[Senate Hearing 111-879]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-879

 
IMPLEMENTING THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION 
                                  ACT

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

           EXAMINING THE MAJOR ASPECTS OF THE DODD-FRANK ACT

                               __________

                           SEPTEMBER 30, 2010

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                      Amy S. Friend, Chief Counsel

                 Beth Cooper, Professional Staff Member

                  Drew Colbert, Legislative Assistant

                Mark Oesterle, Republican Chief Counsel

                Andrew J. Olmem, Jr., Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Brett Hewitt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                      THURSDAY, SEPTEMBER 30, 2010

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     3
    Senator Johnson
        Prepared statement.......................................    55
    Senator Akaka
        Prepared statement.......................................    55

                               WITNESSES

Neal S. Wolin, Deputy Secretary, Department of the Treasury......     6
    Prepared statement...........................................    56
    Responses to written questions of:
        Senator Shelby...........................................   101
        Senator Brown............................................   114
        Senator Tester...........................................   116
        Senator Kohl.............................................   118
        Senator Crapo............................................   118
Ben S. Bernanke, Chairman, Board of Governors of the Federal 
  Reserve System.................................................     8
    Prepared statement...........................................    61
    Responses to written questions of:
        Senator Tester...........................................   119
Sheila C. Bair, Chairman, Federal Deposit Insurance Corporation..    11
    Prepared statement...........................................    62
    Responses to written questions of:
        Senator Shelby...........................................   121
        Senator Brown............................................   139
        Senator Tester...........................................   142
        Senator Kohl.............................................   144
        Senator Merkley..........................................   147
        Senator Bunning..........................................   149
        Senator Crapo............................................   151
        Senator Hutchison........................................   152
Mary L. Schapiro, Chairman, Securities and Exchange Commission...    13
    Prepared statement...........................................    71
    Responses to written questions of:
        Senator Shelby...........................................   153
        Senator Brown............................................   161
        Senator Merkley..........................................   162
        Senator Bunning..........................................   166
        Senator Crapo............................................   168
Gary Gensler, Chairman, Commodity Futures Trading Commission.....    14
    Prepared statement...........................................    80
    Responses to written questions of:
        Senator Shelby...........................................   170
        Senator Brown............................................   176
        Senator Merkley..........................................   177
        Senator Bunning..........................................   180
        Senator Crapo............................................   180

                                 (iii)

John Walsh, Acting Comptroller of the Currency, Office of the 
  Comptroller of the Currency....................................    16
    Prepared statement...........................................    83
    Responses to written questions of:
        Senator Shelby...........................................   181
        Senator Brown............................................   189
        Senator Tester...........................................   190
        Senator Merkley..........................................   191
        Senator Crapo............................................   194


IMPLEMENTING THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION 
                                  ACT

                              ----------                              


                      THURSDAY, SEPTEMBER 30, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher J. Dodd, Chairman of 
the Committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    Let me welcome our distinguished panel of witnesses this 
morning. I cannot recall the last time we gathered in such a 
setting with all the representatives of the major financial 
regulatory bodies with us. Obviously, with the adjournment vote 
last night and when we planned this hearing some weeks ago, we 
were under the impression we were going to be in session at 
least, I think, another week. Obviously, the agenda changed. 
But, nonetheless, I thought this hearing was so important that 
I said to Richard that we wanted to move ahead with you. So I 
do not know how much participation we will actually get from 
Members, but I do not want you to believe that is a reflection 
of any feelings about any of you here this morning.
    Senator Shelby. They will probably like that.
    Chairman Dodd. Yes, fewer questions here from Members. But 
if we do get a quorum--and my hope is we do. I have discussed 
this already with Senator Shelby. We are going to move to 
executive session very quickly on a couple of housing measures 
that I believe have been agreed to. We have worked on them, and 
I think we can deal with them fairly quickly. So if that 
happens, we will interrupt the hearing, and I will apologize to 
whoever is speaking at that moment for the interruption when 
that moment occurs. But in the meantime, I am going to make 
some opening comments here. I will turn to Senator Shelby for 
any opening comments, and Jack is here with us, and since there 
are few of us here, if any other Members have additional 
thoughts they would like to express this morning, we will do 
that as well. And then we will go into a question period.
    I am going to make the question period not 5 or 6 minutes 
but 10 minutes each Member because to try and have--even 10 
minutes is not a great deal, but given the representation of 
our witnesses here, it will give each Member a chance maybe to 
get into a little more depth than you are probably able to in 5 
or 6 minutes, if that is OK with you.
    All right. Well, anyway, the hearing this morning is 
implementing the so-called ``Dodd-Frank Wall Street Reform and 
Consumer Protection Act.'' And, again, we are very grateful for 
the presence of our witnesses.
    I took over the chairmanship of this Committee nearly 4 
years ago, in January of 2007, and over that time we have 
witnessed the near collapse of the American economy, a crisis 
that cost us millions of jobs, wiped out trillions of dollars 
in wealth and at long last provided the impetus for fundamental 
reform of our financial system. That reform should have 
happened a long time ago. Many could make that case.
    For nearly 3 years, this Committee has held hearing after 
hearing identifying and examining gaps, overlaps, and 
shortfalls in a regulatory system that had not been updated 
since the 1930s.
    Today I believe we can say, thanks to the hard work of 
Democrats and Republicans on this Committee--and I include 
every Member of this Committee who was involved in this 
effort--and with the sage counsel of our witnesses, many of 
whom are here today and whose perspectives we have considered 
carefully, we have delivered the reform our financial system 
needed and provided the American people with the economic 
stability that they deserve. We have put an end to too-big-to-
fail bailouts and to an era in which executives on Wall Street 
felt free to gamble with other people's money in the belief 
that American taxpayers would be there for them if they lost.
    Now, Americans and executives alike know with certainty 
that if a company puts itself in a position to fail, fail is 
exactly what it will do.
    We have increased transparency and accountability in our 
markets, bringing the $600 trillion derivatives market into the 
open and preventing shady dealers from operating in the 
shadows.
    We have established an early warning system so that we 
never again find out that a financial product or practice is 
unsafe only after it has already undermined the stability of 
our economy. And we have established an independent consumer 
financial protection agency to provide Americans with the clear 
and accurate information that they need to make good financial 
decisions as well as with the security that comes with knowing 
that someone is watching out for your interests and your 
interests alone.
    But as you will notice, there is no ``Mission 
Accomplished'' banner hanging behind me here this morning in 
this Committee room. The work is not done at all. Hardly a 
mission accomplished. I have heard critics say that the new law 
leaves too much up to the regulators. But it was never my 
intention to have the U.S. Senate, the House of 
representatives, or the Congress as a whole do the job of 
regulators. Indeed, I do not think anyone wants the Senate or 
the Congress writing detailed prescriptions that require 
technical, expert knowledge. Nor could we afford to tie the 
regulators' hands with rigid legislative requirements that 
cannot be adapted to changing circumstances.
    What we have done with this legislation is to eliminate the 
gaps, the overlaps, and the shortfalls that allowed some 
financial actors to game the regulatory structure and some 
parts of our financial system to go unregulated entirely.
    The Glass-Steagall Act of 1933, which established the 
Federal Deposit Insurance Corporation, was 37 pages long. The 
Securities and Exchange Act of 1934 was 29 pages long. Those 
two acts laid the foundation for nearly 75 years of growth and 
innovation in our financial sector and prosperity for 
generations of Americans. But it took competent, energetic 
regulators to make those laws work.
    Our bill is some 848 pages long, when you get just the 
actual text of the bill, because times have changed. Our 
financial system is far more complex than it was 80 years ago, 
and we are competing in a global marketplace, which was not the 
case almost a century ago. We were asked to reform the entire 
financial system, and that cannot be done in a handful of 
pages. But like the Glass-Steagall Act and the Securities and 
Exchange Act, it will require very good, competent, energetic 
regulators.
    Now, I wish I could write a law that prohibits a trader 
from gambling away his firm's bottom line or an executive from 
putting short-term gains above long-term stability. But we 
cannot legislate morality, and goodness knows we cannot 
legislate wisdom. All we can do is establish a comprehensive 
framework and a clear path forward, and that is what we have 
tried to do with this legislation.
    The regulators will have to interpret and enforce the law, 
and those who profit from the innovation and flexibility that 
define our financial system will have to remember that evading 
the rules of the road, in letter or in spirit, hurts all of us. 
This new law gives our President the ability to walk into the 
G20 meetings as a representative of a world leader in financial 
services with a framework for the rest of the world to follow.
    When we first warned of the flaws in our system back in 
January of 2007, few thought we would end up on the path that 
we have traveled since. After all, if we are making money, what 
better proof of the soundness and stability of a system could 
there possibly be?
    Well, I believe that our economy will grow again. People 
will make money, and policymakers will be tempted to forget the 
lessons of this crisis. But mark my words here this morning. 
There will be another crisis as certain as we are sitting here. 
Greed and recklessness will rear their heads again. And I can 
tell you with confidence that when that day comes, we have 
provided regulators with the tools they need to see it coming 
and to put a stop to it in time before it wrecks the economy as 
this crisis nearly did. But whether they will actually do so 
largely depends upon the foundation laid by those of you who 
are before us today and the jobs you do in the coming weeks and 
months to lay that foundation within your respective regulatory 
bodies.
    With that, let me turn to my colleague from Alabama, 
Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman, and welcome to all 
of you. It is not the first time you have been here. I hope it 
will not be the last.
    For millions of Americans, the passage of Dodd-Frank 
provides little comfort as they confront a harsh economic 
reality. The unemployment rate now stands at 9.6 percent. 
Economic growth is anemic. Bank lending remains depressed. And 
housing values continue to fall in many areas. Not since the 
Carter administration has the Nation's economy performed so 
poorly.
    The response of the Administration and Democrats in 
Congress has been to enact a slew of new laws to expand the 
size and the scope of the Federal Government. With the stimulus 
bill, bank bailouts, Obamacare, and now Frank-Dodd, the 
Democratic majority has clearly articulated----
    Chairman Dodd. Dodd-Frank.
    [Laughter.]
    Senator Shelby. Dodd-Frank. Interchangeable.
    [Laughter.]
    Senator Shelby. Frank-Dodd, Dodd-Frank. You know, I think 
Frank would like that, Chris.
    Chairman Dodd. Let us wait and see how it works.
    [Laughter.]
    Senator Shelby. I will call it Dodd-Frank. I do not think 
it is going to work. I hope it does.
    With the stimulus bill, bank bailouts, Obamacare, and now, 
according to the Chairman, Dodd-Frank, the Democratic majority 
has clearly articulated its vision for the future: more 
Government, higher taxes, and greater control over the economy. 
For millions of Americans, however, the Democrats' vision has 
produced an unfortunate reality: higher unemployment, less 
access to credit, and trillions of dollars of Government debt 
on the shoulders of our children and our grandchildren.
    Today we will examine the implementation of one of these 
bills, the recently enacted legislation known here as Dodd-
Frank. Rather than address the core issues that produced the 
financial crisis, I believe the Dodd-Frank legislation adheres 
to the worn-out Washington theory that more is better--more 
regulation, more agencies, more bureaucrats, and more spending.
    To make matters worse, the bill has delegated to 
bureaucrats the authority to devise dozens, if not hundreds, of 
new rules for our financial system. The law itself provides no 
specific guidance in any number of areas, including 
derivatives, consumer protection, and systemic risk. In many 
instances, Dodd-Frank has outsourced this Committee's 
responsibilities to unelected bureaucrats.
    Typically, an implementation hearing involves Congress 
making sure that regulators are following the law as 
prescribed. Today, however, the roles will be reversed. We will 
be asking regulators to tell us what rules that they will be 
prescribing. Consequently, for all intents and purposes, the 
real authors of Dodd-Frank will be the bureaucrats in our 
financial regulatory agencies.
    Let us remember that nearly all of the major financial 
institutions that failed were regulated institutions. Let us 
also remember that the regulators failed to use their already 
broad authorities to take the necessary steps to prevent the 
crisis. And, finally, let us remember that conflicting agency 
rules created opportunities for regulatory arbitrage.
    By ignoring these failures and adding another level of 
bureaucracy to our already cumbersome financial structure, 
Dodd-Frank could potentially create an even more complex and 
dysfunctional system.
    For example, Dodd-Frank instructed the SEC and the CFTC to 
jointly devise rules on derivatives. In doing so, the 
legislation intensifies the decades-long turf battle between 
the two agencies that we are quite familiar with. This likely 
ensures that the final rules will be more about protecting 
bureaucratic fiefdoms than protecting the overall financial 
system. Thus, rather than addressing the regulatory arbitrage 
in derivatives that we know AIG exploited, this bill 
exacerbates the problem. Additionally, by delegated the major 
policy decisions, and therefore most of the real work, to the 
regulators, the Dodd-Frank legislation undermines the 
effectiveness of our regulators by asking them to do too much.
    For example, the Federal Reserve has approximately 70 
rulemakings and studies it must complete over the next 18 
months. How can we expect the head of any agency to properly 
devise and implement so many complex rules while also 
effectively discharging its existing responsibilities?
    The recent financial crisis painfully demonstrated that 
errors, limitations, and conflicts of interest among regulators 
often play a key part in causing a systemic breakdown. The 
majority has promised the American people that Dodd-Frank will 
make our financial system safer and will help revive the 
economy. As time passes, however, I believe that it will become 
clear that neither is true. By extending the Government safety 
net over a much larger segment of our financial system, the 
stage, I believe, has been set for more severe economic crisis.
    Under current law, the responsibility rests largely with 
the regulators to avoid future difficulties. Congress, however, 
can continue to exercise its oversight authority by having 
hearings such as this one today and also, when necessary, 
revisit the law and make changes consistent with our findings 
and the demands of the electorate. In this particular instance, 
change is not only a good thing; I believe it is inevitable.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Does anyone else want to be heard on this matter before we 
turn to our witnesses?
    [No response.]
    Chairman Dodd. Well, very good. Welcome to our witnesses, 
and I will be brief in our introductions because you are all 
well known to those of us on the Committee.
    Neal Wolin is the Deputy Secretary of the U.S. Department 
of the Treasury, prior to that served in the Obama 
administration as Deputy Assistant to the President. We thank 
you, Neal, for being with us once again.
    Chairman Ben Bernanke, as we all know, of the Federal 
Reserve, we thank you, Mr. Chairman, for being here this 
morning.
    Sheila Bair, of the FDIC, has been before this Committee on 
numerous occasions over the last 3 or 4 years, and, Sheila, we 
thank you for your service--longstanding service, by the way. 
Of course, many of us knew Sheila when she was legal counsel to 
Bob Dole here in the Senate, so she knows very much what it is 
like to be on this side of the dais as well, so we thank you.
    Mary Schapiro is Chairperson of the U.S. Securities and 
Exchange Commission, and, Mary, we thank you for being with us 
this morning, and we thank you for the work that you are doing.
    Gary Gensler is Chairman of the Commodity Futures Trading 
Commission and, again, longstanding service to our Government 
and in the private sector as well. And, Gary, we thank you.
    And John Walsh is the Acting Comptroller of the Currency. 
He assumed that position on August 15th, having previously 
served as Chief of Staff for Public Affairs for the OCC. We 
thank you very much, John, for being with us as well.
    I would ask you to begin in the order I have introduced 
you, Neal. And if you can, try and keep it down to 5 to 6 
minutes or so. And, again, all documentation or supporting 
materials that you think would be worthwhile for us to have as 
part of this hearing, we look forward to.
    And let me just say, by the way, in response to Senator 
Shelby, without going into the details of his statement here, 
obviously with my departure in a few weeks from here, this 
Committee will have to continue its job, obviously, of the 
oversight function. And Bob Bennett and I will be on the 
outside watching as this all unfolds here. But, obviously, it 
will be very important. We did not----
    Senator Shelby. Corker will be here.
    Chairman Dodd. Well, we know Corker, and Tim Johnson will 
be here, with the gavel in his hand, we hope.
    [Laughter.]
    Chairman Dodd. I know you were. I could not resist the--
anyway, put that aside for a second. But the point being that 
what we did not write into the law--and you cannot, obviously, 
and that is, the job on this side of the dais, and that is, to 
have the oversight consistently on how this is all working. And 
that will be a very, very important function in addition to the 
other jobs that the Committee will assume come January. But I 
underscore that point very strongly. It will be very important 
to see how this is working and how we are performing.
    So, with that, Neal, thank you again for being with us, and 
we will begin with your testimony. And, by the way, as I have 
said to Members, as soon as we have--I think we are getting 
close. Are we one away? Then we are going to interrupt to do a 
quick markup of two bills.
    Neal.

STATEMENT OF NEAL S. WOLIN, DEPUTY SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Mr. Wolin. Mr. Chairman, Ranking Member Shelby, Members of 
the Committee, thank you very much for the opportunity to 
testify about Treasury's role in implementing the Dodd-Frank 
Act.
    Mr. Chairman, 2 months ago, against tough odds, Congress 
enacted historic financial reform. Passing the Dodd-Frank Act 
was a major accomplishment for this country, and it would not 
have happened without your strong commitment and that of your 
colleagues.
    Congress stood on the right side of history and with the 
millions of Americans who have lost their jobs, homes, and 
businesses as a result of a crisis caused by basic failures in 
our financial system.
    Chairman Dodd. Neal, I want to congratulate you. You have 
brought us a quorum.
    [Laughter.]
    Mr. Wolin. Success.
    Chairman Dodd. So let me move us into executive session, if 
I may. Without objection, we will go into executive sessions.
    [Whereupon, at 10:20 a.m., the Committee proceeded to other 
business.]
    [Whereupon, at 10:22 a.m., the Committee was reconvened.]
    Chairman Dodd. We are back to regular session. Neal, go 
ahead.
    Mr. Wolin. Thank you, Mr. Chairman.
    But the work required to make reform a reality, as you 
noted, Mr. Chairman, in your opening, is far from done. We now 
face the task of implementation.
    I know this process can seem remote or distant to many 
Americans. It is enormously complex and involves unavoidably 
dense topics. So before providing you with an update on our 
efforts, I want to list our guiding principles. These are the 
basic things all Americans should know about how we are 
implementing reform.
    We are moving as quickly and as carefully as we can. We are 
establishing full transparency.
    Wherever possible, we will streamline and simplify 
Government regulation. We will create a more coordinated 
regulatory process. We will build a level playing field here at 
home and around the world for financial firms. We will protect 
the freedom for innovation that is absolutely necessary for 
growth. And we will keep Congress fully informed of our 
progress on a regular basis.
    Mr. Chairman, Ranking Member Shelby, since passage, 
Treasury has been hard at work implementing reform. We 
immediately put in place a governance structure. We established 
teams dedicated to Treasury's four main responsibilities. Those 
responsibilities include helping to establish the Financial 
Stability Oversight Council, laying the groundwork for the 
Office of Financial Research, launching the Consumer Financial 
Protection Bureau, and creating a Federal Insurance Office.
    In my written testimony, I have provided a detailed update 
on where we are with each office. But let me just say a few 
words about two of them: the Financial Stability Oversight 
Council and the Consumer Financial Protection Bureau.
    Tomorrow, the Council will hold its first meeting. As 
Chair, Treasury respects the critical independence of 
regulators to fulfill their responsibilities. We are working 
with other Members to develop an approach that maintains that 
independence while maximizing the coordination required for the 
Council to fulfill its collective responsibility of promoting 
financial stability.
    Tomorrow, I expect that the Council will take important 
first steps. It will consider draft bylaws. It will consider a 
proposal to seek public comment on the criteria to designate 
large, interconnected nonbank financial companies for 
consolidated supervision. And it will consider a proposal to 
seek public comment to inform recommendations the Council will 
make on how to implement the Volcker Rule.
    Treasury has also made important progress standing up the 
Consumer Protection Bureau. Upon passage, we set up a staff 
implementation team with a clear division of responsibilities. 
They have focused on building the necessary infrastructure, 
such as human resources and IT and on the Bureau's key 
functions, including research, preparing for the supervision of 
financial institutions, and working with the various transferor 
agencies.
    Mr. Chairman, let me just conclude by saying that Treasury 
and all the agencies involved in this process have and will 
continue to put enormous effort toward implementation and the 
ultimate goal of making our financial system safer and our 
economy stronger.
    Chairman Dodd. Thank you very much, Mr. Wolin. I appreciate 
it.
    Chairman Bernanke, thank you.

