, you state that you are still asking for
recommendations for candidates. Can you give us a timetable as
to when you hope to have these positions filled?
Ms. Schapiro. I would be happy to. One of the issues in
filling them sooner was the overhang of the Supreme Court case
that challenged of the constitutionality of the PCAOB, the
concern that it wouldn't continue to exist. That has been
resolved. The PCAOB continues to operate. A small fix had to be
made as a result of the Supreme Court case. But we are now
aggressively recruiting for both the chairman and two board
members. We have posted a letter on our Web site seeking
nominations. We have written a letter to a number of
organizations and institutions asking for nominations.
It would be our hope to fill this in the fall after the
appropriate background checks and vetting process interviews by
the Commissioners. But it is one of our highest priorities.
PCAOB must be a functioning part of the regulatory community.
There are lots of international issues with which they are
involved. They are getting new responsibilities under the law
as well, and I view it as one of my highest priorities.
Mr. Baca. Thank you. As we look at those positions,
hopefully as we fill them in, we will look at the diversity and
the growth of our Nation and our country too as well and
hopefully that diversity will be reflected when you look at
filling those positions.
Ms. Schapiro. Yes.
Mr. Baca. Thank you. I yield back the balance of my time.
Chairman Kanjorski. Thank you very much, Mr. Baca. Now, we
will hear from the gentleman from Texas, Mr. Hensarling.
Mr. Hensarling. Thank you, Mr. Chairman. Madam Chairman, I
think you obviously know, as we all do, that unfortunately our
economy is still mired in almost double-digit unemployment. We
have had 2.6 million of our fellow citizens lose their jobs
since the stimulus bill was passed almost 18 months ago. At
least when I talk to people, from Fortune 500 CEOs all the way
down to small business people in my district, one overarching
theme comes through--you heard me mention it in my opening
statement--and that is uncertainty. The head of the Business
Roundtable happens to be the CEO of Verizon. Ivan Seidenberg
said, ``Government is injecting uncertainty into the
marketplace and making it harder to raise capital and create
new businesses.''
The head of the U.S. Chamber, Tom Donohue, has said, ``It
is a fundamental uncertainty that is holding business back.''
The chief economist for the NFIB, Bill Dunkelberg, had said,
``Stop scaring us to death with all this stuff that is going on
and settle down.''
So now, as you well know, you have inherited apparently the
authority and responsibility to promulgate 123 new rules, 32
studies, establish 7 new offices or committees, in addition to
at least 19 SEC actions and reviews that are ongoing. Do you
believe that uncertainty is adding to the level of
unemployment? And if so, what can you do with the new authority
and responsibility you have been granted to at least minimize
the adverse impact of uncertainty on those who would otherwise
bring capital into our economy to help create jobs?
Ms. Schapiro. Congressman, I am really not qualified to say
whether uncertainty is adding to unemployment. But I am
probably qualified from my prior life to say that uncertainty
isn't good for business, and sometimes even the answer they
don't want is better than no answer at all. People can get on
with it and get their work done. We are going to work very hard
at the SEC to be as expeditious as we can in fulfilling our
rule-writing mandates of which, as you point out, there are
many.
At the same time, we want to make sure we hear from those
people who are going to be most affected by what we do, and so
that will be a tension and a balance for us, but we would like
to be able to gather input to understand, what is the
operational impact of this rule if we write it? How is it going
to affect this particular industry participant? How it will
affect these kinds of investors?
So while we work very hard to move quickly, we don't want
to shortchange the process that does so much to improve the
rules that the agency produces.
Mr. Hensarling. Chairman Schapiro, I realize the bill has
yet to be signed into law--and I guess my invitation to the
signing ceremony is probably lost in the mail. But regardless
of that, under section 925, you have new authority under
collateral bars. Do you have any timetable on when you will be
able to add some level of clarity to the marketplace, either
that section 229(l), enhanced application of anti-fraud
provisions?
Ms. Schapiro. The summary of collateral bars is relatively
straightforward. What it means is that if we have barred you
from participation in the securities industry, you are a
registered person who committed fraud while a broker-dealer, it
would mean that we could bar you from becoming associated with
an investment adviser as well. Because committing fraud as a
broker-dealer and then being able to move over and work as an
investment adviser is not really a good result.
Mr. Hensarling. So you would think maybe in short order?
With respect to a timetable?
Ms. Schapiro. We may not even need a rule with respect to
something like that. That may operate by virtue of the statute
itself. But your point is right. There are lots and lots of
rules that we have scheduled out with a very big spreadsheet,
with a team of people assigned, with an individual point person
responsible. We meet every week to see what our progress--
Mr. Hensarling. So you do have a spreadsheet with a
timetable?
Ms. Schapiro. Oh, absolutely.
Mr. Hensarling. Is that something you have or will share
with this committee?
Ms. Schapiro. We could share. The timetables come--
Mr. Hensarling. Speaking of timetables, mine is about to
run out. Quickly, I am also concerned about the standard of
care that will be applied to broker-dealers as compared to
investment advisers. And I am really concerned on how the
application of this standard could impact kind of the
traditional broker-dealer model that allows a lot of people to
still have affordable access to capital markets. Do you have
any insight there on how that rule may be promulgated?
Ms. Schapiro. I do. As a long-time broker-dealer regulator,
I understand this issue very well, I think. But I also
understand that from the perspective of an investor, the
services provided by an investment adviser and a broker-dealer
are largely identical in many cases.
