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

                    OVERSIGHT OF THE U.S. SECURITIES



                               BEFORE THE


                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE


                     U.S. HOUSE OF REPRESENTATIVES


                             SECOND SESSION


                             JULY 20, 2010


       Printed for the use of the Committee on Financial Services

                           Serial No. 111-144

61-848                    WASHINGTON : 2010
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                 BARNEY FRANK, Massachusetts, Chairman

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

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

               PAUL E. KANJORSKI, Pennsylvania, Chairman

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

                            C O N T E N T S

Hearing held on:
    July 20, 2010................................................     1
    July 20, 2010................................................    41

                         Tuesday, July 20, 2010

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


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 
    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 
    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 
    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 
    So, I appreciate Chairman Schapiro coming today to testify.
    Chairman Kanjorski. Thank you very much, Ranking Member 
    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 
    Mr. Bachus. Thank you. Thank you, Mr. Chairman. I thank you 
for holding the hearing which I think Mr. Garrett and I 
    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 
    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 
    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 
    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 
    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 


    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 
    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 
    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 
    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 
    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 
    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 
    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-
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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 
    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. 
    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 
    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 
    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 
    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 
    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 
    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