 STATEMENT OF BEN S. BERNANKE, CHAIRMAN, BOARD OF GOVERNORS OF 
                   THE FEDERAL RESERVE SYSTEM

    Mr. Bernanke. Thank you, Mr. Chairman.
    Before I turn to my testimony, I would like to thank you 
and Senator Shelby and the rest of the Committee for helping 
get Senate confirmation of Janet Yellen and Sarah Bloom Raskin 
to the Federal Reserve Board. As you know and as I am going to 
discuss in my testimony, we have a great deal of work before 
us, and having them on the Board will help us enormously in 
carrying out the responsibilities that we have.
    In the years leading up to the recent financial crisis, the 
global regulatory framework did not effectively keep pace with 
profound changes in the financial system. The Dodd-Frank Act 
addresses critical gaps and weaknesses of the U.S. regulatory 
framework, many of which were revealed by the crisis. The 
Federal Reserve is committed to working with the other 
financial regulatory agencies to effectively implement and 
execute the act, while also developing complementary 
improvements to the financial regulatory framework.
    The act gives the Federal Reserve several crucial new 
responsibilities. These responsibilities include being part of 
the new Financial Stability Oversight Council, supervision of 
nonbank financial firms that are designated as systemically 
important by the Council, supervision of thrift holding 
companies, and the development of enhanced prudential standards 
for large bank holding companies and systemically important 
nonbank financial firms designated by the Council. In addition, 
the Federal Reserve has or shares important rulemaking 
authority for implementing the so-called ``Volcker Rule 
restrictions'' on proprietary trading and private fund 
activities of banking firms, credit risk retention requirements 
for securitizations, and restrictions on interchange fees for 
debit cards, among other provisions.
    All told, the act requires the Federal Reserve to complete 
more than 50 rulemakings and sets of formal guidelines, as well 
as a number of studies and reports, many within a relatively 
short period. We have also been assigned formal 
responsibilities to consult and collaborate with other agencies 
on a substantial number of additional rules, provisions, and 
studies. Overall, we have identified approximately 250 projects 
associated with implementing the act. To ensure that we meet 
our obligations in a timely manner, we are drawing on expertise 
and resources from across the Federal Reserve System in areas 
such as banking supervision, economic research, financial 
markets, consumer protection, payments, and legal analysis. We 
have created a senior staff position to coordinate our efforts 
and have developed project reporting and tracking tools to 
facilitate management and oversight of all of our 
implementation responsibilities.
    The Federal Reserve is committed to its longstanding 
practice of ensuring that all its rulemakings be conducted in a 
fair, open, and transparent manner. Accordingly, we are 
disclosing on our public Web site summaries of all 
communications with members of the public--including banks, 
trade associations, consumer groups, and academics--regarding 
matters subject to a proposed or potential future rulemakings 
under the act.
    In addition to our own rulemakings and studies, we have 
been providing technical and policy advice to the Treasury 
Department as it works to establish the Oversight Council and 
the related Office of Financial Research. We are working with 
the Treasury to develop the Council's organizational documents 
and structure. We are also assisting the Council with the 
construction of its framework for identifying systemically 
important nonbank financial firms and financial market 
utilities, as well as with its required studies on the 
proprietary trading and private fund activities of banking 
firms and on financial sector concentration limits.
    Additionally, work is well under way to transfer the 
Federal Reserve's consumer protection responsibilities 
specified in the act to the new Bureau of Consumer Financial 
Protection. A transition team at the Board, headed by Governor 
Duke, is working closely with Treasury staff responsible for 
setting up the new agency. We have established the operating 
accounts and initial funding for the Bureau, and we have 
provided the Treasury detailed information about our programs 
and staffing in the areas of rulemaking, compliance 
examinations, policy analysis, complaint handling, and consumer 
education. We are also providing advice and information about 
supporting infrastructure that the Bureau will need to carry 
out its responsibilities, such as human resource systems and 
information technology.
    Well before the enactment of the Dodd-Frank Act, the 
Federal Reserve was working with other regulatory agencies here 
and abroad to design and implement a stronger set of prudential 
requirements for internationally active banking firms. The 
governing body for the Basel Committee on Banking Supervision 
reached an agreement a few weeks ago on the major elements of a 
new financial regulatory architecture, commonly known as Basel 
III. By increasing the quantity and quality of capital that 
banking firms must hold and by strengthening liquidity 
requirements, Basel III aims to constrain bank risk taking, 
reduce the incidence and severity of future financial crises, 
and produce a more resilient financial system. The key elements 
of this framework are due to be finalized by the end of this 
year.
    In concordance with the letter and the spirit of the act, 
the Federal Reserve is also continuing its work to strengthen 
its supervision of the largest, most complex financial firms 
and to incorporate macroprudential considerations into 
supervision. As the act recognizes, the Federal Reserve and 
other financial regulatory agencies must supervise financial 
institutions and critical infrastructures with an eye toward 
not only the safety and soundness of each individual firm, but 
also overall financial stability. Indeed, the crisis 
demonstrated that a too narrow focus on the safety and 
soundness of individual firms can result in a failure to detect 
and thwart emerging threats to financial stability that cut 
across many firms.
    A critical feature of a successful systemic or 
macroprudential approach to supervision is a multidisciplinary 
perspective. Our experience in 2009 with the Supervisory 
Capital Assessment Program--popularly known as the bank stress 
tests--demonstrated the feasibility and benefits of employing 
such a perspective.
    The stress tests also showed how much the supervision of 
systemically important institutions can benefit from 
simultaneous horizontal evaluations of the practices and 
portfolios of a number of individual firms and from employment 
of robust quantitative assessment tools. Building on that 
experience, we have reoriented our supervision of the largest, 
most complex banking firms to include a quantitative 
surveillance mechanism and to make greater use of the broad 
range of skills of the Federal Reserve staff.
    A final element of the Federal Reserve's efforts to 
implement the Dodd-Frank Act relates to the transparency of our 
balance sheet and our liquidity programs. Well before 
enactment, we were providing a great deal of relevant 
information on our Web site, in statistical releases, and in 
regular reports to the Congress. Under a framework established 
by the act, the Federal Reserve will, by December 1st, provide 
detailed information regarding individual transactions 
conducted across a range of credit and liquidity programs over 
the period from December 1, 2007, to July 20, 2010. This 
information will include the names of counterparties, the date 
and dollar value of individual transactions, the terms of 
repayment, and other relevant information. On an ongoing basis, 
subject to lags specified by the Congress to protect the 
efficacy of the programs, the Federal Reserve also will 
routinely provide information regarding the identities of 
counterparties, amounts financed or purchased and collateral 
pledged for transactions under the discount window, open market 
operations, and emergency lending facilities.
    To conclude, the Dodd-Frank Act is an important step 
forward for financial regulation in the United States, and it 
is essential that the act be carried out expeditiously and 
effectively. The Federal Reserve will work closely with our 
fellow regulators, the Congress, and the Administration to 
ensure that the law is implemented in a manner that best 
protects the stability of our financial system and strengthens 
the U.S. economy.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Chairman Bernanke. And 
I should say, by the way--I did not say this at the outset; 
that is my failure--I want to thank all of you, by the way. We 
have had tremendous cooperation from all of you over the last 
several years as we worked our way through all of this, and 
particularly you, Chairman Bernanke, going back obviously to 
the very difficult days in the early fall of 2008. In my view, 
history will record that your involvement and your 
participation helped save this country, and so I appreciate 
very, very much what you did, and we are grateful to you for 
your service.
    Sheila.

    STATEMENT OF SHEILA C. BAIR, CHAIRMAN, FEDERAL DEPOSIT 
                     INSURANCE CORPORATION

    Ms. Bair. Chairman Dodd, Ranking Member Shelby, and Members 
of the Committee, thank you for the opportunity to testify on 
the FDIC's efforts to implement the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.
    Let me say at the outset what a pleasure it has been to 
work with you, Mr. Chairman, on this historic legislation, as 
well as on many other matters over the years. This is a 
bittersweet moment for me, as I am sure it is for many of us, 
in appearing before you for what may be my last time. I wish 
you well as you take on new challenges outside the Senate.
    Chairman Dodd. Thanks.
    Ms. Bair. I would also like to say farewell to Senator 
Bennett. It has been a pleasure to know you for many years, and 
this will probably be the last time I will be appearing before 
you, but I do not think there is anyone in the Senate who 
understands financial services better than you do, and your 
measured, balanced approach to these issues will be very much 
missed. I wish you well, as well.
    As Chairman Dodd said, I believe it was 6 a.m. in the 
morning shortly after the final vote: ``We have done something 
that has been badly needed, sorely needed for a long time and 
we hope will protect our country, create the kinds of jobs and 
wealth and optimism and trust once again in our financial 
system that has become so missing.''
    Senator Dodd, I can report to you this morning that at the 
FDIC, we are well on our way to putting this, ``badly needed'' 
Dodd-Frank Act into effect.
    With the U.S. financial system now stable and healing, we 
are moving ahead with some initial rules to implement the 
orderly liquidation process created under the Dodd-Frank Act 
for systemically important financial companies.
    To restore greater market discipline, it is essential that 
the liquidation rules make clear to equity shareholders and 
unsecured creditors that they, not taxpayers, are at risk when 
their company fails. We hope to publish this preliminary set of 
rules in the near future.
    To more effectively carry out our new resolution 
responsibilities, we created a new Office of Complex Financial 
Institutions. This office will focus on monitoring risk at 
large complex institutions, reviewing their required resolution 
plans, and developing strategies to execute those plans should 
it become necessary. This office will also handle the staff 
work in connection with the new Financial Stability Oversight 
Council, of which the FDIC is a member.
    To ensure that we have the information necessary to carry 
out the new orderly liquidation authority, we are working on 
implementing our new back-up examination and enforcement 
authority as granted by the Dodd-Frank Act. This authority will 
likely play a key role in planning for any potential 
liquidation of a systemically important financial company. Our 
Board also recently strengthened our existing Memorandum of 
Understanding with the other primary Federal regulators with 
respect to our back-up authority for insured depository 
institutions.
    As part of ending ``too big to fail,'' the Dodd-Frank Act 
also calls for the largest and most systemically important 
banks to meet higher capital requirements. These requirements, 
in concert with the new international leverage ratio and other 
Basel III standards, are a major step in strengthening the 
safety and soundness of the financial system and ensuring that 
credit is available.
    Other important provisions in the Dodd-Frank Act that have 
not received as much public attention concern changes made to 
our authority as manager of the Deposit Insurance Fund. The 
FDIC has long held the view that the deposit insurance 
assessment system should cushion the impact of economic cycles 
on insured institutions. However, in practice, the opposite has 
tended to occur.
    The FDIC Board will soon consider a long-term strategy for 
managing the Deposit Insurance Fund so that the fund can remain 
positive through a crisis without the need to impose sharp 
swings in the assessment rates. Our Board will look at 
assessment rates, a target reserve ratio, and a dividend policy 
consistent with long-term FDIC goals and statutory 
requirements, including the new minimum 1.35 percent reserve 
ratio.
    We know the last two crises will eventually fade from 
public memory and the need for a strong fund will become less 
apparent. Therefore, actions taken now under the Dodd-Frank Act 
should make it easier for future FDIC Boards to resist pressure 
to reduce assessment rates or pay larger dividends at the 
expense of the long-term stability of the fund.
    Finally, the FDIC is actively supporting the new Consumer 
Financial Protection Bureau established under the Dodd-Frank 
Act. We are working with the Treasury Department and other 
banking agencies to ensure a smooth transition and strong 
coordination as the CFPB is established. Further, the FDIC has 
taken internal steps to strengthen consumer protection by 
reorganizing our supervisory functions and creating a new 
Division of Depositor and Consumer Protection. This new 
division will direct our supervisory resources more effectively 
while maintaining the necessary coordination and information 
sharing between consumer protection and safety and soundness.
    In conclusion, let me say the success of the Dodd-Frank Act 
will rise or fall depending on the commitment and enthusiasm of 
the various agencies to fully implement it in a timely manner.
    Thank you for the opportunity to testify on the FDIC's 
efforts in implementing the Dodd-Frank Act, and I would be 
happy to answer any questions. Thank you.
    Chairman Dodd. Thank you very much, Chairman Bair, and 
thank you again for your tremendous involvement over these 
many, many months. We thank you immensely.
    Chairman Schapiro, we thank you for being with us this 
morning. We thank you, as well, for your strong leadership of 
the SEC. It has been welcome.

    STATEMENT OF MARY L. SCHAPIRO, CHAIRMAN, SECURITIES AND 
                      EXCHANGE COMMISSION

    Ms. Schapiro. Thank you very much. Chairman Dodd, Ranking 
Member Shelby, and Members of the Committee, thank you for 
inviting me to testify today on behalf of the Securities and 
Exchange Commission regarding our implementation of the Dodd-
Frank Wall Street Reform and Consumer Protection Act. And let 
me add my thanks to you, Senator Dodd, to those of my 
colleagues for your leadership of the Committee and for 
shepherding regulatory reform through the legislative process.
    The pace and scope of SEC rulemaking over the next year as 
we work to meet the Act's requirements will be unprecedented in 
our history. Given the scope and importance of the Act, we are 
taking great care to implement its many provisions effectively 
and on schedule and to do so in a transparent manner that 
incorporates significant public input at every step.
    We believe that the successful execution of this landmark 
legislation depends in large part on receiving detailed 
comments from stakeholders across America's financial system. 
Thus, we began by immediately establishing a process for public 
comment that exceeds legal requirements, creating a series of 
e-mail boxes to which the public are invited to send 
preliminary comments, even before rules are proposed and the 
official comment periods begin. The response, with thousands of 
comments received on 31 different topics, has been 
extraordinary.
    We recognize that the process of establishing regulations 
works best not only when all stakeholders are engaged, but when 
the discussions and meetings are transparent. Therefore, we ask 
those who request meetings with SEC staff to provide an agenda, 
which is posted on our Web site, along with the names of 
individuals participating in these meetings and copies of any 
written materials distributed.
    In addition, SEC staff is committed to reaching out as 
necessary to solicit views from affected stakeholders who do 
not appear to be adequately represented by the public record on 
a particular issue and our Web site provides detailed 
information on our schedule for all rules and studies required 
by Dodd-Frank through July of 2011.
    Our consultative efforts include close collaboration with 
our fellow regulators, as well. We are consulting and 
coordinating with the CFTC, the Federal Reserve Board, and the 
Departments of Treasury, State, and Commerce, and other 
agencies. Our Office of International Affairs is meeting weekly 
with our rule-writing staff to ensure appropriate coordination 
with our foreign counterparts. Our goal is to establish a 
seamless and effective framework that crosses agencies and 
borders and which encompasses the full spectrum of financial 
regulatory issues.
    Since the July signing of the Act, the SEC has issued 
interim rules requiring the registration of municipal advisors, 
approved exchange rules eliminating broker discretionary voting 
on executive compensation, and revised Regulation FD to remove 
the exemption for NRSROs, or credit rating agencies. We have 
sought formal comments regarding the study we will conduct of 
the obligations of brokers, dealers, and investment advisors, 
and on the definitions of certain terms fundamental to 
derivatives regulation, including swap, securities-based swap, 
swap dealers, and others. And in recent weeks, the SEC has held 
three joint roundtables with the CFTC to inform our over-the-
counter derivatives rulemaking.
    Yet our work is just beginning. In October, we expect to 
release at least six new packages of proposed rules for public 
comment. These will include proposals that would, among other 
things, establish ownership limitations and governance 
requirements for security-based swap clearing agencies, 
enhanced due diligence disclosure in the asset-backed 
securities market, and require that corporate executive 
compensation and golden parachutes be subject to advisory 
shareholder votes. Also in the next month, we will adopt an 
interim final rule for reporting on pre-Act security-based 
swaps.
    By the end of October, we will have also completed our 
administrative process of establishing each of the five new 
offices created by the legislation. We expect to appoint the 
heads of these new offices during the months of October and 
November.
    Also in November, we expect to issue an additional nine new 
packages of proposed rules. These will include three separate 
derivatives rulemaking releases regarding antimanipulation 
rules, data repository registration, record keeping, and real-
time reporting, and jointly with the CFTC, definitions and 
jurisdictional provisions to guide our OTC derivatives 
oversight.
    By the end of the year, we will have proposed all rules 
required to restructure the derivatives market and to implement 
changes in investment advisor oversight.
    By January, 6 months after passage, we will have completed 
and submitted several studies and reports to Congress, 
including one regarding the obligations of broker-dealers and 
investment advisors and one looking at ways to improve investor 
access to advisory and broker-dealer registration information. 
By then, we expect the broad SEC organizational review to have 
been completed and conveyed to Congress, as well.
    In conclusion, we are engaged in a comprehensive effort to 
implement the Act. Indeed, we will write more than 100 rules 
and conduct more than 20 studies. And while we will undoubtedly 
encounter some bumps in the road, we are currently on track to 
meet the goals, mandates, and deadlines. We are ensuring that 
our process is fully transparent and that the full spectrum of 
views on every issue is heard and considered. And as we proceed 
with implementation, we will continue to work closely with 
Congress, consult with our fellow regulators, and listen to 
members of the financial community and the investing public.
    Thank you for the opportunity to be here and I look forward 
to answering your questions.
    Chairman Dodd. Thank you, Chairman Schapiro, very, very 
much. I appreciate your diligent work. And let me make sure 
that in the case of all of you, your respective staffs and 
others who have been working so hard are recognized, as well, 
for their diligence.
    Mr. Gensler, how are you? Thank you for coming.

STATEMENT OF GARY GENSLER, CHAIRMAN, COMMODITY FUTURES TRADING 
                           COMMISSION

    Mr. Gensler. Good. Doing well. Thank you, Chairman Dodd. 
Good morning, Ranking Member Shelby, Members of the Committee. 
I thank you for inviting me to speak here today on the 
implementation of the Dodd-Frank Act, or the Frank-Dodd Act.
    Chairman Dodd. Wait until you go over to the House to make 
that comment.
    [Laughter.]
    Mr. Gensler. I am honored to appear here today alongside my 
fellow regulators with whom we are working so closely to 
implement the Act and I am pleased to testify on behalf of the 
Commission and thank my fellow Commissioners. There are five of 
us each who are independent, Senate-confirmed, and will come 
and bring their views to these really crucial matters.
    Before I move into the testimony, I do want to thank you, 
Chairman Dodd, for your leadership of the Banking Committee and 
in the Senate. On a personal note, I think we first met about 
13 years ago when I was asked to serve in the Treasury 
Department, but also worked so closely with you on what became 
Sarbanes-Oxley, and it is bittersweet, and also Senator Bayh 
and Senator Bennett. I remember many private meetings and 
public meetings, so I thank you. As Sheila said, it is a bit 
bittersweet.
    The Dodd-Frank Act requires the CFTC and the SEC working 
with our fellow regulators to write rules with regard to the 
derivatives area within 360 days. That means, if one is not 
counting, we have 289 days to go.
    We set up 30 rule teams at the CFTC and publicly put this 
out, and we have two principles really guiding us. One is the 
law itself, not to over-read it, not to under-read it, but to 
do exactly, as best we can, what Congress intended to do and 
wrote in the 840 pages that the Chairman referred to.
    Second is to have broad consultation, heavily both with 
fellow regulators and the public and the Congress, as well. We 
are working very closely with the SEC and the Federal Reserve 
particularly, but also all of my fellow regulators here today. 
Within 24 hours from the bill signing, we had 20 team leads 
over at the SEC for a joint meeting, and with the Federal 
Reserve and other regulators the following week. In fact, to 
date--we added it up--we have had 146 individual meetings of 
staffs or chairman-to-chairman level between the CFTC and 
fellow regulators. That is about 100 with the SEC and about 45 
with all the other regulators to date.
    We are also actively consulting with international 
regulators. I just returned yesterday from a 3-day trip to 
Brussels, where I met with all the different senior regulators 
there. I know my other regulators are doing the same. Two weeks 
ago, the European Commission put out their proposal on 
derivatives and it is very similar and consistent with the 
Dodd-Frank Act. Both have strong clearing requirements. Both 
have covering financial entities and have a commercial end user 
exception. Both use data repositories and have strong risk 
lowering standards for the dealers. And so we are working to 
harmonize to make sure as we go forward with the rule writing 
we are consistent with what they are doing internationally.
    We are also soliciting broad public comments, as our other 
agencies are. We want to engage the public as best we can. We 
have had 3 days of roundtables with the SEC, and we have also 
had many public meetings which we, too, list on our site. I 
think we now have a list of 170 meetings on our site with all 
the details and participants and the major topics discussed.
    We plan to actively publish rules starting tomorrow is our 
first public meeting, publishing proposals through the middle 
of December. We have coordinated that schedule mostly with the 
SEC, but we have shared that schedule with all of the fellow 
regulators and Treasury here today to try to coordinate with 
the FSOC.
    So the next year of rule writing will test certainly the 
talented staff of the CFTC and my fellow Commissioners and me. 
Though we do have the resources to publish the rules and move 
forward on the rules, we do recognize we would need 
significantly more resources about a year from now to actually 
implement these.
    With that, I look forward to taking any questions.
    Chairman Dodd. Thank you very much, Chairman Gensler.
    Mr. Walsh, thank you for joining us and thank you for 
taking on the responsibilities at the OCC.