In the provision of advice, which is how the statute is
limited, to retail customers, we shouldn't leave it to
investors to figure out which standard of care applies in the
context of that activity they are receiving. Before we write
rules in this regard--and we will go through a very
collaborative process--again, we are required to seek public
comment. We have already written a notice, in fact, asking for
public comment on the many issues that the statute lays out for
us to explore with respect to how that duty works in the
investment adviser world and works in the broker-dealer world.
So again, we will be very consultative on this issue.
Mr. Hensarling. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Hensarling.
Now we will hear from the gentleman from Georgia, Mr. Scott,
for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman. Chairman Schapiro, last
week when I was at the White House and I was sitting right in
front of the President as he was signing the Iran Sanctions
Act, a cold shudder sort of ran through me at that moment. And
the reason for that, I am sure, was that I know the gravity of
this situation, that this is, indeed, our last best hope of
stopping Iran from getting a nuclear weapon short of military
action and the consequences of that.
I would like to get to the nitty-gritty of how you see your
role in this. So far, I think I have been able to glean, did
you see your role as, first of all, making sure that companies
cannot be sued for divestiture with companies doing business
and sort of an education program as well? But wouldn't it make
a lot of sense, Madam Chairman, right now, the President has
signed the law. It is the law. And there are companies that are
in violation of that law right as we speak. Wouldn't it make
sense for you, as a first step moving forward, to compile that
list, communicate that list out, and make sure it is available
right now for investors?
Ms. Schapiro. Congressman, we can certainly look at whether
we can do that. I will say, the statute doesn't contain a
specific line item disclosure the way the law does for conflict
minerals and extractive industries and mine safety, which were
three new disclosure provisions added by the Dodd-Frank bill.
That said, disclosure by a company of contact with Iran that
may lead to liability or punitive sanctions are something that
would need to be disclosed.
So what we need to do, and we have turned our attention to,
let me assure you of that, is look at whether we can put out
specific guidance about the disclosure that is required under
this law. And then we will look at the question of whether we
can go back to the old Web site or whatever that might provide
a secondary source of disclosure of activities.
Mr. Scott. And your interpretation of the law as it is now,
don't you feel that you have that authority now to do that?
Ms. Schapiro. I think we probably do. I guess I would like
to confirm that with the legal eagles, but I guess we probably
do have that authority to create specific line-item
disclosures.
Mr. Scott. And under the law as you see it now, what would
happen to that company if it is found to qualify for such a
list?
Ms. Schapiro. I guess from the perspective of the
Securities and Exchange Commission, it would be a disclosure
issue. Did they fail to disclose these contracts that are
material to their business operations or could create a
liability for them that is material, and that could potentially
be a violation of the Federal securities laws which we could
prosecute civilly. We have no criminal authority. And we could
prosecute those civil violations.
Mr. Scott. And do you believe that this law, as it is
written, provides you with the ample authority to do your
particular job under the law to make sure that there are no
violations?
Ms. Schapiro. I believe it does, and I believe it is a very
strong statement of our government's position with respect to
Iran and I would agree with your sort of last hope.
Mr. Scott. And finally, do you believe this will work?
Ms. Schapiro. We can make the securities disclosure work. I
think that has a very chilling effect, when something has to be
disclosed, on the activities that a company is willing to
undertake. So I think it can be an effective tool.
Mr. Scott. Thank you for answering my questions on that. I
think this is a very, very important effort.
Finally, let me ask you about the information, the registry
that under the Dodd-Frank bill, you have to get certain
information from hedge funds and private equity advisers about
their trades and portfolios to assess systemic risk. What
information will be obtained?
Ms. Schapiro. We are required under the Act to get specific
things and have records maintained with respect to assets under
management, the use of leverage, counterparty risk exposures,
the valuation procedures and policies that are used by the
fund, their trading practices, whether they have side letters
with particular investors. So it is a fairly broad range of
information that has to be maintained.
Mr. Scott. And how will you make sure that information is
transported here to Congress for congressional review?
Ms. Schapiro. That we haven't really thought through, to be
perfectly honest. Those records are subject to examination and
inspection by the SEC. I don't know if there are provisions
which would prohibit us--there may well be--from actual further
transmittal. But I would be happy to get back to you on that. I
just don't know how the mechanics of the statute would work on
that.
Mr. Scott. Thank you, Chairman Schapiro. We stand with you
in helping you to progress on these challenging issues.
Chairman Kanjorski. Thank you very much, Mr. Scott. The
gentlelady from Illinois, Mrs. Biggert.
Mrs. Biggert. Thank you, Mr. Chairman. The Dodd-Frank bill
requires the SEC to issue a rule with regard to the disclosure
of the pay of employees ranging from, I would say, the janitor
to the CEO, all employees. When do you anticipate that the SEC
will implement this provision? Do you think it will be in time
for next year's proxy in the spring or is that something that
will be implemented in 2012?
Ms. Schapiro. I can't remember honestly whether there is a
statutory deadline with respect to the advisory vote on pay,
but it is a relatively simple rule for us to write. The
advisory vote piece is relatively simple to write. There are
some complications with respect to the disclosures that are
required--more complexity, I shouldn't say complications--more
complexity with respect to the disclosure required, comparing
the compensation of the CEO and the median compensation of
employees. The say-on-pay piece, I think, having done that
already for TARP institutions, we can do that relatively soon.
That could probably be in place for the next proxy season,
although I can't guarantee that.
I think it will take us a bit more time to structure the
rules with respect to total annual comp and the ratio to median
comp of employees.