 STATEMENT OF JOHN WALSH, ACTING COMPTROLLER OF THE CURRENCY, 
           OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Mr. Walsh. Thank you, Mr. Chairman. Chairman Dodd, Senator 
Shelby, Members of the Committee, it is an honor to testify 
before this Committee where I used to work as staff to Senator 
John Heinz under Senator Bennett's predecessor, Senator Jake 
Garn, and a privilege to testify before you, Mr. Chairman, on 
the Dodd-Frank Act as your service in the Senate draws to a 
close.
    The Committee asked me to discuss our progress in 
implementing the Dodd-Frank Act, our plans for integrating the 
OTS staff and functions into the OCC, our plans for identifying 
employees to transfer to the Consumer Bureau, and our views 
about how Basel III furthers the objectives of the Act. My 
written statement also describes a few challenges we have 
encountered thus far in implementing the Act that may benefit 
from legislative clarification.
    To meet the law's objectives, the OCC is drafting a number 
of new rules, some jointly with other agencies and some on a 
coordinated basis. The rules cover a broad range of issues, 
including regulatory capital, proprietary trading, derivatives 
margin requirements, and appraisals. The law also requires us 
to revise many of our existing regulations, and as the Office 
of Thrift Supervision is integrated into the OCC, we are 
charged with reviewing and republishing all OTS rules.
    We have worked quickly to identify each of our rulemaking 
obligations and have established teams of agency experts to 
lead our work and to coordinate with interagency efforts, as 
appropriate. A group of senior managers is directing and 
coordinating this mammoth effort. My written statement also 
details specific tasks we have initiated, including support we 
have provided to the Financial Stability Oversight Council and 
an Advanced Notice of Proposed Rulemaking we have issued on the 
requirement to end reliance on credit ratings. We have begun 
work on an interagency basis to implement risk retention 
requirements for securitization and to limit excessive or 
inappropriate compensation, among other projects. We are still 
in the early stages of work on these projects and we have 
encountered some challenges detailed in my statement.
    One of the most important tasks ahead for the OCC involves 
the transfer of most functions from the Office of Thrift 
Supervision. The OCC will take on the task of supervising 
Federal thrifts and writing rules for all savings associations, 
while responsibility for State chartered thrifts and thrift 
holding companies will go to the FDIC and the Federal Reserve, 
respectively.
    Most OTS employees will transfer to the OCC and we are 
focused on ensuring the orderly and effective transfer of these 
functions and staff. The OTS employees transferring to the OCC 
have essential skills and knowledge of the thrift industry that 
will be important to the OCC in carrying out this new mission. 
I believe they will find the OCC a supportive and rewarding 
place to continue their careers, and we are looking forward to 
welcoming them to our agency.
    We are mindful of the importance of communicating about the 
transition process, both with OTS employees and the thrifts 
they supervise. I recently wrote to all Federal thrift chief 
executive officers about the transition and I plan to continue 
reaching out to the industry. We are participating in industry 
events that provide opportunities to interact with thrift 
executives and we are developing an outreach program to provide 
information about the OCC's approach to supervision and 
regulation.
    We also have an obligation to work with Treasury to 
identify OCC employees who have the skills to support the 
rulemaking, supervision, and examination functions that will 
transfer to the CFPB and who are interested in working for the 
new agency. We have been participating in planning for the new 
Bureau, and as the CFPB organization takes shape, we are 
committed to providing necessary support to that organization.
    Finally, with respect to Basel III, we believe these 
capital and liquidity reforms which seek to improve the ability 
of banks to absorb shocks from economic stress advances the 
objectives of the Act. The Dodd-Frank Act addresses many of the 
same issues as Basel III, which seeks improvements to quality 
of capital, addresses systemic risk concerns, mitigates 
procyclicality, limits excessive leverage in the banking 
system, and establishes minimum liquidity standards. We think 
the Basel III framework strikes an appropriate balance by 
setting requirements for higher quality capital and liquidity 
while allowing the banking system to continue to perform its 
essential function of providing credit to households and 
businesses. Further, the extended transition period minimizes 
any short-term disruptions in financial services while the 
economy recovers.
    Thank you for the opportunity to testify today. I would be 
happy to answer any questions.
    Chairman Dodd. Thank you very much. Thank you very much for 
your testimony.
    What I am going to do if I can here is give a little more 
time to Members this morning, given the range of witnesses we 
have with us from the various regulatory agencies, so I will 
ask the Clerk to put a 10-minute time on. We will try and focus 
on that.
    Let me pick up on the point, Secretary Wolin, you raised at 
the very outset of your remarks, the very good news that the 
Financial Stability Oversight Council will be meeting tomorrow 
to work on a number of issues. The substantive functions you 
have identified, others have, as well, including designating 
certain nonbank financial companies for supervision by the 
Federal Reserve, recommending heightened prudential standards 
for large interconnected financial companies, and several 
others that will be the job of this oversight council.
    I am interested in hearing briefly from each of you--you 
have touched on this already--on, one, who will represent your 
organization at the Council, who will actually be there, who 
you are designating so we have a good idea of who that is, and 
what is your view of the key substantive priorities of the 
Council. There is a lot to take on here, but I would love to 
get some sense of how you prioritize those issues, at least in 
your view of who will be doing it.
    And as I say this, let me also editorialize a bit here, 
because I--and again, a couple of you have raised this and I 
applaud you for doing so. We certainly expect the members of 
the Oversight Council to share information and to cooperate and 
to create an atmosphere where any agency is free to contribute 
in all of this. This organization is not intended to be a top-
down but rather a collective fathering of equal partners in all 
of this, and I would expect no one to hide behind the work of 
the Fed or the Treasury, nor to be intimidated by it, and I say 
that respectfully, but obviously Treasury and the Fed have been 
very dominant players in all of this, but what I want to have 
happen here is that level of cooperation where each of you have 
a responsibility to bring your designated knowledge and 
expertise to the table and that that information is shared, 
creating a new culture.
    One of the problems in the past has been I cannot legislate 
culture. None of us can here. But unless that culture changes 
on how we operate, that sharing of information that 
particularly an oversight council is going to need in order to 
succeed, if it is really going to work, that has to be a part 
of this. And again, we can designate responsibilities, but 
beyond that, it ultimately depends upon the leadership of the 
respective agencies to create that culture. And so I am 
interested in having you comment briefly on this, as well.
    So let me run down with you, Neal, if I can, who is going 
to be at that table tomorrow and what are your priorities.
    Mr. Wolin. Thank you, Mr. Chairman. Secretary Geithner will 
be at the table chairing the meeting tomorrow for Treasury. I 
think the points that you made, Mr. Chairman, with respect to 
the cultural issues of the Council are critically important, 
because while on the one hand, the Council members have clearly 
their own independent regulatory authorities and those need to 
be respected, getting the information sharing and the sort of 
collaborative effort to make sure that the Council acquits its 
collective responsibility in the right way is also very, very 
important. So that is something we will be focusing on, I 
think.
    In terms of priorities beyond getting that basic rhythm 
right, clearly, the Council has by statute four studies that it 
needs to do that are important, two relating to the Volcker 
provisions and one relating to risk retention in the 
securitization area, a final one having to do with the overall 
economic effect of this regulatory framework. Beyond that, the 
Council, I think, should and will prioritize the question of 
which nonbank financial institutions ought to be designated as 
systemic, and beyond just firms, also utilities.
    So I think those are the core things beyond keeping abreast 
in a range of ways of the various members' views about what 
systemic risk exists in the system and how we are addressing 
them and how they ought to be addressed.
    Chairman Dodd. Let me just quickly say that I appreciate 
that Secretary Geithner will be at tomorrow's meeting. I am 
going to be as interested in who shows up at the following 
meetings. Too often, what happens is, again, this gets 
relegated to some very good people, I am sure, but it takes on 
less of a priority. And I do not expect the Secretary of the 
Treasury to show up at every meeting, but I would really like 
to know that there is someone, particularly someone who might 
happen to be coming before this Committee to be confirmed, that 
within that structure has the responsibility, whether it is the 
member of a commission that someone has designated, that that 
is the person who will be there so we in this Committee in the 
coming years will be able to have someone that comes before us 
from your respective agencies that we can talk to about this so 
it does not end up being, and I say this respectfully, of some 
staff member who has been just given the job to be there and we 
see this culture begin to return to where it has been.
    I do not expect you to necessarily answer that question 
right now unless you know. Do you----
    Mr. Wolin. Well, let me say, Mr. Chairman, the Secretary 
has been very, very engaged in these implementation issues to 
date----
    Chairman Dodd. Right.
    Mr. Wolin. ----and he does absolutely expect to be very, 
very engaged in them, in the work of the Council on an ongoing 
basis, not just tomorrow. He will personally be very much 
involved, whether that means every single meeting, but I think 
that is his expectation. And a number of his senior staff, 
myself included, will continue to stay fully engaged, as well. 
So I think the basic answer is Secretary Geithner expects that 
he will be chairing these meetings on an ongoing basis.
    Chairman Dodd. All right. Well, that is good, and again, 
this is for all of you here, but I would recommend, because you 
will set the tone for years to come. Long after all of--
certainly I am gone and you are gone, as well, who your 
successors are and how you set up this and begin to move this 
will become sort of the standard. And so it is very important 
how this starts, in a way.
    Chairman Bernanke, do you have any thoughts on this?
    Mr. Bernanke. Yes, Mr. Chairman. I will be attending the 
meeting along with Governor Tarullo, who has been a point 
person for us on bank supervision and regulation, and I intend 
to be the regular representative for the Federal Reserve.
    The Dodd-Frank Act provides for a Vice Chairman for 
Supervision at the Federal Reserve, which has not yet been 
nominated, but that person obviously would also play an 
important role going forward. I think this Council is very 
important. Given all these overlapping responsibilities, 
coordination is going to be extremely important. And in 
particular, many of the aspects required to set up this regime, 
designating systemically critical firms and utilities, for 
example, comes from the Council, and so that needs to be put in 
place that we can begin to implement the basic structure of the 
Act.
    Chairman Dodd. Great.
    Ms. Bair.
    Ms. Bair. Yes. I will be attending, and, as long as I am 
Chairman, I will be representing the FDIC. I think it is very 
important that all the principals fully engage with this 
important effort.
    In terms of priorities, I certainly agree with Deputy 
Secretary Wolin. Certainly, from the FDIC's perspective, a top 
priority should be the designation of nonbank systemic firms. 
This is closely related to our ability to be prepared, because 
that triggers a living will resolution planning requirement, 
and so early identification of those entities which the Council 
feels are systemic is very important.
    Also, I hope that the Council will be forward-looking, 
identifying not just systemic institutions but systemic 
practices and emerging risks. We see some emerging risks now, 
and being forward-looking and proactive--to try to get ahead of 
them, identify them and deal with them before they become big 
problems--I think is a very important focus for the Council.
    Certainly, coordination is an important function, too, but 
I think people of good will will work collaboratively together 
and share information and respect each other's respective 
spheres of expertise to get this work done. I think if we all 
start trying to rewrite each other's rules, though, this 
Council will become an impediment, not a way to facilitate 
reform. It is very important to get the balance right, and I 
think we all are committed to working together to make sure 
that happens.
    Chairman Dodd. Thanks very much.
    Chairman Schapiro.
    Ms. Schapiro. Thank you. I will represent the Securities 
and Exchange Commission and I would certainly expect to be at 
every meeting of the Council.
    Obviously, everyone has said designation of the nonbank 
financial institutions is really a critical and a high priority 
item. I would also say that from my perspective, because we 
have much to do to implement rules to fulfill the Volcker Rule 
requirements under the Act, we will be particularly interested 
in launching a study that predates the rule writing in that 
area and getting comment and getting the background that we 
need to do that in a thoughtful way.
    Chairman Dodd. Thanks.
    Mr. Gensler. Chairman Dodd, I expect to be there and at 
every meeting. I am not even sure under the Commodities and 
Exchange Act I could send somebody else to vote for me there, 
so I think that is pretty clear.
    I would also compliment Treasury. I think they have been 
excellent. I mean, we are all sort of learning a new thing 
here, this Council----
    Chairman Dodd. Right.
    Mr. Gensler. ----but they have been excellent, seeking the 
advice. We are sort of at this end of the table. I would 
associate myself more with Senator Reed or my Senators from 
Maryland. Like the Senate, there are small States, they are 
middle States and large States, but the Treasury has been 
excellent in taking all of our views into being.
    In terms of priorities for us, at least, one thing that we 
see over the many months ahead is to designate some 
clearinghouses to be systemically relevant. We currently 
oversee 14 clearinghouses. We think that might grow to 20 or 
so. But some small handful would be so important under Title 
VIII of the statute, the Council would designate them, and I 
hope tomorrow to at least highlight that we will do that. But 
it would certainly come months from now before that happens.
    Chairman Dodd. I appreciate that.
    John.
    Mr. Walsh. The basic operating rule is principal plus one. 
I expect to be there. I assume the Comptroller that is 
nominated by the Administration will be there. Our Chief 
National Bank Examiner is the support for our participation.
    I think the key challenge over time is going to be figuring 
out how to assess systemic risk across the entire financial 
system. We need to gather the data that is available in the 
agencies and the private sector to begin mapping risk across 
the system. We need agencies to bring issues to the Committee 
and I think that will be the kind of challenge as it develops 
its work. And the overall challenge is getting consistent 
policy across a number of independent agencies. That is not so 
much a challenge for the FSOC, but the challenge we all face.
    Chairman Dodd. Right. Well, I will come back to that, and 
again, time is up. But let me ask just one quick question of 
you, Chairman Schapiro and Gensler--other questions I have 
would require participation by more, so I will wait for the 
next round.
    And you touched on this, Chairman Gensler, on the 
derivatives market and the reaction internationally. It is not 
only obviously vast, but it knows no geographic boundaries 
obviously and poses some issues. The European Commission 
recently released its proposals it talked about, which will be 
debated and finalized to the European Union legislative process 
in the coming months.
    Just again, you suggested this to be the case. Maybe 
develop it a little further, and Chairman Schapiro as well, 
based on what you know. And I know you were planning to be 
there, but for today's hearing. So I am grateful to you for 
being here today, but urge you to get over there quickly as 
well, given the importance. I know you cannot be two places at 
once.
    [Laughter.]
    Chairman Dodd. Is the European approach consistent with 
where we are going on this? We have sort of a sense of that, 
but I do not want to put words in your mouth. That is very 
important to me, this harmonization idea, that we have a 
consistent set of rules to the extent we can around the world.
    Mary, do you want to go first on that?
    Ms. Schapiro. I am happy to. I think Gary said it actually 
very well in his opening statement.
    I think the European Union direction is broadly consistent 
with Dodd-Frank: mandatory clearing of all eligible contracts, 
reporting of OTC derivatives, strict capital and 
collateralization or other requirements when contracts remain 
between two counter-parties, where they are bilaterally 
cleared. There is a regulatory framework they will put in place 
for trade repositories, very similar to what we are doing here.
    So I think there will obviously be details, but in broad 
scope it is quite surprisingly almost, in my way of thinking, 
consistent with the approach that we have taken in the United 
States.
    Chairman Dodd. You know we were told that this is the fact, 
and again I think we surprised a lot of people, but the fact 
that the Administration, we up here, led on this issue has an 
impact on what Europe has done. Is that a fair assessment?
    Ms. Schapiro. Oh, I do not think there is any question 
about it, that when we lead as the largest market in the world 
other countries look very carefully at what we have done, and 
we often look to other countries when they have led, to see if 
we can be consistent. I think there is broad appreciation among 
international regulators that while in every jurisdiction all 
the rules will not be identical, that it is in fact important 
to get them as close as possible, so that we do not see 
business migrate for the wrong reasons.
    Mr. Gensler. And I would just add I mean Commissioner 
Barnier, Michel Barnier, who is the European commissioner who 
has oversight of all of this and recommends to the parliament, 
and Sharon Bowles who sort of has either your or Chairman 
Frank's role in the parliament, we have been talking to them 
really since last summer and fall. And Treasury and the Federal 
Reserve have in addition to us. It has been an excellent 
partnership.
    The clearing mandates are very similar--the idea that 
financials would come in and nonfinancials were out. They sort 
of have a clearing threshold, so some nonfinancials would have 
to come in, where we do not have that. They have these trade 
repositories and so forth.
    The one distinct thing is they have said on the trading 
requirement they are going to take that up in about six or 7 
months in a different legislative package. So there is some 
timing delay, and we will have to wait to see where that it is.
    Chairman Dodd. Thank you very much.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Bernanke, as you well know, one of the goals of 
the Dodd-Frank legislation was to end Government bailouts. The 
FDIC was granted vast new powers under that legislation to 
resolve financial institutions, so that no one institution 
would be, as I understood it, too big to fail.
    If the market still thinks that the Fed, the Federal 
Reserve, will rescue failing firms, it will continue to provide 
large financial institutions with below-market financing, 
perpetuating our already severe too-big-to-fail problem. With 
the passage of this legislation, Dodd-Frank, can you, or would 
you, categorically state that the Federal Reserve will never 
again rescue a failing financial institution such as AIG, for 
example?
    Mr. Bernanke. Senator, I can say that because Dodd-Frank 
has eliminated the authority that we used to address AIG, which 
was the ability to lend to an individual firm, so that whatever 
any future chairman may wish to do that authority is no longer 
available, first of all.
    Senator Shelby. Do you agree with that?
    Mr. Bernanke. I do agree.
    Senator Shelby. OK.
    Mr. Bernanke. And I supported that throughout, that 
eliminating that authority was entirely appropriate if we were 
able to develop a regime that would allow for an orderly wind-
down of a firm, and Chairman Baer and the FDIC have been 
working very hard to develop a set of rules to govern that 
process.
    I just may add I think the most important additional thing 
we need to do is to keep coordinating with our international 
colleagues because these firms are typically multinational and 
we would want to be able to work closely with foreign 
regulators as well.
    Senator Shelby. How important is it for this message and 
the legislation that we have passed that is going to end 
bailouts, how important is that to people running financial 
institutions?
    Mr. Bernanke. Well, it is extremely important, Senator. I 
know from a political point of view that American taxpayers do 
not want to be on the hook for these kinds of bailouts in the 
future.
    Senator Shelby. Do you blame them?
    Mr. Bernanke. I certainly do not blame them.
    Senator Shelby. OK.
    Mr. Bernanke. But from a financial regulatory point of view 
the other important aspect is that we want to have market 
discipline. We want to lenders to, large firms to believe that 
they can fail and therefore to take due care to make sure that 
the firms they are lending to are not taking excessive risks.
    Senator Shelby. What is your judgment on Basel III at the 
moment? Just sum it up.
    Mr. Bernanke. I think it is moving in a very productive 
direction. It has strengthened capital, raised capital 
requirements, improved the quality of capital which is very 
important. It has created an international leverage ratio. It 
has introduced liquidity requirements. It has addressed some 
cyclicality issues. So I do think it makes some very 
substantial progress on providing stability for our banking 
system. There is still work to do be done though.
    Senator Shelby. Chairman Schapiro, what is the SEC doing 
now to develop and also to implement a permanent solution to 
the credit rating agency that is deep and with us? I know it is 
complicated.
    Ms. Schapiro. It is complicated. And as you know, since 
2006 when the Credit Rating Agency Reform Act passed, the 
agencies engaged in quite a lot of rulemaking with the very 
able assistance, I should say, of your former staff and 
Commissioner Kathy Casey. But under the new law we have a 
number of additional requirements that will go into place. So 
we have communicated with the rating agencies immediately that 
a number of the provisions take effect upon enactment of the 
law, do not require SEC rulemaking. So they need to change 
their governance, for example, and those efforts are underway.
    We are also staff----
    Senator Shelby. How important is that to, say, every 
bringing back the securitization market?
    Ms. Schapiro. The role of credit rating agencies is one 
that is particularly important in the securitization market. 
The law repeals Section 436(g) which would no longer allow the 
use, or the reliance upon--it requires a credit rating agency's 
consent to their ratings being included in offerings. They will 
not consent thus far, and it is not clear whether 
securitizations on what basis will continue to go forward until 
we reach some kind of an accord with the rating agencies.
    We have issued a no action letter to effectively remove the 
requirement from our rule that credit ratings be included where 
the offering is dependent upon the rating.
    So we are working through those issues with the credit 
rating agencies. We are also establishing our credit rating 
agency office that the law requires, that will report directly 
to me. We are employing the examiners that will be necessary to 
put credit rating agencies on an annual examination cycle, 
which is particularly important and required under the law as 
well.
    There are a number of rulemakings that will have to go 
forward relating to due diligence and other issues, reps and 
warranties in the asset-backed securities markets as well, that 
require the role of the rating agencies and the SEC to write 
rules.
    Senator Shelby. I hope it works.
    Ms. Schapiro. So do we. And Senator, I am sorry, I should 
just add that the law also requires us to evaluate all of our 
existing regulations and to remove reliance upon credit rating 
agencies in all of those rules, and that process is also well 
underway. We had already proposed that in the asset-backed 
securities markets for the use of shelf registration.
    Senator Shelby. Chairman Gensler, I want to get into your 
area if I can. You publicly argued against an end-user 
exemption from the clearing requirements in the derivatives 
title that we passed, and you have argued repeatedly for 
keeping any exemption as narrow as possible. What steps are you 
taking to ensure that your personal aversion to the end-user 
exemption does not interfere with your agency's mandate to 
carry out the Dodd-Frank legislation? What are you doing here 
and how will it affect the end user?
    Mr. Gensler. Senator Shelby, a very good question, but I 
took an oath of office and Congress writes the law. So we are 
going to adopt exactly what you have.
    There is a clear end-user exception for anyone who is 
hedging or mitigating a commercial risk for nonfinancial firms, 
and I think that was a balance, to take that sort of 9 or 10 
percent of the market out. Completely what we are going to do 
is comply with the law, and I think that was a balance that 
Congress appropriately made.
    Senator Shelby. OK. Thank you.
    Secretary Wolin, each of the regulators charged with 
rulemaking under the legislation, Dodd-Frank, has publicly 
committed to specific steps to provide transparency during 
their respective processes. You are familiar with that. Will 
Treasury follow this lead and post on its Web site, or 
otherwise make public, the names and affiliations of 
individuals who meet with Treasury officials, including Special 
Assistant to Secretary Geithner, Ms. Elizabeth Warren? Will you 
do that? Will there be transparency there?
    Mr. Wolin. Senator Shelby, we will be, I think, in very 
short order publishing a transparency policy that will be 
similar to what you ask about and making clear that people can 
know who it is, senior officials at the Treasury.
    Senator Shelby. Going back to you, Chairman Schapiro, the 
SEC's experience in overseeing securities markets in which 
participants have the choice of several different trading 
venues, each of you, what are you doing to ensure that the CFTC 
has the benefit of the SEC's expertise in this area, and vice-
versa maybe?
    Ms. Schapiro. I will let Chairman Gensler speak to this as 
well, but we do have a very different kind of a model in the 
U.S. equity markets. They are quite dispersed. There are 
multiple venues, exchanges, electronic communications networks 
and even internalization of securities transactions. And we 
think there is a lot of virtue, and there are some downsides as 
well, but a lot of virtue to that competitive model.
    And we have spent a lot of time talking with the CFTC about 
the extent to which the exchange trading or swap execution 
facilities that will handle both security-based swaps and 
commodity swaps could benefit from understanding what has 
worked well in the equity markets, understanding they are not 
perfectly analogous.
    Senator Shelby. Gary, do you want to?
    Mr. Gensler. It has been tremendous cooperation, over 100 
meetings with the SEC, and it feels a lot are around these 
trading venues.
    I would add, not to muddy up the hearing, within the next 
couple days I think we will put out this May 6 supplemental 
report. There are a lot of lessons from there too, and our 
joint staffs. And we have a joint advisory committee of outside 
experts that are going to give us a lot of advice too which 
would address your point, and lessons from May 6 can apply even 
to the derivatives marketplace.
    Senator Shelby. Secretary Wolin, I want to get into the 
question with you. The Treasury Department, I believe on 
September the 21st, conducted a mortgage disclosure forum with 
consumer advocacy groups and others. In a press release 
surrounding the forum, Secretary Geithner stated in regard to 
the Dodd-Frank legislation, I quote, and he said: ``Wherever 
possible, we are committed to expediting completion of the 
law's requirements ahead of statutory deadlines.''
    Earlier in the month, Secretary Geithner stated in his 
speech at New York University, and I will quote him again, and 
he says: ``We want to move quickly to give consumers simpler 
disclosures for credit cards, auto loans and mortgages, so that 
they can make better choices, borrow more responsibly and 
compare costs.'' Those are his words.
    These are laudable goals, but seem to require rule-writing 
authority which I do believe the new Consumer Financial 
Protection Bureau will not have until a director is appointed 
and confirmed by the Senate. Do you believe the Treasury has 
the writing authority without a confirmed director, and if so, 
why?
    Mr. Wolin. Senator Shelby, I think there is limited rule-
writing authority, but it is constrained until such time as 
there is a confirmed director.