Mrs. Biggert. I think that there are a lot of companies
that are really concerned about this and the cost to calculate
the median salary of all employees, particularly large
companies. And at a time when we have record unemployment and
when we should be promoting job growth, should we be burdening
non-financial companies with such a requirement? So I would
hope that--
Ms. Schapiro. Congresswoman, we have heard a number of
those concerns as we have met with public companies, and they
have raised that issue with us. So we will do our best to work
through those issues and we will fill Congress' mandate in as
least costly a way as possible.
Mrs. Biggert. Thank you. Do you agree with the FASB
statement that appears in the May 2010 FASB and focus? It is a
document. And it is regarding this recently issued exposure
draft on expanding mark-to-market accounting. They said, ``The
global economic crisis has highlighted the ongoing concern that
the current accounting model for financial instruments is
inadequate for today's complex economic environment.'' Do you
believe that FASB's rhetoric is appropriate, and should FASB be
making these policy pronouncements?
Ms. Schapiro. FASB is responsible for writing the
accounting standards, and they have, as you point out, issued
an exposure draft with respect to fair value for loans and debt
securities. That is out for comment right now. We are
monitoring very closely that activity. They will hold a series
of activities and roundtables for the public to weigh in on
those issues. They are getting lots of comment letters as well.
That will be done in the fall and we will stay very close to
that.
Mrs. Biggert. But the SEC does have oversight of FASB?
Ms. Schapiro. We absolutely do have oversight. But again,
this is the equivalent of our notice and comment proposal.
Mrs. Biggert. So you will be reviewing--
Ms. Schapiro. There is a distance to go here.
Mrs. Biggert. Okay. Thank you. There is a recent appellate
court decision regarding indexed annuities. It effectively
means that the SEC will have to restart the rulemaking process
for these products.
Ms. Schapiro. Unfortunately, we won't, because the Dodd-
Frank bill does prohibit the--
Mrs. Biggert. This was foreclosed by the amendment adopted
during the conference that would classify indexed annuities as
State regulated insurance products as long as they are governed
by NAIC standards.
Ms. Schapiro. You are exactly right.
Mrs. Biggert. Does the Commission have any future plans
related to indexed annuities?
Ms. Schapiro. We haven't really gone beyond the words of
the statute at this point. There are concerns, and I have had
these for many years, about how equity indexed annuities are
sold. We are very happy to work with the State insurance
commissioners who clearly have the responsibility under this
law to see if we can be of assistance to them. They do have a
model suitability rule. They are very focused also on sales
practices, so we will try to be helpful to them in this
process, but we don't have any plans to re-engage on this
issue, given the legislation.
Mrs. Biggert. Thank you very much. I yield back.
Chairman Kanjorski. Thank you very much, Mrs. Biggert. Now
we will hear from the gentlelady from New York, Mrs. Maloney.
Mrs. Maloney. Thank you very much, Mr. Chairman, for your
leadership. I welcome the new Chairman, and I congratulate her
on her public service and on her new position.
The bill that we just passed, the financial regulatory
reform bill, requires the SEC to conduct 100 new rulemakings
and issue 12 new reports, most of which are required within the
next year. And the bill also authorizes a doubling of the SEC's
budget over 5 years. But considering most of the new actions
will have to be completed in 1 year, do you believe you have
the necessary resources to complete the work that is required
by the Dodd-Frank bill?
Ms. Schapiro. We will have to double our efforts in order
to get the work done that is required under the law. We are
hiring right now because Congress gave us an increased
appropriation last year which was enormously helpful. And over
time, as we implement all of the rules, we will certainly need
resource increases to examine hedge funds, to regulate over-
the-counter derivatives and all of that. But I think we are
prepared for the rulemaking task which is not to say it won't
be hard, but we are prepared, and I think we are adequately
staffed for that. But we will continue to bring people onboard.
Mrs. Maloney. A number of private equity firms that I
represent have raised this question to me. They are smaller,
and they do not borrow money. They do not engage in derivatives
or in other risky products. What is the concern that the SEC
has? What is the threat that they see that requires them to be
registered? They claim that being registered will cost them
hundreds of thousands of dollars, and I think this is a debate
that we often hear between larger corporations with many
resources and smaller firms that are having trouble making ends
meet. But if you have the prerequisite that you are not engaged
in derivatives, you do not borrow money, you are only with that
particular money and the equity fund, what is the threat that
the SEC sees in such equity firms that would require their
registration?
Ms. Schapiro. I don't think that we do see a threat
necessarily. Our concern was when the legislation was drafted
that the hedge funds or private funds registration provision if
it had multiple exemptions in it, hedge funds and others would
just reorganize to fit into an exemption, and we would lose the
benefit that the bill was giving us in closing this regulatory
gap. We will be very sensitive, and we clearly understand that
the oversight and examination of a small private equity fund is
quite different in terms of our resources and attention that we
will bring to it than the oversight of a large hedge fund
engaged in highly leveraged and derivatives trading activities.
Mrs. Maloney. Could you see or consider possibly two levels
of registration forms, with those involved in risky derivatives
or highly leveraged--having a higher standard than one that is
not borrowing money or involved in derivatives?
Ms. Schapiro. We can certainly look at that. Certainly to
the extent they are not utilizing leverage, they wouldn't
obviously maintain records on leverage and we wouldn't be
examining that. But we can certainly look at what different
alternatives there are.
Mrs. Maloney. Also, regretfully, many of my constituents
were harmed by the Madoff scheme, and many of them were retired
teachers, firefighters, people who are now almost destitute
because of that loss. So I would like to ask, since the Madoff
scheme was uncovered, your IG has issued three reports about
it. And the first talked about systemic breakdowns in the
manner in which the SEC conducted its examinations and
investigations. Can you expand on what these breakdowns were
and elaborate on some of the changes that have been put in
place since you have come onboard to ensure that Ponzi schemes
like this do not hurt people in the future?