    But I think in the meantime there is plenty of work to be 
done to get these various disclosures ready. It is an important 
piece of the legislation and an important part of the mandate 
of this new bureau. As you know, the mortgage disclosure 
example, the statute says it has to be done a year after the 
transfer date which would be July 21, 2012, and so we are keen 
to make sure that this new bureau is ready to move forward with 
its mandates and its focus, important focus on disclosure as 
quickly as it can do. So it is the Secretary's responsibility 
under the statute to stand this bureau up, and we want to give 
it as much of a running start as we can, consistent obviously 
with authorities.
    Senator Shelby. With the law.
    Well, let me ask all of you this. First, it has been 
brought to my attention the Securities and Exchange Commission 
has posted its rulemaking agenda on its Web site. Will each of 
you do the same thing? We are interested in transparency and 
what is going on.
    Anybody against that? The SEC is already doing it.
    Mr. Gensler. We did on the day the bill passed. We put the 
30. We put them in buckets, but 30 teams. It was on our Web 
site.
    Senator Shelby. So you are willing to do that?
    Mr. Gensler. Oh, absolutely. I think we have, but we can do 
more.
    Senator Shelby. What about you, the Treasury?
    Mr. Wolin. Insofar as we have rulemakings, Senator Shelby, 
we will be transparent.
    Senator Shelby. What about at the Fed and rulemaking?
    Mr. Bernanke. We are going to be as clear as we can. We are 
in discussion with the others.
    Senator Shelby. What does that mean when you say ``clear as 
you can''?
    Mr. Bernanke. Well, we have the following issue which we 
are working on very hard, which is that many of our rulemaking 
authorities are joint or consultative, and we just want to make 
sure that we are coordinated with the other agencies.
    Senator Shelby. Sure.
    Mr. Bernanke. And we have not yet quite got all those ducks 
in a row quite yet, but we will certainly try and make that 
information available.
    Senator Shelby. Let us know what you are doing.
    Mr. Bernanke. OK.
    Senator Shelby. Thank you, Mr. Chairman.
    Senator Reed [presiding]. Thank you, Senator Shelby.
    Thank you for your testimony.
    Secretary Wolin, in response to Senator Dodd's question 
about the systemic council, I think every respondent talked 
about the need for analytical evaluations, looking ahead, which 
raises the question of the Office of Financial Research. You 
and the President and Secretary Geithner have really the 
opportunity and obligation to create not just an organization 
but a culture which I hope is analytical and apolitical, which 
attracts the best minds that are looking across the system and 
forward. Can you give us an update as to where you all are in 
the process of appointing a head and getting that staffed?
    Mr. Wolin. Senator Reed, thank you. First of all, thank you 
for your leadership in creating the Office of Financial 
Research. It is, I think, a very important opportunity for the 
council and for the Federal Government in general to have a 
much better handle on data and data analysis that can make sure 
that it is in a good position to fulfill its various regulatory 
responsibilities and systemic risk responsibilities 
appropriately.
    We are hard at work in trying to begin setting up the 
structures that the statute requires. We want to do it 
consultatively with the other regulators, to make sure we know 
what data are already being collected and how they are being 
collected, so that we can move forward smartly on creating data 
standards and making sure that we do not duplicate efforts, 
either public sector or private sector efforts at data 
collection.
    The President, I think is reviewing possibilities for who 
might be the first head of the OFR. We are very much focused on 
making sure that it is someone who has real experience and 
capacity in data collection, data analysis and its application 
in these important contexts.
    And of course we want to make sure that the office, when it 
is stood up, has the independence that the statute intends for 
it. It is a part of the Treasury, but with independent 
leadership and budget capacity and so forth. And that is an 
important element so that the work of this office provides a 
clean, unbiased, unvarnished look at the issues which I think 
are critical and which give the Government, for the first time, 
a real set of potential tools that it has not had.
    Senator Reed. Thank you, Mr. Secretary.
    Chairman Bernanke, in a similar vein, Title 9 of the bill 
requires, as you mentioned in your comments, the appointment of 
a Vice President or a Vice Chair for Regulatory Supervision at 
the Fed. Do you have any notion of when that might happen?
    Mr. Bernanke. I do not have any precise information. I know 
it is the Administration's responsibility. I know they are 
considering alternatives, but I have no specific information.
    Senator Reed. Switching gears, one of the provisions in the 
legislation in terms of the Volcker Rule allows an exemption 
for roughly 3 percent for an institution to continue 
proprietary trading. I must say Senator Levin and Senator 
Merkley were really the key people pursuing a much tighter 
regime. But nevertheless, can you give us an idea of how much 
additional capital an institution like that, if they have their 
proprietary trading operation continue, would have to carry? Is 
that something you have considered already?
    Mr. Bernanke. I am sorry, that the bank would have to 
carry?
    Senator Reed. That the bank would have to carry. Or, let me 
put it another way. Would you require additional capital as one 
of the sort of prudential ways in which you could protect the 
system from proprietary trading if an institution uses the 3 
percent?
    Mr. Bernanke. Well, first of course, as you stated, 
Senator, there is a 3 percent of capital limit that a bank can 
dedicate to that.
    Senator Reed. Right.
    Mr. Bernanke. But, in addition, we have already in fact 
begun implementation of new rules for capital requirements for 
trading books, for trading of securities and those sorts of 
things.
    Senator Reed. So, essentially, you were already beginning 
to think about if one chooses this option to have additional 
capital even beyond what is required by the minimum rules?
    Mr. Bernanke. Well, on the Volcker Rule specifically we are 
of course engaged in the study, that we are working with the 
council to develop the study, and we will be working 
expeditiously to put in rules to implement the intent and to 
figure out what the appropriate exemptions and so on are.
    On a separate track, the Basel II international capital 
requirements have already significantly increased the capital 
required against risky trading of all types that would be 
market-based trading as opposed to loans on the banking book.
    Senator Reed. Let me ask another question too. As you go 
forward monitoring these operations, will you have on a 
frequent basis, perhaps even daily basis, actual knowledge of 
the positions that these trading units will be taking and also 
what units the clients of the bank are taking? Will you have 
that detailed constant information?
    Mr. Bernanke. We do not have that information on a daily 
type basis now. We mostly operate via rules and policies, 
assuring that the bank or the bank holding company has a set of 
risk management tools that it is applying consistently, and 
then we check to make sure that is happening.
    I think an open question is whether the Office of Financial 
Research will be gathering more detailed position information 
and the like, and that is certainly something that we may want 
to look at because that may be the only way in which to 
identify, across the system, crowded trades or other risks that 
might not be visible from the perspective of an individual 
institution.
    Senator Reed. I appreciate the systemic approach, but in 
just looking back it seems to me that the approach of looking 
at the risk assessment and evaluating it and seeing that they 
were doing what they said they were doing did not seem to be 
particularly helpful in many circumstances in the past. And if 
that is the approach that you choose to take, it very well may 
be ineffectual going forward. If these major institutions are 
going to have, under this exemption, a proprietary trading 
operation I would say, do you not think you need to know a lot 
more than just their risk policies and whether on a periodic 
basis they are doing what they say they are doing?
    Mr. Bernanke. We certainly do need to test what they are 
doing and to evaluate their positions, but realistically we 
cannot duplicate their entire operation.
    Senator Reed. I understand that.
    Mr. Bernanke. We are going to have to assess based on 
sampling and based on spot-checks and the like.
    Senator Reed. I think Chairman Schapiro has a comment.
    Ms. Schapiro. I was just going to add that since we have to 
define market-making and underwriting activities that are 
permissible under the Volcker Rule, one of the things that we 
will be looking to is a new large trader reporting system that 
we have proposed in the consolidated audit trail. That should 
help provide us with much more granular information about 
trading activities that we would hope we could then share with 
fellow regulators, to make a determination whether market-
making has been exaggerated and goes beyond what is permitted 
under the rule and has become speculative or proprietary 
trading. So we are intent on working very closely with our 
colleagues on that.
    Senator Reed. Let me just say, both to Chairman Gensler and 
Chairman Schapiro, the comments this morning reflect a 
collaboration and cooperation that is recent, but is very 
commendable.
    Just specifically, I know, Chairman Gensler, you are going 
to propose a rule tomorrow or in the next few days about 
clearing platforms.
    Can you both comment on the collaboration that you have 
entered into in terms of making sure this rule is truly 
reflective of both your equities in the business of clearing 
derivatives?
    Mr. Gensler. The three things we are taking up tomorrow and 
all that we are taking up all the way through December, we are 
sharing not only drafts, but we share preliminary term sheets, 
and we try to collaborate.
    On the governance rule tomorrow, I think Chair Schapiro can 
talk. They are about 10 days behind us. We could not quite get 
our commissioners' schedules lined up. As of now, I think they 
are nearly identical, the actual text and so forth. Now those 
10 days may change something, but that is what our goal is on 
each one of these--to be, if not identical, nearly there. That 
is certainly.
    And I think Mary and I have such a relationship. I know 
future chairs might not, but we have been benefited, and we 
want to use that.
    Senator Reed. Chairman Schapiro, do you have comments on 
that?
    Ms. Schapiro. No. I would agree completely. I think the 
cooperation really has been unlike anything I have ever seen in 
my all years in Government, and I think it is very positive. 
Even where we have had slightly different approaches, which I 
expect we will on some issues going forward, we are committed 
to asking questions about each other's approaches in our 
proposals, so that we can, even if we do not propose exactly 
the way, bring them back as close together as we can at final.
    Senator Reed. Mr. Walsh, please.
    Mr. Walsh. Just on this thought about risk management 
systems, I think the recent experience showed in some cases 
that large, complex institutions thought they were managing 
particular portfolios and risks and lines of business in an 
effective way, but did not really capture all exposures and all 
risks across lines of business and across activities. Improving 
their internal MIS to capture risk positions across the whole 
firm is part of that effective risk management that Chairman 
Bernanke was referring to, and that is an emphasis going 
forward.
    Senator Reed. Now I think we have made progress, but my 
sense was, not specific to one regulator, is that there were 
these elaborate risk procedures and that you reviewed them. And 
if they made sense, sure, they were OK. And if you occasionally 
spot-checked them, that was great. But as you indicated, they 
did not seem to work.
    I do not have a magic answer, but I think there has to be a 
much more textural or granular approach, even periodically. 
Otherwise, I think we will find ourselves right back where we 
were, and that would be unfortunate.
    Thank you.
    Chairman Dodd. Thanks very much, Jack.
    I appreciate, Chairman Gensler, you talked about how the 
two of you--you cannot speak for future people who sit in these 
chairs. All the more reason why you need to institutionalize a 
lot of this so that it does not become just a question of two 
people at this particular moment in time have that 
relationship. It will be very important in the years to come 
that that relationship between the CFTC and the SEC be a 
continuation of what you are doing. So anything you can do to 
institutionalize that so that people do not drift away, as they 
are apt to do in the coming years, would be very, very helpful 
as well.
    Mr. Gensler. I agree with that, and I am personally 
dedicated to figure that out.
    Chairman Dodd. And I want to just mention--Jack is 
finished. I did not say it earlier, but I am very grateful to 
all the Members of this Committee who worked so hard on all of 
this. And even though we did not end up with the kind of votes 
necessarily on this, an awful lot of this bill reflects an 
awful lot of work by a lot of Members of this Committee, not 
the least of which was the person I am about to introduce, and 
that is Bob Corker. So I would not want the moment to pass. 
That whole Title I, Title II that you and Mark worked on in 
large part is your effort and Mark's, so I thank you immensely 
for it.
    Senator Corker. Thank you, Mr. Chairman. I appreciate the 
way you have conducted this Committee for the entire time I 
have been on it. Thank you very much, and I will talk about 
that later.
    And I appreciate each of you coming today, and nice to hear 
everybody is playing well with each other at the moment.
    [Laughter.]
    Senator Corker. Secretary Wolin, the CFPB, the issue of 
consumer protection, I think there has been some discrepancy 
about whether it actually has rulemaking authority between now 
and July of 2011. You seem to indicate you think there is 
limited rulemaking ability. I wonder if you would expand upon 
that, because I think a lot of us think that during this 
transition there absolutely is no rulemaking authority until it 
is actually transitioned.
    Mr. Wolin. Thank you, Senator Corker. I think, you know, 
the Secretary has by statute a series of authorities to stand 
this Bureau up, and I think that those include, of course, 
working with the other regulators that are transferring both 
authorities and people as well as getting the Bureau ready to 
undertake its rulemaking and its supervision and enforcement 
authorities as of the transfer date next July.
    I think the rulemaking authority is circumscribed, but I 
think the Secretary probably does have the capacity to do the 
things that I just talked about, getting these authorities and 
people transferred over----
    Senator Corker. But not real rules across the financial 
industry, then.
    Mr. Wolin. I think that is probably right. It is quite 
limited there. I think that is right, Senator.
    Senator Corker. So let me make sure I understand. So there 
are some abilities to stand the organization up, but I think 
what you are stating today is there is absolutely zero ability 
to make rules as it relates to consumer protection that relate 
to the financial system.
    Mr. Wolin. Well, again, Senator, you know, absolutely 
zero--I think that the Bureau, the Secretary on behalf of the 
Bureau in this transition phase as he is standing it up has the 
capacity to do the sorts of things we did last week: have fora, 
get on top of the issues, hear from people about what they 
think, and so forth.
    Senator Corker. Right.
    Mr. Wolin. I think the authority to actually issue a rule 
that would bind private parties, for example, in the mortgage 
area is a tough one until such time as there is a confirmed 
director.
    Senator Corker. Let me just--a tough one. That is a vague 
word. What I would like for you, if you would--I know we have 
had a good relationship. If you ever think that you have the 
ability to actually make a rule, would you make sure we all are 
aware of that?
    Mr. Wolin. Absolutely.
    Senator Corker. At present, it is my understanding, as I 
leave here today, that you do not have that authority until the 
organization is stood up in July of 2011.
    Mr. Wolin. Before we do any such thing or----
    Senator Corker. Well, before even thinking about doing----
    Mr. Wolin. ----comes to you.
    Senator Corker. ----thing, I hope that you will talk with 
us.
    [Laughter.]
    Mr. Wolin. Fair enough.
    Senator Corker. Because I assume we would have a Senate-
confirmed type of person in that position before you all 
started making rules.
    Mr. Wolin. The President obviously intends to nominate 
someone. He is reviewing candidates for that role right now, I 
think committed to making sure he gets the best candidate he 
can, and I believe that he hopes to be in a position to make a 
nomination on this role soon. And as I said, I think the 
rulemaking authority, insofar as you are talking about it, I 
think, Senator, depends on that process moving forward.
    Senator Corker. And being completed.
    Mr. Wolin. And being completed.
    Senator Corker. OK. I understand that the Treasury is going 
to be presenting a GSE proposal around January the 1st, and 
just--because I think like a lot of things we did over this 
last year, many of us will start working together on both sides 
of the aisle to try to figure out the most pragmatic way of 
doing that. Do you still plan on having something that is very 
tangible on January the 1st?
    Mr. Wolin. The statute requires it in January, and we 
intend to certainly meet the terms of the statute. We are hard 
at work on this topic, as I think you know, Senator, and we 
will come forward with an approach before that time.
    Senator Corker. And I assume you are involving other 
banking agencies and entities in that process.
    Mr. Wolin. We are, Senator. We are consulting broadly 
within the Government and without.
    Chairman Dodd. Let me make a suggestion to you as well. You 
are trying to involve people up here, and I think in this 
process of conversing about it, my recommendation would be, as 
someone who will not be here, there are a lot of people 
interested in this subject matter, you would be well advised to 
invite people to be a part of that discussion. You might find 
yourself on a better track when we come forward. Just a 
thought. Sorry to interrupt.
    Senator Corker. Yes, and I think--and I appreciate your 
intervening there? I think would be a good idea. I actually 
think there are a number of people on both sides of the aisle 
that want to solve the problem, and I think it would be good to 
have a little bit of discussion along the way. I know we are 
spending a lot of time in our office, and I know others are, 
too. So it is an issue that we all together have got to figure 
out a way to deal with. I cannot imagine anybody likes it the 
way that it is today, and so I would hope you would do that, 
and I thank you.
    Do you have any idea about the criteria that the FSOC, I 
guess, as we are calling it now, is going to use to define a 
systemically important entity? I imagine there are a lot of 
companies around the country that are wondering if they are 
going to be in the sights or not. Do you have any indication as 
to what that criteria might be?
    Mr. Wolin. So let me first, just if I could, Senator, go 
back on the GSEs. We had a fantastic working relationship with 
you, Senator, and with all the Senators on this Committee on 
the Dodd-Frank legislation. We fully intend to have a similar 
relationship on GSEs. We look very much forward to working with 
you and others on the Committee and across Congress on what is 
clearly a critical issue on which we are going to have to work 
together.
    On the matter of FSOC designations, I should say in the 
first instance this is really a question for the FSOC 
collectively to work through. As I said in my opening 
statement, I expect that tomorrow at its first meeting the FSOC 
members will consider a proposal to seek public comments on 
what those designation criteria ought to be so that we have, 
again, a robust conversation about that before the FSOC lands. 
But I think not for me to make a judgment, ultimately before 
the full range of the FSOC membership on the basis of whatever 
input it receives--and its own analysis, clearly--to make 
judgments about what those criteria ought to look like.
    Senator Corker. Chairman Bair, it is good to see you again. 
It has been a long time since you were meddling in all our 
affairs.
    [Laughter.]
    Senator Corker. I am just kidding you, of course.
    The interagency working group was going to set up, I guess, 
the risk retention standards and safe harbor. I know you sort 
of jumped out in advance of everybody in that regard, and I am 
just wondering if you have had any input from the other 
agencies. I know the OCC opposed that, and I wonder if you 
might just expand a little bit on that. And I really appreciate 
your input. I was not trying to be----
    Ms. Bair. If I could review the history of that. A number 
of members of the industry came to us late last year in 
anticipation of the new accounting rules, FAS 166 and 167, that 
changed the accounting treatment for securitized assets. It 
made it much tougher to get what we call true sale accounting 
where you have a clean sale and can move that off balance 
sheet.
    We had a safe harbor that determined whether we would try 
to claw assets back that had been securitized if the bank 
fails, and we had relied on achieving true sale accounting to 
provide for that safe harbor.
    The concern was that securitizations would no longer meet 
the true sale standard of the new accounting rule. So we 
provided some temporary safe harbor relief for everybody 
retroactively. But going forward, we thought, given all the 
problems in the securitization market, the incentives for lax 
lending, the losses that had been created for banks, the 
problems we were seeing with resolution activity with failed 
banks, that we should impose some conditions on the safe 
harbor. In addition to requiring risk retention, we worked very 
closely with the SEC on more granular loan level disclosure. 
This is something we had heard from the investment community 
that they wanted very much.
    We tackled servicing issues, too. We have had a lot of 
problems with servicing, including lack of servicer oversight, 
and an inability to restructure loans because of restrictions 
in pooling and servicing agreements.
    So we addressed what we thought were key issues in the 
conditions, and went out for two sets of comments on this. 
Consequently this has been going on for nearly a year. A 5-
percent risk retention requirement is part of the, which is 
consistent with the SEC's proposal. The disclosure requirements 
are synched up with the SEC, to try to have one standard for 
everyone.
    Yes, we decided to go ahead with the safe harbor rule that 
was expiring at the end of this month. It is important for 
people to understand we had to do something. If we did not do 
something, we would have disrupted the securitization market, 
especially all the outstanding securitizations currently in 
existence. We think what we did was prudent.
    In addition, we put an auto-conform provision in our rule 
so that once the agencies do get together and define what a 
qualified residential mortgage (QRM) is, the 5-percent risk 
retention provision will no longer apply. And we are very eager 
to engage in that process. We hope that, to some extent, this 
will be an action-forcing event so those interagency rules can 
be done on a very timely basis. It is a 270-day timeframe that 
is provided by Dodd-Frank. We hope that is met. We would like 
to see it sooner than that.
    Senator Corker. And that is the timeframe to actually 
define a qualified residential mortgage?
    Ms. Bair. That is right. But pending interagency rules we 
presently do not have underwriting standards, and, frankly, we 
do not have a securitization market right now. Nothing is 
happening. I think a lot of it is because investors just do not 
have confidence to start it up again.
    Senator Corker. Why did the OCC object to the rule?
    Mr. Walsh. A fairly straightforward thought that we have 
held the position since this was in a Notice of Proposed 
Rulemaking that it would be preferable to have a single policy 
on securitization across all markets and all securitizers. And 
we did not see any great downside to just extending the safe 
harbor for the 270 days and then having a set of rules in each 
venue that conform to one another. So it is a fairly 
straightforward point.
    Ms. Bair. And if I could just say----
    Senator Corker. Well, Mr. Chairman, I sense a slightly less 
playing well together than appeared. I think that these are the 
kind of things that are going to take a lot of oversight down 
the road. But if you want to respond.
    Ms. Bair. Well, thank you, Senator. The 5-percent risk 
retention is the law in Dodd-Frank. It clearly states that you 
have 5-percent risk retention unless the mortgages comply with 
new underwriting standards that will be developed by the 
agency. So we think we were quite consistent with the clear 
language of what the law is now under Dodd-Frank.
    And, again, we hope this happens in 270 days. My experience 
with interagency rulemaking is that sometimes those deadlines 
are missed. The SAFE Act required simply that we do interagency 
rules to register mortgage originators. It was a 1-year 
timeline, and it took us 2 years.
    FCRA is another example where the agencies overshot the 
statutory deadlines by a significant amount. So we think it is 
only prudent to have the 5-percent risk retention in place 
until these underwriting standards are developed, and if this 
can help facilitate a timely process, we welcome that, and we 
think that is very consistent with what is in the letter of the 
law now.
    Senator Corker. Mr. Chairman, thank you for letting me go a 
minute forty over, and I want to thank each of you for your 
testimony. This whole issue of securitization was one that I 
think we were all trying to understand how this 5-percent 
retention would work, and I do look forward to talking to each 
of you. This is obviously--especially in the commercial side. I 
mean, there is nothing happening right now.
    Ms. Bair. It does apply to commercial and to all other 
securitizations.
    Senator Corker. No. I understand that. I understand that. 
But as it relates to the securitization business in general, I 
mean, there are a lot of problems there, and I do look forward 
to working with each of you to try to deal with that. It looks 
like you want to say one more thing.
    Ms. Bair. The one private label securitization that I am 
aware of, did have a risk retention of 5 percent vertical and 
horizontal slice. So the one that was done did have this 
feature in it.
    Senator Corker. Well, there is a wealth of knowledge 
sitting at the table there, and we certainly look forward to 
working with you over the next couple of years.
    Thank you.
    Chairman Dodd. Thank you very much.
    Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. Thank you for 
having this hearing, and thanks to all of you for coming 
together. It is fun to have you in one place.
    I think I would like to start with you, Chairman Bernanke 
and Chairman Bair, if you have got thoughts about this, too. 
You know, among ending the TARP and Basel III and setting up 
the infrastructure for the resolution authority, I wonder if 
you could tell the Committee what actual changes your agencies 
have been able to discern in behavior at the largest, most 
interconnected financial institutions. Is there less leverage, 
those kinds of things? What are you actually seeing? And, 
Chairman Bernanke, I was, as always, curious on the 
quantitative surveillance mechanism you talked about, whether 
you could describe that. Is that something that is up now? And 
how are you going to use it? What are the inputs going to be?
    So those are my first two questions.
    Mr. Bernanke. Well, we are certainly seeing movement in the 
right direction in our banking system. Capital has been 
increased significantly. One of the results of our stress test 
was to not only increase capital but to increase the quality of 
capital, to have more common equity. All of the banking 
agencies are pushing the banking organizations to improve their 
management information, their risk management systems. Some of 
the banks were not as able as they should have been or we 
should have insisted they had been to identify risks on an 
enterprise-wide basis running into the crisis. And so progress 
is being made on those lines as well.
    Obviously, this is a period where, given that we have just 
come through a crisis, banks are not, generally speaking, 
taking excessive risks. In fact, many of the portfolios are 
quite conservative, and so we will have to see how things 
evolve as the economy normalizes. But I do think things are 
moving in the right direction.
    At the Fed we are moving toward a more, as I said, 
macroprudential and multidisciplinary approach. We are in the 
process of establishing a staff Office of Financial Stability 
which will draw on staff resources from a wide range of 
disciplines--economics, finance, payment systems, accounting, 
legal, et cetera--which in turn will provide inputs and 
analysis to other parts of our operation.
    So, in particular, for example, we have revamped our 
supervisory organization to take a more multidisciplinary 
approach and, for example, to do stress tests which are based 
on alternative macroeconomic or financial scenarios. This 
Office of Financial Stability is responsible for generating the 
scenarios and their implications as an input into that stress 
test analysis. And so we are linking together these different 
parts of our expertise.
    As you mentioned, we have a quantitative evaluation--sorry.
    Senator Bennet. Let me stop you there before you do that. 
Had what you are describing been in place precrisis, what are 
the things that you think--the macroeconomic trends that you 
think you might have picked up that were not picked up by the 
Fed?