Ms. Schapiro. Absolutely. In addition to specific rules we
have done, for example, requiring the investment advisers to
custody the assets of their customers with either an
independent custodian or a custodian subject to a surprise exam
by a registered accounting firm and the work we have done on
our tips and complaints and referrals system so that we don't
lose track of tips and information that come into the agency,
we have done some things that go to the internal restructuring
the organization.
Some of the problems highlighted by the Inspector General
really go to a lack of collaboration and coordination across
geographies, New York, Boston, and Washington, for example, and
between the Enforcement Division and the Inspections and
Compliance Examinations Division. We have new leadership in
both of those areas. We have new cross-functional teams across
those areas tackling the largest financial institutions. We
have united the broker-dealer and the investment adviser
examination function in New York so that we are not stovepiped
about who is seeing what when it is two affiliated entities, as
Madoff was the investment adviser and the broker-dealer.
We are really working on highlighting for employees the
importance of sharing information early and often, and I think
we are having some success with that. I think it is changing
very much the culture of the institution. Where employees are
being--in all of their examinations now do independent custody
verification when they are looking at large investment advisers
so that we don't rely on the word of somebody like a Madoff
about how they are operating their business. And I would be
happy to maybe provide more to you in writing because I could
speak about this for about an hour, detailing all the changes
at the SEC that were really brought about because of the Madoff
failure.
Mrs. Maloney. Thank you. My time has expired. Thank you,
Mr. Chairman.
Chairman Kanjorski. Thank you, Mrs. Maloney. Now, we will
hear from the gentleman from Florida, Mr. Posey.
Mr. Posey. Thank you very much, Mr. Chairman.
Madam Chairman, I have had an interest, I guess, for as
long as I have been here now in some accountability for what
went wrong at the SEC with the Madoff investigation, the fact
that Barrons had a cover story, I guess, exposing the scam. And
still for almost a decade, the SEC made no effort to get him
off the street or prosecute him. Whether it was ineptness,
indifference or incompetence, I don't know, but I am still
interested in knowing if and when there is going to be some
kind of accountability for that. We have had scathing internal
audits and external audits, and we have heard from the SEC, we
are still looking at it, we are still reviewing it. There are
no actions.
The last word we had is, there hasn't been one wrist
slapped, one whisper of criticism, nobody has been fired or
furloughed, and I am hoping that an update is going to tell me
that is not true.
Ms. Schapiro. Congressman, during the pendency of the
Inspector General's review which came out last fall, we could
not take any disciplinary action against any employee at the
request of the Inspector General. I will tell you that of the
20 enforcement employees who were involved in some way with
Madoff, about 15 of them are gone. And of the 36 examination
group employees, 19 of them are gone. A lot of the senior
people have left the agency. We do have, under Federal law, a
disciplinary process for employees, and it is complicated here
because it requires that we go back and review how employees
performed years ago. We can't just look at the Inspector
General report and make a decision based on that. I can tell
you that we have gathered and reviewed the evidence. We are
complying with the requirements of the civil service laws and
procedures. We have designated, as we are required to under
Federal law, a recommending official for potential discipline
and a deciding official, and the process is coming to a
conclusion in the near future.
It does take time. And employees have appeal rights, I will
say that. So even when the agency has concluded, it doesn't
necessarily mean that it is over.
Mr. Posey. And I certainly don't want people who are not
guilty of misbehavior to be punished. I am all about that. But
I am encouraged to know that you are telling me that we are
going to hear sooner or later that there is going to be some
accountability and there are going to be some consequences for
allowing this guy to milk the public for between $50 billion
and $70 billion.
Ms. Schapiro. Yes. You are going to hear that. But let me
also say that, we made sure every employee had a copy of the
Inspector General's, as you say, scathing reports as well as
copies of victims' letters. And I talk to employees across the
agency about the importance of their reading those letters so
they understand, when we do our jobs well, the kind of pain
that we can prevent and why it is important for us to take the
lessons of the Madoff tragedy very much to heart and how that
transforms how we approach our jobs at the SEC.
I think our message has resonated. I see enormous
enthusiasm and dedication for pursuing investor protection. And
as I said in my opening statement, Madoff was a Ponzi scheme.
We have shut down twice as many Ponzi schemes this year as in
the prior year, and that is a significant change.
Mr. Posey. Yes, it is. But what happens--it is just like
Mr. Markopolos apparently went back for the second time with
the second file to encourage an investigation, they blew him
off and said, we have busted hundred-million-dollar schemes
before. Essentially, ``We don't need your help.'' And his is so
unprecedented. On another note--and I will look forward--I
hope, Mr. Chairman, we will call a special meeting when we have
a final outcome here and we know what accountability there is
going to be for that misbehavior.
Are there any plans right now to investigate recipients of
bailout money in the same or a similar manner that Ken Lay was
investigated for shafting all the Enron stockholders? We have
some big, big companies, and there is a lot of public
perception that their executives did the same thing that Ken
Lay did, but they have not been brought to justice yet. Are
there currently plans to pursue these investigations?
Ms. Schapiro. Absolutely. And Congressman, we filed a case
just a couple of weeks ago that is referenced in my written
testimony where the case was brought against a TARP recipient.
It was actually fraud in the receipt of TARP funds. We are
working very actively with the Special Inspector General for
TARP as well as with the Justice Department and others. And I
can tell you for all the financial regulators, it is a high
priority to look for fraud in that area.
Mr. Posey. I am thinking about the pre-req activities. I am
thinking about cashing out multimillion dollar bonuses when
they knew the ship was on its way down, and now the government
and other taxpayers having to carry that burden for them. Are
we going back and doing a forensic audit of some of this stuff?