    Mr. Bernanke. Well, I think we would have identified some 
of the broad-based risks that were occurring, the broad-based 
leverage. Our Office of Financial Stability, besides providing 
inputs into bank supervision, is going to provide general 
monitoring functions looking across a range of markets and 
institutions and funding markets and the like, trying to 
support our membership in the FSOC and in our collaboration 
with other agencies.
    So we plan to take a much more holistic viewpoint. I do not 
think people appreciate how much that, prior to the crisis, 
agencies were very focused narrowly on individual markets and 
institutions, and there were very significant gaps. And I think 
it is important for all of us to work together to make sure 
that those gaps and emerging risks are identified, and this is 
our intellectual framework for approaching that.
    Senator Bennet. And I am sorry, before I interrupted you 
were about to talk about the quantitative surveillance 
mechanism.
    Mr. Bernanke. Yes. So we are combining with our traditional 
bank supervision, which goes and looks at the books of 
individual banks, sort of offsite analysis which looks, for 
example, at real estate trends and housing trends and house 
price trends, mortgage delinquency trends and the like and 
tries to make broader assessments based on market variables and 
on macro variables--you know, what some of the risks might be 
to the banking system. And interaction between those kinds of 
analyses and the supervisory analyses I think is very helpful. 
In particular, it was a very helpful addition to our stress 
tests that we did a little over a year ago that we were able to 
supplement the bank's assessment of the value of their mortgage 
with a model-based econometric analysis that drew on 
information about individual housing markets and the 
relationship of house prices to macroeconomic developments and 
the like.
    Senator Bennet. That sounds to me like a big step in the 
right direction, and I am wondering how you are planning on 
sharing the results with the public. Or are you?
    Mr. Bernanke. We are considering how best to do that. 
Obviously, the first step is to make sure that our supervisory 
process is comprehensive and macroprudential, and that is what 
this is all about. But I think that we ought to think 
collectively, the people at this table as part of the Financial 
Stability Oversight Council, about what kinds of reports we 
would like to provide. I think Dodd-Frank requires a regular 
report from FSOC about financial stability and risks to 
financial stability. And one natural thing would be for our 
analysis to be part of the input to our collective reports to 
the Congress and to the public about the stability of the 
financial system.
    Senator Bennet. Thank you.
    Chairman Bair, do you have anything you want to add to the 
first part?
    Ms. Bair. Well, I think we are engaged in parallel efforts, 
and as the backup supervisor and insurer, we obviously rely 
heavily on the primary regulators, including the Fed, 
obviously, for holding company data where we just recently were 
given new authorities.
    We have focused a lot, though, as had the Fed, on liquidity 
monitoring and annually reporting on liquidity profiles on an 
ongoing basis, including having consistent reporting and 
horizontal analysis to be able to identify outliers.
    I think your original question was what has changed, 
really. I think the good news is underwriting standards have 
gotten a lot better, and I would like for the supervisors to 
take credit for that. I think that is as much to do with the 
market and all of this coming home to rest. But that has gotten 
significantly better, and I do think large financial 
institutions, at least insured depositories and their holding 
companies, are in much better shape now, are much more stable. 
I think the SCAP results with the increased capital at that 
time served us well.
    And so I think this is giving us more time to put these new 
systems in place, but there is a lot of work to do. I think we 
just went too far in the other direction in assuming that the 
market would always correct without providing vigorous 
oversight. But there is a lot of groundwork to be done.
    Senator Bennet. We are--and I know it is not the subject of 
this hearing, but just for the record, still in places like 
Colorado facing incredible challenges with small businesses' 
access to credit. And I do not think all of that is loan 
demand, but I am going to----
    Ms. Bair. Well, I would not disagree with you on that. I 
think there is a particular problem with small business credit, 
and I think we have tried to take a very balanced supervisory 
approach, telling our banks we want them to lend. For smaller 
banks, frankly, the loan balances are stronger than they are 
for the larger institutions.
    Part of the problem, though, is a lot of the small business 
lending went through home equity lines or was collateralized by 
commercial real estate. Those values have gone down so 
significantly, the collateral just is not there anymore. That 
is a key part of the problem.
    Senator Bennet. I think unleashing that again is obviously 
so critical to our economic recovery, and both anecdotally and 
also just in the broader trends that I am seeing, we are still 
not there.
    I wanted to come back, Chairman Schapiro, to something that 
was of a lot of interest to me when we were doing this bill, 
which you talked about earlier with the Ranking Member, about 
what we are doing to minimize the conflicts of interest at the 
rating agencies. There was one provision in particular that had 
to do with the composition of the boards of directors of those 
agencies and having independent directors. And I was not sure 
in your answer to the Ranking Member whether that was 
happening. Are they complying with that? Are we on track there?
    Ms. Schapiro. We are monitoring it very closely. Right 
after the bill was signed, we sent a letter to all of the 
credit rating agencies informing them that all the provisions 
in the law that took effect upon enactment as opposed to 
waiting for the SEC to write rules, and that is one of them. So 
we are checking in on them on a regular basis. We would be 
happy to provide more specific information about where they 
are.
    Senator Bennet. I would appreciate that. That would be 
tremendous.
    Ms. Schapiro. Sure.
    Senator Bennet. Thank you. And the last question--and I am 
the last person who wants an unhappiness to break out here, but 
I wanted to ask you, Chairman Gensler, and you, Chairman 
Schapiro, about one particular rule that you are going to be 
writing, which is to determine what types of entities are 
considered major swap participants. How are you working 
together? What process is that going to look like to get to a 
result? Because part of also what I am hearing out there and 
just as a general matter, not related only to Wall Street 
reform, is just a sense of lack of predictability about things. 
What are the rules of the road? We need to understand that.
    By the way, I think that is a sensitivity that everybody 
ought to have as you think about publishing the rules and 
publishing the notices of the meetings, that there are a lot of 
people out there that are feeling like they have got a complete 
lack of clarity about what the future is going to bring, which 
is important for us to hear and attend to. But in this specific 
case, what is the process going to look like?
    Mr. Gensler. I think you have raised two very good points, 
trying to lower regulatory uncertainty so that businesses out 
there can understand where we are. We are going to put out 
proposed joint rules on definitions like major swap 
participant. I think our current hope is to do that in the 
middle of November right before Thanksgiving. We are human. We 
may slip. But I think Congress really spoke to this. This 
category of major swap participant in the statute should be 
very small. Why is that? Because it is somebody who is not a 
swap dealer but has some systemic relevance. I think there were 
three prongs to it, but all three of them really speak that it 
has to have some--if it fell apart or defaulted, had to have 
some systemwide effect on the economy or the financial system.
    So I think the majority, I would even say the vast 
majority, of end users I would envision--again, it is ten 
Commissioners between our two Commissions will have to comment 
on this. But I would envision it would be a very small set of 
companies because Congress really has spoken to this in that 
way.
    Ms. Schapiro. I would agree with that. I think the three 
criteria that are set out in the statute make it clear that 
this is not intended to be an enormous category of market 
participants.
    The other thing we have done, though, because we recognize 
this is of such enormous interest, is we put out an Advanced 
Notice of Proposed Rulemaking to solicit comment on how should 
we define a number of things, including in this particular 
area. So that I think will help guide us as well. And it is 
important as well because a whole regulatory regime attaches to 
it, and that will be new for many market participants who might 
fall into this category.
    So this is an area where I would expect we would get an 
enormous amount of comment, and we will listen to it very 
carefully.
    Senator Bennet. Thank you very much. Thank you all for 
being here.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator. You have been very 
helpful down at the end of that table down there, but you have 
been very, very supportive and helpful in this process over the 
last couple years, and I personally want to thank you for it.
    Senator Johanns, you, as well, have been a good friend. I 
appreciate your work.
    Senator Johanns. Thank you, Mr. Chairman. Let me just say 
before I get started here, Mr. Chairman, it has been a pleasure 
working with you. I think you have handled your chairmanship 
and working with majority and minority in just a very, very 
fair way. I want to say that publicly and tell you how much I 
appreciate it as one of the new people here.
    Let me, if I might, turn to, I think, the best people to 
ask this to would be Chairman Schapiro and Gensler. As you 
know, there was discussion about retroactivity of this 
legislation relative to derivatives in contracts that had 
already been entered into and I want to make sure that the 
record is clear in this hearing. Do you see any part of this 
legislation at all applying retroactively to derivative 
contracts that were entered into before the effective date of 
the legislation?
    Mr. Gensler. Senator, I think it is a very good question. I 
can only speak for myself, because again, five Commissioners, 
five Commissioners and other regulators, also, as the Federal 
Reserve and the prudential regulators have a very big role in 
setting capital and margin. But I think where this has come up 
the most and people have raised it in public and private 
meetings with me is whether, for instance, contracts that 
existed before the Act stand, and I think the Act is very clear 
they do.
    But also some people have raised, what about clearing 
requirements or margin requirements and so forth, and I am just 
sharing one Commissioner's view. I think that we should look 
that that should be prospective, not retrospective in that 
regard, and I know that is something that a lot of people have 
raised, but I--this is a whole rule-writing process and a lot 
of Commissioners and fellow regulators.
    Ms. Schapiro. I would really agree with that. We have heard 
the issue most frequently in connection with whether margin 
requirements should now apply. We also appreciate, though, that 
legal certainty is absolutely critical in this area. So while 
my Commission has not dealt with this issue specifically, I 
think we would be hard pressed to suggest that there ought to 
be retroactive application of margin, but it is an issue we 
will discuss extensively and also continue to take public 
comment on.
    Senator Johanns. Does anyone else want to weigh in on that?
    Let me now go in maybe a bit of a different direction for 
each of you, actually. Having served as a cabinet member and 
attended meetings like this where you have a complex piece of 
legislation that involves a lot of various areas, I have to 
tell you that, quite honestly, I see conflict as somewhat of a 
positive thing, and I will just give you an example.
    Sheila Bair, if we wanted your boss to be Tim Geithner, we 
could do that, but we do not want that. We like a certain 
amount of independence. The same way with Ben Bernanke. If we 
wanted your boss to be Tim Geithner, we could do that, also. I 
mean, the words do exist in the English language to make that 
occur if you can find the votes. But a decision has been made 
that you operate independently and that independence is 
important to the functioning of our financial system and your 
regulatory responsibilities, et cetera.
    So I appreciate the spirit in which you come here, which is 
to try to say, well, we are getting along. I have sat through 
those meetings, and I did not want the EPA running the USDA, so 
if they attempted to, I pushed back. So I need to know, because 
I think this is very important for oversight responsibility, 
and I want to go right down the table here, I want to know very 
specifically the areas of conflict that have arisen and the 
area of conflict that you anticipate arising as you implement 
this legislation. I will start at this end, Mr. Secretary.
    Mr. Wolin. Senator, I think that just to sort of say 
generally, the independence of the regulator's point is 
obviously a critical one that I have mentioned already. Having 
said that, at least in the Financial Stability Oversight 
Council, having a cooperative spirit, establishing a rhythm to 
accomplish the collective responsibility of the Council itself 
is also important, and I suspect that in that context there 
will be plenty of good debates with people, as you say, as they 
should, taking different perspectives and offering different 
views. I think the important thing is that it be done in a way 
in which information is shared and that the group understands 
that the ultimate role of that Council is distinct from the 
individual independent responsibilities of the regulators as 
regulators is something that is also important.
    The Council has not had its first meeting yet, so I think 
it is too early to tell, really, how that all is going to work 
out. It is in early days. I think that as we at Treasury feel 
like we have tried to convene representatives of all the 
members of the FSOC in creating a governance structure and a 
set of bylaws by which the Council can govern its affairs, it 
has been a conversation that has been very helpful. People have 
approached it in a very cooperative spirit. They have not 
always agreed on exactly----
    Senator Johanns. What are you not agreeing upon? You know, 
we might want to weigh in here, and we have a responsibility to 
provide oversight. We want this implemented right. Even though 
I did not support it, I want it implemented right. So----
    Mr. Wolin. You know, I do not think, Senator, there are 
disagreements as such, meaning sort of clear fault lines. I 
think on the question of what should be the appropriate 
transparency policy of the Council, what should be, you know, 
the structure by which votes are taken, all those things, 
people have different views and they express those views, but I 
do not think I am in a position to say there has been 
controversies or fault lines. It has been a good, cooperative 
effort in that respect. You know, that may change. The Council 
is in its nascence and we will see how it does in its first 
meeting tomorrow. But I think from this point, from the point 
of enactment to the cusp of the first meeting, it has been 
quite collegial and people have been approaching it as they 
have said here at this table, and there are others, of course, 
who are members not at this table, in a very helpful way.
    Senator Johanns. Chairman Bernanke.
    Mr. Bernanke. So I will not take time agreeing with you 
about independence. I think it is very important for a lot of 
good reasons.
    One of the strategic decisions in the bill is to have a lot 
of shared responsibilities, so for supervision, oversight of 
utilities, of banks, of large complex institutions and the 
like, in many cases, there are multiple regulators who have 
responsibilities shared and the like. I think that was the 
right decision because these are complex entities and different 
viewpoints, multiple sets of eyes are good. But I think, 
inevitably, there will be some disagreements or frictions at 
some point.
    But I have to tell you honestly, and I am not just trying 
to put a happy face here, is that in terms of the substance of 
the rule writings that we have so far addressed, I do not see 
any deep or principled controversies at this point, just an 
issue here on the margin. So the Federal Reserve in particular 
is working with everybody on this table and we have found it to 
be very productive.
    I would say there is some pressure arising from the fact 
that there is so much to do so quickly, and so it is sometimes 
a challenge to make sure that everybody has been appropriately 
consulted and all the input has been taken and still meet all 
the deadlines. So there are some challenges here. But I do not 
see any--at this point, I do not see any deep conflicts or 
differences in point of view that are going to threaten the 
implementation of this Act.
    Senator Johanns. Chairman Bair.
    Ms. Bair. Well, I think there are a lot of different 
perspectives in a lot of different areas, and I agree with you, 
I think that is not an unhealthy thing. I think that is a 
healthy thing. You come together and try to find the right 
solution based on different perspectives.
    And I would echo what Chairman Dodd said at the beginning, 
that I think we should all come together collegially. I think 
it is a dangerous dynamic if one or two players try to drive 
everything else, and I do not think that will happen.
    I think in just about all the major areas, we bring 
different perspectives to the table. I do not think that it is 
a bad thing and I certainly do not see anything that would rise 
to the level where it would need a legislative fix. We are 
honored that you gave us so much flexibility and authority and 
that you defer to our hopefully good expertise and wise 
judgment in writing these rules and implementing this law, and 
so I think we all are committed fully to doing that. But there 
will be differences and we will need to overcome them, but I do 
not think that that is really an unhealthy thing.
    Senator Johanns. Chairman Schapiro.
    Ms. Schapiro. I think I, needless to say, believe deeply in 
the independence of the SEC, and I know every agency up here 
feels that way. But you should not take the fact that we are 
here in agreement on many things at this early stage as a sign 
that we have not had lots of rigorous debate behind the scenes 
about very specific issues. Where we can resolve those issues 
among us, we want to do that. Where we cannot, we will 
sometimes present the public through the comment process with 
options and alternatives for ways to address issues where we 
are not all perhaps entirely synced up to see what the experts 
and the public think might be the right answer on a particular 
issue.
    So there is lots of debate and discussion. There are very 
different perspectives that are being brought to bear on each 
and every one of these issues. But I think there is also 
tremendous commitment to try to get to the right answer for the 
American people in every single thing we do. Where we cannot, 
we might have some differences and agencies will have to go 
forward doing what they believe is the right thing under their 
statutory mandates.
    But I think so far, it is actually working the way you 
would want, with that healthy tension yet a spirit of 
collaboration.
    Mr. Gensler. I would echo the thoughts about independence, 
which are very important, but the collaboration. I mean, I 
think it is what the American public expects of us. I think 
with nearly 10 percent unemployment, they even expect it more, 
and this was the worst financial crisis, where the regulatory 
system failed, as well. It was not just the financial system 
that failed.
    You asked where there have been disagreements. I will say 
in the clearing area, one area that we are supposed to oversee, 
and it might be sort of selfish of the CFTC, we want to have 
clearing standards that are rigorous enough that the Federal 
Reserve and the bank regulators think they can withstand the 
test of time, but also that international regulators will find 
our clearinghouses equivalent and they will stamp them that the 
international regulators will allow the U.S. clearinghouses. So 
there is also a selfish goal, in a sense, for American commerce 
that these things have that.
    We did have a little bit of an arms race on transparency. 
These four agencies and now maybe Treasury, I mean, we all sort 
of, how we could be voluntarily, not do more than the law on 
transparency and the rule writing. I think that was healthy.
    I do foresee some debates in the future on how the SEC and 
CFTC take on this swap thing, because futures regulation and 
securities regulation is not always aligned. We are trying, and 
Mary and I have been committed to avoid regulatory arbitrage, 
but does that mean this new swaps regulation should be more 
aligned with securities regulation, more aligned with futures 
regulation, or somewhere in the middle? And so that is where we 
will have a healthy debate, no doubt.
    Senator Johanns. I have some colleagues that--I have gone 
over my time, and so I hate to cut it off here, and maybe there 
will be an opportunity for you to offer your thoughts, but Mr. 
Chairman, again, thanks for your leadership on this. It has 
been a pleasure being on this Committee with you.
    Chairman Dodd. That is a great question to ask, Mike, on 
this, because for years, in fact, it was the independence and 
sort of the stovepipe approach that created it. It seemed to 
almost not only enshrine independence, which we want, but also 
seemed to enshrine conflict without the ability to sit together 
and come to some common answers where you could. So the very 
idea of this oversight council is designed to perpetuate the 
independence, but also to take, as Chairman Bernanke pointed 
out, the collaborative multiple sets of eyes to look at a 
situation that one set of eyes or one perspective might not see 
as clearly.
    So this is obviously going to be an experiment. There has 
been nothing like it before. It is going to require a lot of 
hard work. So I was very pleased to hear that so many of the 
principals intend to stay involved in this process, because 
what can happen too often is it gets related to people down the 
line and then it begins to fracture and fall apart and does not 
succeed with that goal of getting the cooperation necessary.
    So it is a great question and goes to the heart of whether 
or not this is going to work. You and I cannot legislate that.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman. I, too, 
want to add my thanks to you for your hard work here on the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, and 
I want to thank the Committee, too, for all the hard work to 
ensure that the Act makes a strong and clear commitment to the 
protection and education and empowerment of our investors and 
consumers.
    Now that we have enacted this historic legislation, I am 
committed to ensuring that the provisions of the Act will 
provide tangible assistance and protection to hard-working 
Americans are soundly implemented. I worked to develop many of 
the Act's provisions to increase financial literacy and empower 
hard-working Americans and promote informed financial decision 
making, and so I want to go to that ladder and work on one part 
of it.
    Secretary Wolin, Title 12 of the Dodd-Frank Act will help 
unbanked and underbanked families by increasing access to bank 
and credit union accounts. It will also establish programs to 
develop small dollar loan alternatives to high-cost and 
predatory financial products. These provisions are particularly 
important to me personally because I grew up in an unbanked 
family. What is being planned to increase access to mainstream 
financial institutions and services?
    Mr. Wolin. Thank you, Senator Akaka, and thank you for your 
leadership on this extremely important set of issues. We are 
very focused on implementing Title 12 and to continuing our 
work on the unbanked. As you know, I think we are staffing up 
in this area at the Treasury. We have been working to really 
survey the landscape. We have had some pilot projects, I think 
you know, focusing on the unbanked and providing opportunities 
to access, working with private sector entities. There has been 
a lot of excellent work that has been going on in the States 
and among a pretty wide range of cities. So we are gearing up.
    We are, of course, looking forward to being funded in this 
area, which is important for us to really take advantage fully 
of the important opportunities that Title 12 presents. We are 
very excited to work on this set of issues because we believe 
that it is critical to the engagement of a wide range of 
Americans in our economy and allowing them to do the kinds of 
things that they need and want to do to meet their own 
aspirations.
    So we are hard at work. We will continue to be hard at work 
and we very much look forward to continuing to work with you as 
we move forward.
    Senator Akaka. Thank you. Chairman Bernanke, consumers that 
sent portions of their earnings to family members abroad can 
experience serious problems in these remittance transactions. 
The Dodd-Frank Act requires meaningful disclosures of the 
remittance transaction costs and establishes an error 
resolution process to protect consumers. The Act also instructs 
the Federal Reserve and Treasury to expand the use of ACH, 
Automated Clearinghouse System, for remittance transfers to 
foreign countries.
    My question to you is, why is it important to provide these 
remittances protections and make greater use of the ACH system?
    Mr. Bernanke. Senator, this has been an area of interest 
for me personally and for the Federal Reserve for a long time. 
Remittances are an important contact point between many 
unbanked, particularly immigrant families and the financial 
system, and it is often an entree into the normal mainstream 
financial system. And so we want to make that as safe and 
inviting as possible.
    The Federal Reserve, as part of its payment systems 
responsibilities, has been involved for a long time in the 
transmission of remittances, for example, agreements we have 
done with Mexico and other countries. And we will continue, of 
course, to look for ways to reduce the cost and increase the 
efficiency of remittances via ACH as required by the bill.
    I would like to say a world in particular about disclosures 
and error corrections. As you mentioned, because of language 
and other issues, people who use remittances are particularly 
vulnerable to disclosure problems, and so it is very important 
that they understand the services that they are receiving and 
what the terms of that service are.
    So we are already undertaking, already hard at work 
implementing the disclosure requirements of Dodd-Frank, and one 
thing in particular that we are doing, which we have used a lot 
in our consumer protection efforts in the last few years, is 
using consumer testing; that is, we actually either directly or 
engage an outside organization to try different disclosures on 
real-life consumers and then see how well they understand, how 
much they get the information, how accurately they understand 
what the disclosure is trying to provide. And we found this to 
be very successful in the past, and I am hopeful that the new 
Bureau will adopt these consumer-testing practices because we 
think they are very constructive.
    So we are doing that now, and we are looking forward to 
developing proposed rules along the schedule that the act 
requires.
    Senator Akaka. Thank you for what you are doing on that.
    Chairman Bair, I comment the FDIC for working to improve 
financial literacy, develop affordable financial products, and 
improve access to mainstream financial institutions. I know 
that these issues are important to you, and I respect your 
perspective on them.
    What must be done to ensure that the Dodd-Frank Act's 
economic empowerment activities are implemented in a meaningful 
way?
    Ms. Bair. Well, I think there are a number of new and 
important tools that are provided in Title 12, and some build 
off of programs we have already, especially in the small-dollar 
loan area. We initiated a pilot a few years ago to try to get 
some brave banks to try to come up with an economically viable 
small-dollar loan product that would provide a low-cost 
alternative to payday loans. And it was quite successful. We 
were very pleased and are actively trying to get other banks to 
start offering that type of product.
    As you know, our Money Smart curricula has been very 
successful, and we have issued the high school version of it as 
well. It is used quite extensively.
    Also we have set up our own advisory committee on economic 
inclusion. When I became Chairman, that was one of the first 
things I did. The committee has a lot of good minds from the 
banking sector and the community sector, to try to help bring 
more people into mainstream financial services--products and 
services that are appropriate for them, and not ones that can 
end up costing a lot of money.
    These new tools will be very important, and certainly the 
new Consumer Financial Protection Bureau will also put an added 
focus on this area. I am hoping that one of the outgrowths of 
this crisis is that we will get back to more traditional 
banking services. There was an article in the papers today 
about how more banks are now offering small-dollar loans, 
seeing it as an economically viable alternative, because such 
loans are clearer to understand than credit cards and are a 
one-shot deal that are perhaps easier for folks to manage.
    There may be actually some positive things coming out of 
this in terms of banks getting back to basics, consumers 
understanding they need to have their eyes open, and then 
certainly the new Consumer Financial Protection Bureau 
providing better, consistent rules and disclosures. I think 
these will all be very helpful things.
    Senator Akaka. Thank you very much.
    Chairman Schapiro, I am pleased that the Dodd-Frank Act 
will significantly improve investor problems. The act 
establishes the Office of Investor Advocate within the 
Commission. It provides the Commission with the authority to 
require more meaningful presale disclosures. The Commission 
will also conduct the studies on investor financial literacy 
and on obligations of broker-dealers and investment advisers.
    Can you please update the Committee on the Commission's 
work to implement these provisions and explain how they can 
improve investor protection?
    Ms. Schapiro. I would be happy to, and you and I have had 
many conversations over the years about the importance of 
investor literacy.
    I will say we are benefited in all these initiatives that 
we are undertaking now by the fact that we have really 
revitalized our Office of Individual Investor Education and 
Advocacy. As just an example of that, for the first time, we 
brought a large group of high school teachers to the SEC this 
summer to train them in how to impart education about financial 
matters throughout their course work, and also in specialized 
courses. And it is a program that was enormously successful and 
we will continue.
    We do have the investor literacy study that you mentioned. 
We are in the project planning stage right now. It will focus 
on the current levels of literacy in this country, how to 
increase particularly, as you mentioned, transparency of fees 
and expenses so investors can understand what they are paying 
for the product that they are buying and can compare products 
in a simpler way because they will understand the fees and 
expenses.
    We are also looking at what have been the most effective 
private and public sector efforts so that we can model our own 
SEC investor literacy efforts on ones that have been 
successful. And we are looking at investing goals and behaviors 
as part of this study as well. We will report to Congress 
within the 24-month period.
    We are also in the process of standing up the Office of the 
Investor Advocate which will report directly to me and will 
have a role throughout the agency in ensuring that while we 
believe we always have investors in the forefront of everything 
we do, particularly in the rulemaking process, this will be a 
focal point to help ensure that the retail investor voice is 
heard as we engage in many of our Dodd-Frank and other 
rulemakings going forward.
    Senator Akaka. Thank you very much for your responses.
    My time has expired, Mr. Chairman, and I want to wish you 
well and thank you for your work as Chairman of this Committee.
    Chairman Dodd. Thank you, Senator, very much. And let me 
just say thank you as well for your insistence over the years 
on financial literacy. I was speaking to the Economic Club of 
Washington last evening, and I talked about the financial 
literacy and the importance of it, beginning at the elementary 
school level. Getting people familiar with just basic math 
techniques and balancing a checkbook and doing other things can 
contribute significantly to this. And no one has done more 
consistently over the years to advocate on that than Senator 
Akaka of Hawaii. So we all owe you a debt of gratitude. There 
were not many applause lines in the speech last night, but that 
was one of them, on financial literacy.
    Evan, thank you, by the way. We will be leaving together in 
January, and I thank you for your friendship and support on 
this Committee. You have been a great Member of this Committee 
and a great member of the Senate, so thank you.
    Senator Bayh. Well, thank you, Mr. Chairman. All 12 years I 
have been privileged to serve in this body, we have served 
together in the Banking Committee. Have you considered 
establishing an alumni group?
    [Laughter.]
    Senator Bayh. We can be charter members. And I would like 
to thank all of our witnesses today for your contributions.
    It occurred to me, Mr. Chairman, that while those of us on 
this side of the dais may have been the architects of this 
legislation, these men and women will be the builders who will 
be responsible for taking abstract concepts and turning them 
into a reality that will really deliver for the American 
people. And so I want to thank you for your dedication to 
making that process successful.
    Chairman Gensler, I was really heartened to hear about the 
sort of tension about more transparency. Very often tension 
leads to, you know, sort of the lowest common denominator kind 
of decision making, but maybe we are having a race to best 
practices here. That would be a happy outcome, indeed. So I 
congratulate you for that, and the others. I guess some of the 
reports of some tension have been exaggerated, and that is a 
good thing. Reconciling independence and consensus building is 
not always easy, but I am confident that all of you at the 
table here can get that job done.
    Mr. Wolin, let me start with you, and I want to follow up 
on something that Senator Corker raised, and that is with 
regard to the new consumer protection entity. As I understood 
your testimony, you are allowed to stand up this agency and do 
some practical things and gather information, sort of laying 
the predicate for rulemaking, but really cannot get into the 
meat of rulemaking absent a confirmed head of the entity. Is 
that a fair summary of your interaction with Senator Corker?
    Mr. Wolin. Yes, I think--Senator Bayh, I appreciate the--
thank you, Mr. Chairman. I thank you, Senator Bayh, for the 
opportunity to comment on this further.
    I think there are a range of rulemaking authorities that do 
hinge importantly on there bring a Director confirmed. There 
are authorities that the Secretary has under Section 1066 of 
the bill that will allow him to do the business of transferring 
and so forth and to make sure that the rulemaking and the 
supervision and so forth that the new Consumer Bureau receives 
from the various other Federal agencies from whom they are 
receiving those authorities can go forward. So that would 
include rulemaking but in that context----
    Senator Bayh. Well, I think we could agree that--and I 
understand all that, and you do not want to get unduly 
constrained here.
    Mr. Wolin. Right.
    Senator Bayh. That is a job for the lawyers to kind of work 
through. But I think we would all agree that there appears to 
be some significant area of rulemaking that will be impacted if 
there is not a confirmed head of the agency. Is that a fair 
statement?
    Mr. Wolin. I think it is important for the Bureau to have 
its full authorities for there to be a confirmed Director.
    Senator Bayh. Well, my question to you, what would be the 
practical implications if no one was confirmed for a 
considerable period of time?
    Mr. Wolin. I am not sure, Senator, exactly what those would 
be. We are continuing to sort of work those true. There is an 
awful lot of work to do between now and then. The statute 
explicitly contemplates that work. Once the various agencies 
that are contributing authorities that will become the Bureau's 
authorities as of next July 21st, there will still be a lot of 
room for the agency, the new Bureau, to do its work as it goes 
forward.
    You know, the President is committed to putting forward a 
nomination for a Director for the Senate to consider, and 
hopefully to confirm, and I think that, as I said earlier, I 
believe he will be doing that soon.
    So I think there are a lot of things that the Bureau is 
seized with currently and will continue to be seized with.
    Senator Bayh. The reason for my question--and, Chairman, if 
you were raising your hand, please feel free to jump in. The 
reason for my question was the crisis uncovered some 
significant areas where enhanced consumer protection is 
important, in spite of best efforts. And so some of us have, 
you know, reasonable hopes for this Bureau. And yet I do not 
have to tell all of you, including you, Chairman, how difficult 
it is to get people confirmed under the current environment up 
here, even in fairly noncontroversial, fairly straightforward 
situations. It is a practice I refer to as hostage taking for 
unrelated reasons. It is unfortunate, but it is a fact of life. 
Who knows what is going to happen in November? It is entirely 
possible that getting confirmations done in a new Congress may 
be even more difficult, particularly for a Bureau as 
significant and complex as this one. So it is a call for the 
President, but it seems to me that somewhere in the calculus 
confirmability is going to be a factor that has to be weighed. 
And, of course, sometimes people--you know, you can also just 
decide to have a fight even if confirmability may be unlikely.
    Mr. Bernanke. Senator, I just want to assure you that there 
will be no lacuna in rulemaking for consumer protection. Until 
such time as that authority is transferred, the Federal Reserve 
will aggressively pursue its responsibilities, and we are, in 
fact, working very hard on the mortgage rules that are in Dodd-
Frank, for example, and we will continue to do that at the same 
time as we work with the Treasury and the new Bureau to make 
sure there is a smooth transition at the appropriate time.
    Senator Bayh. That is an excellent point. I had breakfast 
this morning with Dan Tarullo, and we were going over some of 
this, and he was informing me about the progress that was being 
made. So I want to compliment you on that.
    I am just kind of thinking beyond the horizon posttransfer 
about how, you know, vital the new entity will be, and it seems 
that having someone in there who is confirmed is going to be an 
important part of that. Thank you both for your responses with 
regard to that.
    Secretary Wolin, again, something for you. This involves--
and perhaps, Chairman, you as well--the Volcker Rule. Only 
Congress could come up with a situation like this where you 
have to give your recommendations about implementation of the 
rule, and, indeed, it has to be put into effect in some form. 
But then there is a 9-month study period, and these timelines 
are not, you know, contemporaneous.
    And so my question to you is: Since you have got to opine 
in some ways about how to implement this rule, in fact, go 
forward with implementing some iteration of the rule, what 
weight, if any, will this study have in the decisions that are 
ultimately made since the study may be completed after some of 
the decisions have been required to have been made?
    Mr. Bernanke. Well, there is a study which the Council has 
to complete by January 21st, and the Federal Reserve is very 
much engaged in working with the Council in doing that. It will 
be a considerable time after that before any of these rules are 
actually implemented. In particular, I think there is a 9-month 
period----
    Senator Bayh. A 9-month lag time, right.
    Mr. Bernanke. Lag time, and then even once the rules are in 
place, there is a 2-year conformance period, which could even 
be extended further, if necessary. So I do not think that there 
will be any situation where rules will be put in place and then 
rescinded because we decided they were not such a good idea.
    Senator Bayh. Well, the reason for the study, as I recall, 
was that many of us understood that there was a potential risk 
here that probably had to be dealt with, but we were concerned 
we were taking a ready-fire-aim approach to handling this. So 
we wanted to make sure that, you know, all of you with 
authority here sat down, really analyzed what the risk was, 
what the most effective way to go about handling it was, and 
then we would ultimately put into place whatever that mechanism 
might be. That was really the heart of my question, to kind of 
make sure that whatever we end up doing, it is informed by your 
analysis rather than put into place and then the analysis comes 
out later and may have led to a different result if we had 
known about it beforehand.
    Mr. Wolin.
    Mr. Wolin. Senator, I think that is exactly the intention. 
The FSOC is meant to do the studies the Chairman noted on the 
Volcker Rule set of issues that will then provide 
recommendations to the regulators who have to make rules in 
this area, will inform that work, so it will be sequenced, I 
think, in the proper way.
    Senator Bayh. This very brief question, you do not have to 
jump in, but it might go to all of you. Those of us up here on 
the Hill like to think when we are finalizing these things and 
the cake has been sufficiently baked that it really cannot be 
changed a whole lot. We agree to engage in colloquies on the 
floor of the Senate, and these will carry some significant 
weight when historians and others look to divine congressional 
intent in analyzing legislation.
    I am curious. Will you grant some weight to congressional 
colloquies where we take the opportunity to say for the record 
what our intent was? Or is that in the legal realm of what the 
lawyers would refer to as an advisory opinion, interesting but 
not granted a whole lot of weight?
    Ms. Bair. Well, as a former Senate staffer, I take this 
very seriously. Yes, committee reports, floor statements, 
colloquies, yes, absolutely carry weight. I think the Collins 
amendment, for instance, is something that is of key interest, 
and we strongly support it. The legislative history there and 
floor colloquies were quite informed and informative, as was 
the case in a number of other areas.
    So, yes, I think we absolutely need to make sure we are 
adhering to both the letter and the spirit of Congress' intent, 
and the legislative history is quite important in that regard.
    Senator Bayh. Thank you, Chairman Bair, and I would not 
expect any of you to come up here and say, ``Well, no, Senator 
we are not paying any attention to what you had to say when 
this was enacted.'' But there were some colloquies with regard 
to Volcker, and some--OK.
    [Laughter.]
    Senator Bayh. Well, unfortunately, mental telepathy is not 
a part of my toolkit. No psychic abilities on the panel.
    I do think it is important with regard to Volcker and some 
of these other things that you look at what was said, give it, 
you know, fair consideration in trying to make the ultimate 
determinations about what Congress intended and so forth. So 
enough said. But there are some in this area that I would 
recommend to your consideration.
    My last question--and, Chairman, if I could go over by a 
minute or two, I might just have another brief one.
    Chairman Dodd. No problem at all. Go ahead.
    Senator Bayh. Chairman Gensler, this involves you. It is 
great to see you again. You have been a friend for many years, 
and I congratulate you on the excellent work you have done, 
and, indeed, you were somewhat clairvoyant back in the day 
about what might have happened with regard to the crisis, and 
now you are in a position to do something about it going 
forward. So it is good to see you, and I am grateful for your 
leadership.
    These are somewhat technical. What is your view on whether 
regulators have the authority to impose margin requirements on 
end users? And, again, I am talking about the end users 
themselves, not the transactions.
    Mr. Gensler. I thank you for that compliment. I do not 
think anybody was clairvoyant. But the Dodd-Frank Act does say 
that to lower risk of the swap dealers and to lower risk of the 
financial system as a whole, various regulators sitting here 
would have an authority to set capital margin on these dealers. 
If they are banks, it is the bank regulators, and nonbanked we 
get involved as well with the SEC. And this is an area where 
Congress has spoken very clearly. There is a letter--even 
Chairman Dodd and Chairman Lincoln wrote a letter on this right 
as the bill was going forward, but there were many colloquies. 
So we are all taking that together.
    If I might say, as I understand the intent, it was that a 
certain group of end users, the nonfinancial end users, are out 
of clearing and then, as Chairman Dodd put in his letter, would 
be considered to be out of this margin requirement.
    So we are taking all of that together and taking it very 
seriously, the intent of Congress that the financial system, 
about 90 percent of the swaps transactions are between 
financials and financials, and it is only about this 9 or 10 
percent that is----
    Senator Bayh. Well, that gets to my next to the last 
question, which does involve end users. And I have discussed 
the importance of, to the extent we can, the harmonization of 
global standards to prevent forum shopping and all that kind of 
thing. Basel is dealing with that in his arena. As I understand 
it, the EU has moved forward with regard to end users and have 
taken their approach. You know, you are now going to look at 
what we are doing, and I would ask you what kind of effort we 
will make to harmonize these things and, to the extent that 
there is some disparity, what implications that will have on 
our competitiveness if the Europeans have taken on approach and 
we take perhaps a more restrictive approach?
    Mr. Gensler. I, after 3 days overseas--I just returned 
yesterday--am very optimistic. They put forward their proposals 
2 weeks ago. Their clearing requirement, for instance, on this 
end user issue aligns very similarly. Financial companies would 
have to use the clearinghouses. Nonfinancials would have, you 
know, a choice. They do not have to use it, unless they meet a 
certain clearing threshold, a certain size. We do not have 
that. Congress has spoken clearly. If you are mitigating a 
commercial risk, you are out of the clearinghouse.
    But I think it is very aligned. Swap data repositories are 
very aligned. They say they are going to take up the trading 
mandate later in what they call MiFID review, which is about 6 
months away.
    Senator Bayh. Good. Well, I would encourage you to keep an 
eye on that because to the extent that they are not harmonized, 
they can lead to some consequences that could hurt us 
commercially.
    Mr. Gensler. And if I might say, Senator, also, we are 
taking it to heart in our proposed rules. So in our memos up to 
our fellow Commissioners and the harmonization with the SEC, 
where Congress has left this discretion--in many ways Congress 
has decided, but if they have left this discretion, we want to 
harmonize with the international--where we think the Europeans 
will end up on this, and the other regulators.
    Senator Bayh. Thank you.
    Chairman, if I can have just 1 minute with Chairman 
Bernanke?
    Chairman Dodd. Yes, certainly.
    Senator Bayh. We have talked before about the Basel 
process. You talked about it here today, and I am delighted to 
hear your opinion that it is moving in a positive direction, 
capital requirements, quality of capital, liquidity and so 
forth. I understand some of our European friends have some 
domestic challenges that they have got to address. We need to 
be realistic about that.
    So my question to you is: Were you satisfied with the 
progress that has been made with regard to quality of capital, 
those things that will be counted and those things that perhaps 
will not? Are we moving sufficiently, are they moving 
sufficiently that this will harmonize in a way that is good for 
the global financial system?
    Mr. Bernanke. Yes, I think we have made a lot of progress. 
There is now a much larger focus on common equity as the 
principal source of loss absorption. There is very restricted 
ability to use other types of assets. No more than 15 percent 
can be noncommon. And in negotiating that, we particularly 
limited some of the types of capital that Europeans had used, 
minority interest and things of that sort that we did not feel 
were particularly good forms of capital.
    So we really have made substantial progress, and I think it 
was a very important achievement. And the FDIC and the OCC 
joined the Federal Reserve at the meeting in Basel, and we all 
worked together, I think, to get a good international 
agreement.
    Senator Bayh. Good. Well, let me thank each of you again 
for your public service. It has been a privilege for me to work 
with you, and, Chairman Dodd, with you as well.
    Chairman Dodd. Thanks. Thanks, Evan, very much.
    Chairman Bernanke, I did not ask you the question, but I 
presume I will get the same answer, and that was: Was the fact 
that we moved when we did here, with the legislation, was that 
helpful in terms on the derivatives section, for instance in 
your view, or not?
    Mr. Bernanke. Well, I am less informed about the 
derivatives than Chairman Gensler and Chairman Schapiro.
    Chairman Dodd. Well, on the capital.
    Mr. Bernanke. But broadly speaking, on capital and on many 
of the issues there is absolutely great interest in what we 
have done around the world, and we have moved first, and we 
have set an important and high bar, and I think it has been 
very well received internationally.
    Chairman Dodd. Let me ask you. I am not going to submit a 
lot of questions because you have a lot of work to do, and the 
last thing I want you to do is answer a lot of questions here 
while the efforts get underway, but just a couple of things 
come to mind.
    Let me ask, and I want to give you a chance to jump in 
because Mike Johanns asked a question. He got down as far as 
you and did not give you a chance to respond, and I want you to 
do that.
    But in doing so, Title 3 of our bill transfers the safety 
and soundness functions, personnel, property and funds of the 
OTS, primarily the OCC, but also the FDIC and the Fed. And let 
me parenthetically say that I have great respect and admiration 
for the people who worked at OTS. I mean this is not an 
indictment of this decision to close down that regulatory body, 
and this is awkward, and it is difficult.
    It is very important to me that this be done well and that 
the people who worked at the OTS be treated with a lot of 
respect and understanding. I just want to know how that is 
going. This is a difficult time for everybody in the Country, 
and to do something like this can be tremendously disruptive 
obviously to a family and their concerns.
    I know we tried to accommodate that in the bill, but I 
wonder if you might just give me a quick answer as to how we 
are doing on that, and then if you want to respond to the Mike 
Johanns question.
    Mr. Bernanke. Well, I mean we are working hard at it. I 
have had a number of meetings with Acting Director Bowman. Our 
management teams have met. In fact, they are meeting this 
afternoon in New York to kind of start talking about how we are 
going to integrate the supervisory staffs and functions 
together.
    Tremendous effort being made to ensure that we find the 
right places and the right fit for people at OTS in the agency. 
They clearly have skills and abilities that we need. We need 
the people to come and do the work. There is going to be about 
a 50 percent increase in the number of institutions we are 
called upon to supervise, and we cannot do that without the 
talent and contribution of OTS staff. So we are working very 
hard to encourage them to look to a career in the combined 
agency.
    It would be very bad to have them go elsewhere. So we are 
working very hard.
    Chairman Dodd. I am going to ask you to keep the Banking 
Committee staff informed as to how that is going, the progress.
    Mr. Bernanke. Absolutely.
    Chairman Dodd. So we have a good understanding of it and 
how it is functioning.
    Mr. Bernanke. Absolutely.
    Chairman Dodd. So they know someone is also working with 
you and watching carefully.
    Mr. Bernanke. Right, and we have to report to Congress at 
the end of 6 months.
    Chairman Dodd. I knew that, but even during this time 
period I would like to know how it is going.
    Mr. Bernanke. Yes. OK.
    Chairman Dodd. Anything you want to respond to Mike Johanns 
at all? I saw you wanted to say something, and then we cut you 
off.
    Mr. Bernanke. Well, I mean the only thing I would say is 
that there is always some tension in the interagency process. I 
think it essentially has less to do with people's interests and 
goals being aligned than with kind of differences in mission 
and approach and agencies, and that sort of thing.
    But we are an independent agency within the Treasury. We 
participate in a lot of interagency discussions. We do 
interagency rulemaking with the other banking agencies. 
Congress has kind of endorsed, even expanded, the need for that 
kind of coordination, but you know there are policy 
differences. We work those out. You know. I mean it is a 
process that can sometimes be torturous, but it does work, and 
it will work again.
    Chairman Dodd. Good. Chairman Bernanke, let me thank you 
for your comments about the residential, the mortgage issues, 
and the Fed is working on those.
    And underscore Evan Bayh's question. Look, this is 
important as well, and you had Bob Corker raise it. I know the 
Administration is working on this, and I have raised the issue. 
You have got to have a confirmable nominee, and we have got to 
get someone in place.
    Otherwise, we are going to be--look, this is a 
controversial section of the bill. I do not have any illusions. 
Regardless of the outcome of the election in November, they are 
going to moving to try to get rid of this bureau, and it is 
going to be a lot easier to get rid of it has not gotten up and 
gotten started, and demonstrating the value and the importance 
of it.
    So it is at risk in my view until we get someone in, 
running the place and demonstrating what it can do and the kind 
of rules it is going to develop. And believe me, there will be 
people out to get rid of it. So be confident of that 
conclusion.
    But let me ask, if I can, ask both Sheila Bair and Chairman 
Bernanke. Headlines this morning were in the Washington Post--I 
do not know if in the other papers--about JPMorgan and 
foreclosure issues. We had the problems with the mortgage 
servicing company called Ally, formerly GMAC, regarding certain 
improper actions by its employees and foreclosing on people's 
homes. Those stories are very troublesome.
    Obviously, I guess I congratulate JPMorgan this morning for 
making the decision it did. I did not read the whole story.
    But I wonder if you might comment, both of you, on this 
situation. I know it is not exactly the subject matter here, 
but I would be remiss if I did not raise it with you, given 
attention that is going on. And the numbers of foreclosures, I 
mean this last month or so we have seen actually those 
increases.
    Ms. Bair. Well, we are still learning about it ourselves. 
The OCC might have something to add on this as well, as the 
primary regulator of these large institutions.
    I think it is troubling, and it is just a further 
indication of how wrong we went with the mortgage origination 
process and securitization process, which was deeply tied to 
some of the breakdown in what would ordinarily be expected in 
terms of underwriting standards--in terms of documentation, in 
terms of perfecting title. So it is troubling.
    So we will learn more about it, but I think it underscores 
that going forward we need to be very careful. We want to bring 
the securitization market back. We want to bring it back in the 
right way. We want a GSE exit strategy, but we want to make 
sure the alternative promotes stability in the mortgage market.
    It just is another indication that too many things went 
wrong in the mortgage origination process, leading into this 
crisis.
    Also, as you know, Chairman Dodd, we have been longtime 
proponents of trying to rework mortgages as an alternative to 
foreclosure where it makes economic sense, and it frequently 
does make sense. So I think we continue to push and advocate 
for that in various venues.
    But this is very unfortunate, and we are still learning 
more. I would also defer to the Federal Reserve.
    Chairman Dodd. Mr. Walsh, do you want to make any comments 
at all?
    Mr. Walsh. Well, just to say that obviously when evidence 
emerges, and has emerged in this case, of deficiencies in the 
process of reviewing and approving these individual cases, we 
immediately went and talked to people both at JPMorgan Chase 
and at the other half-dozen large servicers where we are 
dealing, and instructed them to go back once again.
    I mean we have been to them a number of times to make sure 
they were ramping up processing to keep pace both in particular 
with the mortgage modifications that we were all hopeful would 
increase, as they have done, but not obviously to anyone's 
satisfaction, but asked them to go back and look at those 
processes again. There are State laws that require quite 
specific requirements for the review and approval of cases, and 
they must comply with those laws and have clearly had 
deficiencies in processing.
    We both want to see that they fix the processing problems, 
but also to look to see whether there is specific harm that has 
been caused in individual cases. So we will be looking both for 
the procedural improvements, but also any evidence of harm to 
consumers.
    Chairman Dodd. Chairman Bernanke, any comments on this?
    Mr. Bernanke. Only that it has been a managerial challenge 
to the banks to deal with these foreclosures, modifications, et 
cetera.
    Chairman Dodd. Right.
    Mr. Bernanke. And they have not always met that challenge, 
and we continue to press them through guidance and supervision 
to ramp up and to make sure they have the people and that they 
are responding quickly to borrowers, and the like. 
Unfortunately, that has not always happened.
    Chairman Dodd. Yes. Sheila, I know that Ally is regulated 
by the FDIC.
    Ms. Bair. Well, actually that was in the holding company. 
The insured depository institution was not involved in the 
mortgage activities. It was not in the bank.
    Chairman Dodd. Well, listen, again I think it is one of 
these areas that I am sure the Committee will want to be kept 
informed, even during this period. We are not in session here 
as these stories are breaking. The staff, I know, and I would 
appreciate it if you would keep us posted as to how this matter 
is resolving itself.
    With that, again I thank all of you. I am very impressed, 
by the way, at the amount of work being done. I mean there is 
always that given the time and all the other issues you have to 
grapple with. The fact that all of you seem to be working very, 
very hard, and your staff are, to fulfill the commitments of 
the legislation. That is very good news.
    So I am very grateful to all of your being here this 
morning and sharing your testimony with each other, and we look 
forward to working with you.
    We are going to have a couple of hearings in the lame duck 
session when we come back after the elections. So I will look 
forward to seeing some of you then. In the meantime, I thank 
you all again for your service and your contribution to this 
effort.
    The Committee will stand adjourned.
    [Whereupon, at 12:52 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