Ms. Schapiro. Yes. I can tell you we have a number of
investigations under way that relate to major financial
institutions, some of which received TARP money at one time or
another and others that didn't. But we also have brought cases
against, for example, Angelo Mozilo at Countrywide, officers of
Beazer Homes, some of which include insider trading charges as
well. So we have actually done a fair number of cases coming
out of the financial crisis. They don't all get lots of
attention, but the record is there.
Mr. Posey. I will be wanting to follow up on that as we
move forward. Thank you, Mr. Chairman.
Chairman Kanjorski. Thank you, Mr. Posey. The gentleman
from Colorado, Mr. Perlmutter.
Mr. Perlmutter. Thank you, Mr. Kanjorski.
And just following up on a couple of comments that Mr.
Posey made, also Mr. Hensarling, talking about uncertainty and
accountability, my perspective on this is entirely different
than theirs in that we need to bring certainty back into the
markets. Accountability: there has to be accountability for
those who would commit fraud or misrepresentations and those
kinds of things. What we saw in 2008 was complete uncertainty
and complete chaos, which I believe was as a result of certain
policies of the Bush Administration and an approach which
basically took the cops off the beat, meaning the SEC not
enforcing the rules and regulations and laws that were on the
books.
This country suffered a terrible financial trauma that is
going to take years for us to recover from. But at least--and
just looking at the end of 2008 compared to today--business
profits are up almost 100 percent. Jobs are up from the bottom
when we were losing 780,000 jobs per month the last month of
George Bush, and the wealth of everyday Americans has gained
from dropping 25 percent--we have gained about a third of that
back, and we have a long way to go.
So I do agree with Mr. Hensarling that we need to bring
more certainty. But obviously, the markets are responding that
they want policemen on the beat, and I appreciate you, Madam
Chairman, and the efforts that the SEC are taking on Ponzi
schemes, on dealing with a number of other subjects that, in my
opinion, had just gotten out of control under the prior
Administration.
I have two questions. One deals with nanotrading, high-
frequency trading, flash trading. Mr. Kanjorski and I had a
hearing on this a number of months ago. You attended. What is
happening from the SEC's point of view in studying or
monitoring these high-frequency trades, which may or may not
have played a part in that dramatic drop in the market a month
and a half, 2 months ago?
Ms. Schapiro. As you know, we published in January a
concept released to review really all the issues surrounding
our fragmented equity market structure, including a focus on
high-frequency trading, the strategies that are used, the
impact of high-frequency trading on the marketplace.
At the same time, we also have proposals out to ban flash
orders, to sort of open up, light up dark pools of liquidity,
to ban sponsored access where customers of broker-dealers can
access markets directly and not go through risk management
systems. And then we most recently proposed a large trader
reporting system, so we could assign every large trader a
unique identifier and follow their activities in the markets
and then more broadly a consolidated audit trail so we can
bring the many audit trails that exist in the equity markets
into one and reconstruct events like May 6th much more
efficiently. So we have lots of pieces in play on market
structure. And I actually think that the May 6th events helped
to crystallize to some extent our thinking about how we want to
go forward with that. But it would be my hope that this fall,
in spite of all the other things on our plate, the market
structure is one we will not lose sight of because the real
importance, frankly, to the capital raising function, which is
so critical to the growth of our economy that our markets work
well not just for long- and short-term investors but for the
public companies that are desperate to raise capital.
Mr. Perlmutter. Can you explain to me a little bit more
about the circuit breakers that you have put into place?
Because one of the things we have talked about for at least 2
years or more is sort of the uptick rule, which is a circuit
breaker of a certain kind. Where are you on circuit breakers?
And then I want to talk to you about investment advisers.
Ms. Schapiro. Sure. Circuit breakers, right after the
market crashed, the exchanges and the SEC worked together to
create a rule that required, if a stock moved more than 10
percent in the S&P 500 more than 10 percent in a 5-minute
period, trading in that stock is halted for 5 minutes while
traders are able to adjust, gather their thoughts, change their
algorithms, if necessary, gather liquidity into the order
books, and then the stock is reopened after 5 minutes by the
primary market.
So if it is a New York Stock Exchange-listed company, the
New York Stock Exchange would re-open trading. The circuit
breakers have been triggered 3 times, actually, since they were
put into place, and they operated just exactly as we hoped they
would, stopped further cascading down of those stocks. They
were all erroneous trades. They re-opened right where they were
before they had the dramatic decline.
So we have now proposed to expand those circuit breakers
from the S&P 500 to include the Russell 1000 and certain
exchange-traded funds; and the exchanges and FINRA are working
on the next step, which would be to try to capture all stocks
in a circuit breaker kind of mechanism. There are other options
here that we are look at closely, whether you should not be
able to ever put in an order that is priced more than, say, 10
percent away from the market. And that is something we are
looking at which would eliminate erroneous trades completely.
But we have a full menu of things. We are working very closely
with the industry to see what is doable and what is doable in a
short time to help restore investor confidence and the market's
function. Because frankly, after May 6th, there were a lot of
people who were saying, ``That is it. I am done. This is way
too terrifying to see a $40 stock go to a penny in a matter of
seconds and then go back to $40 in a matter of seconds.''
Mr. Perlmutter. Thank you. My time has expired. I would
like to talk to you afterwards about investment advisers and
broker-dealers and the study that the SEC needs to undertake.
Ms. Schapiro. I would be happy to do that.
Mr. Perlmutter. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Perlmutter.