               PREPARED STATEMENT OF SENATOR TIM JOHNSON

    Thank you Mr. Chairman for holding this hearing today. First, I 
want to thank you for your leadership. Without your hard work, we would 
not have passed the historic Dodd-Frank legislation. Second, given the 
extensive scope of the Dodd Frank legislation and the fact that much of 
it is subject to regulatory interpretation and rulemaking, our work is 
certainly not finished, and I look forward to today's hearing.
    There is obviously a lot of ground to cover with our witnesses 
today, but I think it is important to begin these conversations, and 
today's hearing certainly provides us with an opportunity to identify 
important issues that will need more attention. I suspect as we further 
identify these areas, there will be many more oversight hearings in the 
future.
    As both the regulators and industry proceed with the initial stages 
of Dodd-Frank implementation it is important for us to hear from the 
regulators on the priorities they are making, and the potential 
challenges they are facing. I know I am hearing from constituents in my 
State who are concerned about this stage of implementation, and I thank 
the witnesses for being here today to talk about these concerns.
    I believe there are some issues, including derivatives, the 
``Volcker Rule,'' market making, insurance and capital standards, to 
name a few, where it is going to be vitally important that we get the 
rules right, ensure that we harmonize these rules internationally, and 
guarantee that our Nation's consumers and investors continue to be 
protected.
    Additionally, as we create the new agencies and entities mandated 
by Dodd Frank, we must do it thoughtfully and carefully. Strong 
systemic risk regulation, common sense consumer and investor 
protection, certainty and having Federal and international expertise on 
insurance are all key to a stable economy and a strong financial 
services sector. We need to put the right people and resources in place 
to ensure that these agencies and council succeed.
    Last, I want to commend all of today's witnesses for their hard 
work. This is not a simple task, and I hope that you will come to this 
Committee with your concerns and that your doors will be open for our 
questions and concerns.
    Thank you.