Now, we will hear from the gentleman from Illinois, Mr.
Manzullo.
Mr. Manzullo. Thank you, Mr. Chairman. Madam Chairman, as I
understand it, some investors fully participate in a
transparent market process by making their stock orders
available and contribute to the price discovery process. Other
investors don't, they operate in dark pools, a system whereby
they don't need to disclose sale or buy prices. I am wondering,
what incentives does the SEC offer to encouraging investors to
operate in an open and transparent trading process?
Ms. Schapiro. That is a great question. That is one we are
really wrestling with. Because we have this fear of the
development of a two-tier market where certain orders go into
dark pools and others are available to a public quotation and
what is the incentive to quote in public markets if you can get
a better price in the dark pools. And we actually believe that
there are about 30 dark pools operating and they have about 8
percent of the trading volume. We have proposed that what are
called indications of interest, which are used in dark pools,
be treated as bids and offers and be required to be publicly
displayed unless they are very large blocks which is the reason
for upstairs trading in the first place and the reason for dark
pools to have developed.
And we are also proposing that--for alternative trading
systems, which execute a large volume of stock--that they have
to display a much greater amount of their trading.
So it used to be if they had less than 5 percent of trading
stock, they didn't have to display. We have proposed to lower
that to a quarter of 1 percent. The broader question about how
to incentivize people into the public records is one that we
really tried to capture in our concept release and those are
issues we are working through right now. There are a number of
interesting ideas that we will pursue and put out for comment.
But the dark pools issue is one that we are very keenly focused
on because of its potential to create the two-tiered market
that could disadvantage ultimately the public price formation
market.
Mr. Manzullo. So I would take it that nothing in the Dodd-
Frank regulatory reform bill addresses that issue?
Ms. Schapiro. I cannot think of anything that specifically
addresses these kind of market structure questions.
Mr. Manzullo. It is not there?
Ms. Schapiro. Not that I know of.
Mr. Manzullo. That is okay. It is a big bill and you
probably would have been briefed it because it is obviously--I
have another question unrelated to this. Some investors have
taken losses because they have been ``Madoff'd'' under that
type of a scheme. If I have it right, it is the SIPC that
provides insurance up to a certain amount. But am I also
correct is that it doesn't cover a 401(k) or a retirement plan
but only an individual?
Ms. Schapiro. The issue there, I believe, is that under the
SIPA Act, the customer--under the view of SIPC at least--the
customer is defined as the individual or the account at the
broker-dealer. So that while a hedge fund, for example, might
have an accountant or broker-dealer, each of the individual
participants in the hedge fund are not viewed as customers and
therefore the SIPC payment of up to $500,000 in the case of a
broker-dealer that fails is only available to the fund itself,
not to each of the account holders within that fund.
Mr. Manzullo. So if you have a 401(k), if you hold it in a
401(k), as opposed to individually, you are out?
Ms. Schapiro. Actually I am not sure about that
specifically with respect to 401(k). I would be happy to get
back to you quickly with an answer.
Mr. Manzullo. That is fair enough. Thank you.
Chairman Kanjorski. Thank you very much, Mr. Manzullo. I
think I may have a quick answer for you there. Actually, in the
comprehensive study portion that we put into the bill, there is
a reference to flash trading, that study take on the
parameters--
Ms. Schapiro. You are absolutely correct. There is a
reference to high-frequency trading in the comprehensive study
that you--
Chairman Kanjorski. Because of the short period of time
between the enactment of the bill and the experience we had,
really, no one had sufficient information to legislate a
solution to the problem. We have had a request for just a few
more questions, Madam Chairman. Because we know we do not get
the benefit of your presence that often, not because you do not
want to testify, but you have a few other things to do over
there, I suspect, and we do not want to call you back, I am
going to give the gentleman from New Jersey the opportunity for
another 5 minutes.
Mr. Garrett. So, you are going to be really busy and you
have been really busy. But back in February of this year, the
SEC issued an interpretative release with regard to perhaps
some people would say not as important, the issue of disclosure
costs associated with climate change. You had that in February.
Then, we had the health care bill come out, and to the best of
my knowledge, correct me if I am wrong, there was no such
interpretative statement with regard to that.
Despite the fact that when some companies were--like
Caterpillar and others were reissuing statements, you had the
Commerce Secretary down the street being somewhat critical and
you had some chairman here in this House wanting to go after
these companies for what they were doing, but there was no
interpretative statement there with regard to that, now we
have, I guess, just recently, Bank of America, not on health
care but on the bill that is before us right now, saying that
what their projected cost of compliance will be. So my simple
question on this is: Will you be issuing an interpretative
release with regard to what we are discussing today? And that
is the whole--
Ms. Schapiro. It is a fair question. I really don't know
the answer to that. Let me explain that with respect to the
climate release, we did have investors managing more than a
trillion dollars in investments ask us to petition the
Commission for greater clarity on climate-related business
risks and we did have the New York attorney general
investigating a number of firms for inadequate disclosure of
climate risk in his view.
And this was also actually on the agenda of the SEC before
I even arrived. But I think it is also really important to note
here that this was an interpretative release about existing
disclosure obligations that we did not either opine on the
existence of climate change or its causes if any, and we did
not impose new requirements. I will tell you that from my
private sector experience, I know that a number of companies
have done a very good job with their climate related disclosure
over several years. But that it is quite spotty.
But on the health care side, we have seen before the bill
was passed even a number of health care companies do a good job
on their disclosure already.
Mr. Garrett. It actually wouldn't be health care companies.
It would just be any companies that would be impacted by it,
right? It is my fault, my time. I appreciate that. So you will
be looking into it is the bottom line?
Ms. Schapiro. We can certainly look at that.
Mr. Garrett. One of the interesting things--the bill came
out, and almost immediately after, you had a letter from
Senators Dodd and Lincoln to Representatives Frank and Peterson
with regard to an area of their interest. And that is the way
that the bill will be treating an aspect of the bill that was
quite controversial at the time. It is interesting that they
were members of the committee who drafted the bill and their
letter to Representatives Frank and Peterson came out so
quickly afterwards.
So I guess my question is, do you interpret the legislation
the same way that Lincoln and Dodd did, that under the
legislation, under no circumstances should end users be subject
to margin capital or clearing requirements?
Ms. Schapiro. I think this is actually largely a question
for the CFTC, quite honestly. Because under the bill, there is
no exemption as an end user for a financial institution. So it
is really--the end-user exemption goes to non-financial
companies that are hedging a commercial production risk. Those
are likely to be commodity-type products and those are not
under the SEC's jurisdiction.
Mr. Garrett. To the extent that you will be working jointly
with the CFTC and regulations have to come out on these
matters, what will be your interpretation or input on those
discussions?
Ms. Schapiro. I think we will have a serious discussion
about it. I honestly don't know where we will end up.
Mr. Garrett. So you don't have an opinion?
Ms. Schapiro. I don't know what their view is at the CFTC
at this point.
Mr. Garrett. You don't know what theirs is, but you do know
what your view will be even on the broader issues?
Ms. Schapiro. I think we will try to arrive at a view
together to the extent that we have to engage in joint
rulemaking.
Mr. Garrett. So it was ambiguous in the bill and it is
ambiguous going forward?
Ms. Schapiro. We will work through the issue. I would be
happy to come and talk to you about it as we progress on that.
Mr. Garrett. Another area that is somewhat ambiguous--and
this is an area where I got a study actually put into the
bill--surprise--and that is to deal with the fact that we have
so many different aspects with the retention requirements, you
have the FASB rules coming out as far as 166 and 167, the
changing capital requirements that are both in the bill and
also what you guys are working on with Reg AB. And we were
saying you should study all this stuff to see how they all work
together. Are you with me on that? So my question very briefly
is, the study is going to be done because it is in the bill. So
are you going to be on hold then with regard to what you all
are doing with regard to Reg AB and until our studies get done
so it all comes out clean and easy?
Ms. Schapiro. I think that there are going to be a lot of
aspects of Reg AB that are going to be subject to a joint
rulemaking, among the regulatory agencies, I believe,
shepherded by the Treasury Department. So while we do have our
proposal outstanding, we would be receiving comments. The
comment period has not even closed yet. We are obviously going
to have to sit down with our colleagues in the regulatory
community and see where we go from here. We understand the
message is to try to get these things coordinated.
Mr. Garrett. So you are going to sort of rely on the study
to help you with that?
Ms. Schapiro. The study will be important.
Mr. Garrett. Great. Thanks.
Chairman Kanjorski. Thank you very much, Mr. Garrett. Now,
we will hear from the gentleman from Florida, Mr. Posey.
Mr. Posey. Thank you again for the opportunity to follow
up, Mr. Chairman. Madam Chairman, you mentioned that 15 of 20
investigators are no longer at the SEC?
Ms. Schapiro. 15 of--I don't have all the position levels
or anything like that. But 15--about 15 of the 20 enforcement
employees who are involved in one way or another with Madoff
over a many, many-year period off and on, are gone.
Mr. Posey. And the others were examiners?
Ms. Schapiro. Examiners, yes.
Mr. Posey. How many examiners--
Ms. Schapiro. I understand that about 19 out of 36 are
gone. This isn't a science because some people touched these
matters very peripherally, some people more so, some were in
supervisory positions, some were quite junior. And frankly,
that was one of our issues, I think with respect to the quality
of the supervision of the examinations.
Mr. Posey. Very good. The question that really begs for an
answer is, where did they go? Are they working for other
enforcement agencies now? Are they working for the companies
they were supposed to regulate or enforce before? Are they
retired and receiving pensions while the people that Madoff
screwed are busted for the rest of their lives? Can we get a
rundown of where they went?
Ms. Schapiro. I don't know the answer to that. We do know
where employees go for a period of 2 years after they leave the
SEC. They are required to report where they have been employed
or who they have been retained by. But I don't know that we
have any right beyond that to know where they are.
Mr. Posey. I think there is a necessity to know where they
went. It is like letting a pedophile slink out the door or
change neighborhoods and it makes everything okay. I think we
are dealing with the same type of a problem here and I think it
is important. If the people who allowed Madoff's fraud to
perpetuate are now at other regulatory agencies, I think we
ought to know that, and the other agencies ought to be put on
notice. If they are working for a company they used to
regulate, I think we ought to know that too.
Ms. Schapiro. Congressman, I would like to disagree with
you. These aren't bad people. In some cases, they were people
who were very junior and were not adequately trained or
supervised in what they were doing. In some cases, they were
being pulled from one project to another project because the
flavor of the day perhaps was market timing and late trading by
investment companies and this is highlighted in the Inspector
General's report. There are a lot of reasons the SEC failed
with Madoff. And I have been highly transparent about those
reasons. We have published all the Inspector General reports.
We have posted on our Web site all of the actions we have taken
to try to improve the agency's operations to try to prevent
something like this from ever happening again. But I don't
think we have to vilify these people. There are lots of reasons
for this failure. Some were people who didn't do a good job,
without a doubt. But we can't say that about everybody.
Mr. Posey. There are people who are out $50 billion or $70
billion that might feel a little bit differently. Maybe they
haven't had the same sensitivity classes but they think there
needs to be accountability for bad conduct, misconduct, and
maybe criminal misconduct. I read the audits, and as I said
before, and you acknowledged, they are scathing. So the signal
when nobody is held accountable for what is done, if they are
allowed to quit and not be held accountable because they left,
the signal is you don't have to do your job right. If you don't
do your job and the taxpayers get bilked $50 billion to $70
billion, we will talk about how insensitive it could be to
point a finger at anybody in the agency here; and if you just
leave, everything will be okay and it will be forgotten.
Ms. Schapiro. I think people paid a very large price
through the Inspector General's reports. I am not suggesting
that is enough. We have a disciplinary process. It is coming to
a conclusion. It is pursuant to the Federal civil service
rules. I agree very much in accountability, which is one reason
why we have talked so much over the last year and a half about
Madoff, why the Inspector General reports are out there. He was
given free rein to do whatever investigation was necessary and
we have been very transparent about it.
Mr. Posey. My only point in saying that 15 of the 20
investigators who were involved in this--and stealing is
stealing, even if the government is in on the job, believe it
or not. Some people think that if the government is involved,
it makes it okay. Stealing is still stealing, even if the
government is involved in it. And I think saying that 15 of 20
of these investigators and 19 of the 36 examiners are no longer
with the agency doesn't make what they did okay, and doesn't
mean that they can't be held accountable. We should know where
they are now.
Ms. Schapiro. I agree it certainly doesn't make what
happened okay. I am not sure how we hold them accountable under
the law if they have left the agency and they haven't violated
any law. I am happy to think that through further.
Mr. Posey. Maybe some of the 1,200 lawyers who file 600
cases a year can find time between filing a half a case every
year to research that a little bit and see how other law
enforcement agencies handle that when somebody leaves a job
after maybe they have embezzled money or helped somebody
embezzle money, how leaving the job just doesn't change the
fact that they have done something very wrong and there needs
to be some accountability for it. And they have ways of
bringing those people to justice in the private sector. Maybe
it may seem relatively unheard of in the public sector, but in
the private sector, they seem quite capable of getting people
like that and bringing them to justice and holding them
accountable.
Ms. Schapiro. I hear you, and we will certainly think
further about that. I don't know of any evidence or suggestion
that anybody was embezzling at the SEC or aiding somebody
knowingly embezzling if that is a suggestion.
Mr. Posey. They certainly, they certainly by their--what
would you want to call it--indifference or ineptitude let the
Madoff fraud perpetuate for a decade. I think everybody with a
half a brain in the financial industry knew that. That is why
none of your big money managers or hedge fund managers got
caught. They read the Barron's expose, front page story on what
a fraud this guy is. But for 10 years, the SEC did nothing
about it. You read the investigation just like I did.
And I am just saying that there needs to be consequences
for that kind of behavior, and you told us that you are going
to see that eventually we are going to hear some just being
served in the future as you go through the proper course of
doing this. But I am just making the statement that 15 people
who were culpable probably to some degree, 19 of 36 who are
culpable to some degree should not be unnamed or forgotten just
because they left the agency. I think we need to know, as I
stated, where they are, if they are with agencies they used to
regulate, if they are in charge of overseeing at other agencies
now where the blunder could be repeated and if they just
retired and they are collecting pensions at the expense of the
people who got bilked.
Chairman Kanjorski. Mr. Posey, I yielded you 3 minutes of
your time just so that you could--
Mr. Posey. God bless you, Mr. Chairman. Thank you so much.
Chairman Kanjorski. I do want to wind this up. I want to
thank Madam Chairman for her courtesy in remaining over here
for these extra questions, but I do want to--as to what Mr.
Posey talked about, as you and I discussed, I believe it was
yesterday, but time escapes me now, there is no natural
immunity to criminal law if you work for the SEC; that is true.
If there are criminal violations to the U.S. Code, they will be
pursued by the Justice Department, not by the SEC, because the
SEC only takes actions in a civil matter, as we all know. I do
think, however, that Mr. Posey raises an interesting question,
and perhaps as you are constructing the comprehensive study,
that would be a good question to be posed to the studier: what
could we do and what can we do to be more effective in finding
or maintaining jurisdiction over employees in highly sensitive
positions that could participate in or subliminally be part of
a fraud or violation of the law? Maybe we could come up with--
not only for the SEC but other sensitive agencies--some
methodology; I would hate to find out that Homeland Security,
because an employee did not act according to the highest
standards and then left the agency, they were unreachable. I
think that is the question that Mr. Posey is positioning.
As you construct the comprehensive study, Madam Chairman, I
know you are already done with the construction of it, but
seriously, if you could put some thought to it, it would be an
interesting question either this subcommittee could follow up
on or other committees of the House.
Ms. Schapiro. I would be happy to do that. I should make it
perfectly clear, if we have suspicion of illegal conduct by an
SEC employee, that would be a referral immediately to the
Justice Department. That would not be something that we would--
Chairman Kanjorski. Right. As I expressed to you, there is
a great hunger out there in the land for someone to be
reprimanded, prosecuted, or in some way made to pay a price for
extraordinarily bad judgment or activities that could border on
criminality. Maybe we could cooperate together on that and
utilize the comprehensive study to accomplish that. Now, that
being said, and having kept you well over the witching hour of
noon, we thank you for your courtesies to the committee. We
look forward, as I said, to working with you in the future.
I would note that some members may have additional
questions for this witness which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to this
witness and to place her responses in the record. Without
objection, it is so ordered. The panel is dismissed and this
hearing is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
July 20, 2010
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