                                 ______
                                 
             PREPARED STATEMENT OF SENATOR DANIEL K. AKAKA

    Mr. Chairman, thank you for convening this hearing today on the 
implementation of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act. I thank my fellow Members on the Committee for working 
with me to ensure that the Act makes a strong and clear commitment to 
the protection, education, and empowerment of investors and consumers. 
Now that we have enacted this historic legislation, I am committed to 
ensuring that the provisions in the Act that will provide tangible 
assistance and protection to hard-working Americans are soundly 
implemented.
    Most Americans participate in the financial system by accessing 
credit to meet short-term household needs or relying on financial 
products to achieve personal goals, such as purchasing a home, 
supporting family members living abroad, planning for retirement, or 
financing a child's education. I worked to develop many of the Act's 
provisions to increase financial literacy, empower hardworking 
Americans, and promote informed financial decision making.
    I developed Title XII of the Act together with my friend, Senator 
Herb Kohl of Wisconsin, to improve access to mainstream financial 
institutions. Too many low- and moderate-income families are forced to 
rely on costly and predatory financial products to meet their 
households' financial needs. Title XII will establish grant programs to 
bring more Americans into the financial mainstream by providing access 
bank and credit union accounts. A small dollar loans program will also 
be established to make available safer alternatives to predatory 
financial products.
    The Consumer Financial Protection Bureau will have the authority to 
restrict predatory financial products and unfair business practices in 
order to prevent unscrupulous financial services providers from taking 
advantage of consumers. An Office of Financial Education is established 
within the Bureau and the Director of the Bureau will become the Vice 
Chairman of the Financial Literacy and Education Commission. The Bureau 
should be established and operate in accordance with these functions 
and responsibilities in order to provide essential consumer protections 
and encourage coordination and improvement of all Federal financial 
literacy activities.
    Investors will greatly benefit from improvements within the 
Securities Exchange Commission and the additional investor protection 
responsibilities that are provided to the Commission under the Dodd-
Frank Act. I am pleased that the Office of the Investor Advocate will 
be created within the Commission. The Investor Advocate is exactly the 
kind of external check, with independent reporting lines and 
independently determined compensation that could not be provided within 
the existing structure of the Commission. The Commission will also be 
required to conduct a study of financial literacy among investors and 
develop a strategy based on its results. The Dodd-Frank Act also 
provides the Commission with the authority to require meaningful 
disclosures be provided to retail investors prior to the purchase of a 
financial product or service.
    I commend the Commission and the other Federal agencies represented 
here today for moving expeditiously to implement the Dodd-Frank Act. 
Already, the Commission requested public comment for a study on the 
obligations of brokers, dealers, and investment advisers. There is a 
harmful and unnecessary regulatory gap in the regulatory standards of 
care which investment advisers, brokers, and dealers must adhere to. 
Investment advisers are held to a fiduciary standard that imposes 
strong and meaningful obligations on them to investors. Yet, brokers 
and dealers are only held to an inferior and inadequate suitability 
standard. Investors are entitled to reliable and accurate investment 
advice from these financial professionals. It is important to the 
protection of investors that a fiduciary duty be uniformly applied to 
investment advisers, brokers, and dealers.
    The Dodd-Frank Act also includes landmark consumer protections for 
remittance transactions. It will require simple disclosures about the 
cost of sending remittances to be provided to the consumer prior to and 
after the transaction. A complaint and error resolution process for 
remittance transactions will also be established. These improvements 
will provide essential protection to the many people in Hawaii and 
across the country who send significant portions of their income to 
relatives who live abroad.
    We enacted this legislation to address inadequacies in the 
financial regulatory system and make necessary improvements to the 
safeguards that protect investors and consumers. Now, it is important 
that the Act is implemented in a sound and timely manner. I applaud the 
respective agencies for promptly beginning their respective 
implementation processes, and I look forward to each of the witnesses' 
testimonies today. Thank you, Mr. Chairman.

                                 ______
                                 
                  PREPARED STATEMENT OF NEAL S. WOLIN
              Deputy Secretary, Department of the Treasury
                           September 30, 2010

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
thank you for the opportunity to testify about the progress Treasury 
has made in implementing the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act).

Introduction
    Two months ago, against tough odds, Congress enacted the strongest 
set of financial reforms since those that followed the Great 
Depression. The Dodd-Frank Act will ultimately reshape our financial 
system and will affect us all in a number of important ways.
    The Act builds a stronger financial system by addressing major gaps 
and weaknesses in regulation that helped cause the financial crisis 
that led to the recession. It puts in place buffers and safeguards to 
reduce the chance that another generation will have to go through a 
crisis of similar magnitude. It protects taxpayers from bailouts. It 
brings fairness and transparency to consumers of financial services. 
And it lays the foundation for a financial system that is pro-
investment and pro-growth.
    Mr. Chairman, passing this bill was no easy task. It would not have 
happened without your strong commitment and that of your colleagues to 
make sure that meaningful reform became a reality.
    You stood on the right side of history and with the millions of 
Americans who have lost their jobs, homes and businesses as a result of 
a crisis caused by basic failures in our financial system.
    But the work is far from done. Enacting financial reform was just 
the beginning.

Guiding Principles
    Implementing the Dodd-Frank Act is a complex undertaking. 
Effectively describing the process requires terms that are often 
unavoidably dense, making reform seem distant to many. So before 
outlining the steps we have taken to date, I want to detail the broad 
principles guiding our efforts.
    First, we are moving as quickly and as carefully as we can.
    Wherever possible, we are quickly providing clarity to the public 
and the markets. But the task we face cannot be achieved overnight. We 
have to write new rules in some of the most complex areas of finance; 
consolidate authority spread across multiple agencies; set up new 
institutions for consumer protection and for addressing systemic risks; 
and negotiate with countries around the world. In getting this done, we 
are making sure to get it right.
    Second, we are bringing full transparency to this process.
    As we write new rules, we will be consulting a broad range of 
groups and individuals. And as we seek their input, the American people 
will be able to see who is at the table. Draft rules will be published. 
Everyone will be able to comment. And those comments will be publicly 
available.
    Third, wherever possible, we will streamline and simplify 
Government regulation.
    Over the years, our financial system has accumulated layers upon 
layers of rules, which can be overwhelming. That is why alongside our 
efforts to strengthen and improve protections through the system, we 
will avoid duplication and seek to eliminate rules that do not work.
    Fourth, we will create a more coordinated regulatory process.
    Ahead of this crisis, gaps and inconsistencies between regulators 
proved to be a major failure. Gaps allowed risks to grow unattended and 
inconsistencies allowed an overall race to the bottom. Better 
coordination will help prevent a recurrence.
    Fifth, we will build a level playing field.
    A level playing field must exist not just between banks and 
nonbanks here in the United States, but also between major financial 
institutions globally. We are setting high standards at home while 
working tirelessly to persuade the international community to follow 
our lead. We welcome the agreement just reached in Basel. It 
substantially raises the level of capital major banks must hold whether 
they operate out of New York or London or Frankfurt.
    Sixth, we will protect the freedom for innovation that is 
absolutely necessary for growth.
    Our system allowed too much room for abuse and excessive risk. But 
as we put in place rules to correct for those mistakes, we have to 
achieve a careful balance and safeguard the freedom for competition and 
innovation that are essential for growth.
    Seventh, we are keeping Congress fully informed of our progress on 
a regular basis.

Implementation Update
    Treasury has been working hard to implement the sweeping reforms of 
the Dodd-Frank Act since enactment.
    Immediately after passage, we put in place a governance structure 
that oversees Treasury's role to implement financial reform. The bulk 
of the work is being done by teams dedicated to our core 
responsibilities such as helping to establish the Financial Stability 
Oversight Council (Council); laying the groundwork for the Office of 
Financial Research (OFR); launching the Consumer Financial Protection 
Bureau (CFPB); and creating a Federal Insurance Office (FIO).
    These teams provide an update to a steering committee of senior 
Treasury officials who meet every day and consider options, make 
decisions, push implementation forward, and, where appropriate, make 
recommendations for the Secretary.
    Let me now discuss in greater detail our actions around each of our 
core responsibilities.

The Financial Stability Oversight Council
    With respect to the Council, we are focused on three things: 
approach, structure and execution.
    First, the Council has a clear statutory mandate and overarching 
responsibility to identify risks to financial stability, respond to any 
emerging threats in the system and promote market discipline. This is a 
mandate that previously did not exist. In the lead-up to this crisis, 
the regulatory framework focused regulators narrowly on individual 
institutions and markets, which allowed gaps to grow and 
inconsistencies to emerge that allowed arbitrage and weakened 
standards. Before the Dodd-Frank Act, no single institution had 
responsibility for monitoring and addressing risks to financial 
stability. The Act fixes that through the creation of the Council.
    To carry out its mandate, the Council has been given an important 
role in several consequential regulatory decisions. These include which 
major nonbank financial and critical financial market utilities firms 
will be subject to heightened supervision, and what prudential 
standards should be applied to those firms. The Council will also 
closely monitor the financial system as a whole, looking out for any 
emerging threats and, where they exist, make recommendations on how to 
address them.
    As Chair, Treasury respects the critical independence of regulators 
to fulfill their responsibilities. We must develop an approach that 
maintains that independence while maximizing the coordination required 
for the Council to achieve its mission of financial stability. The 
Dodd-Frank Act makes agencies collectively accountable for this 
mission. While each agency has authority and mandate for a specific 
part of the financial sector or for certain aspects of its functioning, 
we need to develop an approach for the Council and its members of 
collective accountability for financial stability. This approach will 
promote the coordination, cooperation, and information sharing 
necessary for success.
    Our second focus is on structure.
    Tomorrow, the Council will have its first meeting. In advance of 
that meeting, senior officials from each member agency have been 
looking at how best to set up the Council's governance structure. They 
have drafted bylaws, and I expect those will be considered tomorrow.
    Member agencies have also discussed setting up a committee 
structure to promote shared responsibility and make the best use of 
each member's expertise. This plan would entail forming committees 
around the Council's various statutory responsibilities, and around 
core issues that relate closely to systemic risk where more than one 
agency has a significant interest.
    For example, we have proposed committees for designating certain 
nonbank financial firms and financial market utilities, for drafting 
recommendations for heightened prudential standards, and for monitoring 
and reporting on threats to financial stability. The Council members 
and their deputies would set the priorities for each of the committees, 
which will draw upon the expertise of each member agency and be chaired 
by one or more members.
    Our third focus is on execution.
    While we settle on structure, the Council has already begun its 
work because its duties commenced immediately upon enactment. Member 
agencies have already formed staff working groups to begin taking 
action. And, thanks to significant, joint work by staff of the member 
agencies, we expect that the Council will be in a position to take 
important steps toward fulfilling several of its core responsibilities 
at its meeting tomorrow.
    At that meeting, in addition to adopting organizational documents, 
I expect the Council to consider a resolution to seek public comment on 
the criteria for designating nonbank financial companies for heightened 
supervision.
    I also expect the Council will consider tomorrow a resolution to 
seek public comment to inform recommendations the Council will make on 
how to implement statutory restrictions on banking institutions' 
proprietary trading and investments in private funds (the ``Volcker 
Rule''). In addition to that study, the Council must also study and 
make recommendations for implementing the concentration limit; study 
the macroeconomic effects of risk retention requirements; and study the 
economic implications of financial regulation. Work on those reports is 
also underway.

The Office of Financial Research
    In drafting the Dodd-Frank Act, Congress recognized that better 
information and analysis will be critical to the success of the Council 
and its member agencies. In the lead-up to this crisis, financial 
reporting failed to adapt to an ever evolving financial system. Both 
supervisors and market participants lacked data about the buildup of 
leverage in the rapidly growing shadow banking system. Policymakers and 
investors responded to the crisis with inadequate information about the 
interconnectedness of firms and associated risks. That is why the Dodd-
Frank Act created the Office of Financial Research.
    As the statute requires, the OFR will have a Data Center to set 
standards for financial reporting and improve the quality of data that 
supervisors and market participants rely to manage risk.
    These standards will make it easier to spot emerging threats. For 
example, more consistent and complete reporting of derivatives will 
make it easier to track how they redistribute risk through the system. 
Data standards will also improve market discipline as individual firms 
will be better able to assess their own risks, and standardization may 
lower firms' costs over the long run.
    In addition to standards, the Data Center is required to develop 
and publish key reference data that identify and describe financial 
contracts and institutions. Regulators and supervisors as well as 
private firms and investors rely on such reference data to analyze 
risk. Gaps and inconsistencies in existing reference sources inhibit 
meaningful analysis. The OFR will seek to close gaps and increase 
consistency to improve risk analysis and strengthen market discipline.
    To help the Council fulfill its role, the Dodd-Frank Act mandates 
that the OFR have a Research and Analysis Center. Although no analytic 
effort, no matter how thoughtful, can anticipate all risks, the OFR can 
help identify undue concentrations of risk such as took place at AIG 
before the crisis. And the OFR can help ensure that when the next 
crisis begins to emerge the Government has the information and 
analytical tools it needs to respond appropriately.
    The OFR will be headed by a director nominated by the President and 
confirmed by the Senate. The director will have an independent 
obligation to report to Congress on threats to the financial system. We 
envision a director who combines the capacity to lead a cutting edge 
research program with experience both in managing data systems and in 
risk analysis.
    Until there is a confirmed Director, the Treasury staff team 
working on creating the OFR has been hard at work planning its 
functions and gathering input from regulators and private parties. Our 
OFR team will continue to coordinate closely with other members of the 
Council.
    We will move quickly to complete a census of existing data 
standardization initiatives and existing sources of reference data. The 
OFR will work to maximize the effectiveness of existing private sector 
efforts.
    The OFR must not duplicate existing Government data collection 
efforts or impose unnecessary burden. That is why we are working with 
the regulators to catalogue carefully the data they already collect to 
ensure the OFR relies on their data whenever possible, as the Act 
requires. The OFR will help Government get the most out of existing 
data by facilitating sharing among agencies. We are also identifying 
existing private data sources to improve risk monitoring without 
imposing new burdensome data collection mandates.
    When we have finished assessing existing public and private data 
initiatives, we will move quickly to draw up detailed plans for OFR to 
facilitate and advance these initiatives without duplication or 
unnecessary burden. We also are developing organizational structure, 
hiring procedures and pay structures, information technology, and other 
requirements.
    Our efforts to establish the OFR will stay focused on ensuring that 
the OFR protects private information and trade secrets. The Act 
provides strict protections for data security and confidentiality and 
we take seriously our obligation to implement these protections fully. 
In the coming months our OFR team will be developing confidentiality 
policies and procedures for the OFR and its data centers that meet the 
highest data security standards.
    We will in all these efforts continue to seek advice and expertise 
from the private sector, academia, and Congress. Working with the 
Council we will seek to formalize our outreach by establishing advisory 
committees. The lessons and information we take back will be built into 
the foundations of the OFR.

The Consumer Financial Protection Bureau
    The CFPB will be an independent bureau of the Federal Reserve with 
the mission of ensuring transparency in consumer financial products and 
services and protecting consumers from abuse and deception. It will 
consolidate existing rulemaking authorities for consumer financial 
products and services. And it will consolidate agencies' existing 
functions for supervising the very largest banking institutions for 
compliance with consumer financial protection laws. It also will 
supervise many nonbank financial firms that sell consumer financial 
services, an entirely new Federal function.
    The Act charges the Secretary with standing up the CFPB. Under his 
leadership we set up a staff implementation team with a clear division 
of responsibilities right after enactment. The team has working groups 
focused on setting up key functions of the CFPB such as research, 
preparing for the supervision of financial institutions, and working 
with the transferor agencies. Other working groups are focused on 
building the CFPB's supporting infrastructure (e.g., finance and 
budget, records management, legal services, human resources, 
information technology, procurement, and other operations).
    Elizabeth Warren is leading Treasury's effort to create the CFPB as 
the Secretary's Special Advisor. She will chair a steering committee of 
senior Treasury officials dedicated to overseeing CFPB implementation 
and reporting to the Secretary.
    The team is tracking and projecting the CFPB's expenses, working 
with GAO to build audit requirements for FY2011, and developing a 
budget model. The team is also analyzing and aligning salary structures 
of agencies transferring staff to the CFPB, and building a pay and 
compensation system that fulfills the unique requirements of the Act. 
Initial privacy protocols are being developed and data management 
systems are being built.
    The Secretary has designated July 21, 2011, as the date on which 
the CFPB will assume existing authorities of seven agencies (OCC, OTS, 
FDIC, NCUA, FRB, FTC, and HUD). Six of these agencies will also 
transfer staff to the CFPB. We are developing protocols with these 
agencies for determining how many people will transfer and for 
determining how the agencies will jointly identify which specific 
employees will transfer.
    We have made substantial progress preparing the CFPB to incorporate 
staff and assume authorities from other agencies. We have begun 
planning and preparations for certain rules mandated by the Dodd-Frank 
Act so the CFPB can meet statutory deadlines. We have met with the 
agencies that will transfer rulemaking authority to coordinate and 
ensure a smooth transfer. We are coordinating fulfillment of certain 
rule-writing mandates under the Dodd-Frank Act with the Federal Reserve 
Board to speed clarity for the market and meet statutory deadlines.
    We are also hard at work to ensure a smooth transfer of consumer 
compliance supervision for banks, thrifts, and credit unions with 
assets exceeding $10 billion. Senior experts in consumer compliance 
supervision of large banks--detailed to Treasury from the banking 
agencies--are laying plans for staffing, training, and information 
systems. We will make sure to coordinate examination schedules with 
prudential regulators to avoid unnecessary burden.

Federal Insurance Office
    FIO will provide the Federal Government for the first time 
dedicated expertise regarding the insurance industry. The Office will 
monitor the insurance industry, including identifying gaps or issues in 
the regulation of insurance that could contribute to a systemic crisis 
in the insurance industry or the United States financial system. The 
director of FIO will advise the Council on these matters as a nonvoting 
member. FIO may receive and collect data and information on and from 
the insurance industry and insurers; enter into information-sharing 
agreements; analyze and disseminate data and information; and issue 
reports.
    Under the Act, the director of this office must be a senior career 
civil servant, and we are committed to finding a top caliber person to 
fill the job. Last week we posted a vacancy notice and we will move as 
fast as the civil service hiring process allows. Meanwhile, existing 
Treasury staff has started the work of FIO.
    We will make every effort to ensure a cooperative and collaborative 
relationship with the National Association of Insurance Commissioners 
(NAIC). Senior Treasury officials and staff are engaging frequently 
with the NAIC as well as other interested parties. We are establishing 
with NAIC a framework within which FIO and the States, as the 
functional regulators, can work hand-in-hand.
    And we are also making plans for a system that will provide FIO 
with industry and insurer data and information, including data to 
monitor access to affordable insurance products by traditionally 
underserved communities and consumers, minorities, and low- and 
moderate-income people.
    We are working to engage effectively with representatives of other 
countries on insurance prudential issues. We will also be working 
closely with the United States Trade Representative.
Conclusion
    This economic crisis was caused by fundamental failures in our 
financial system. And over the past few years, those failures have cost 
us dearly--millions of lost jobs, trillions in lost savings, thousands 
of failed businesses, homes foreclosed, retirements delayed, educations 
deferred.
    Financial reform addresses those failures so no future generation 
has to pay such a price. But it also rebuilds our financial system so 
that it can once again be an engine for economic growth.
    For much of the last century our financial system was the envy of 
the world. From London to Shanghai, it was analyzed and even emulated 
for its creativity and efficiency in finding innovative ways to channel 
savings towards credit and capital, not just for the biggest companies 
but also for the individual entrepreneurs who had a good idea and a 
solid plan.
    The Dodd-Frank Act will help ensure that our financial system 
becomes safer, stronger and, just as in the past century, the world 
leader.
    Thank you.

                                 ______
                                 
                 PREPARED STATEMENT OF BEN S. BERNANKE
       Chairman, Board of Governors of the Federal Reserve System
                           September 30, 2010

    Chairman Dodd, Ranking Member Shelby, and other Members of the 
Committee, thank you for the opportunity to testify about the Federal 
Reserve's implementation of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act).
    In the years leading up to the recent financial crisis, the global 
regulatory framework did not effectively keep pace with the profound 
changes in the financial system. The Dodd-Frank Act addresses critical 
gaps and weaknesses of the U.S. regulatory framework, many of which 
were revealed by the crisis. The Federal Reserve is committed to 
working with the other financial regulatory agencies to effectively 
implement and execute the act, while also developing complementary 
improvements to the financial regulatory framework.
    The act gives the Federal Reserve several crucial new 
responsibilities. These responsibilities include being part of the new 
Financial Stability Oversight Council, supervision of nonbank financial 
firms that are designated as systemically important by the council, 
supervision of thrift holding companies, and the development of 
enhanced prudential standards for large bank holding companies and 
systemically important nonbank financial firms designated by the 
council (including capital, liquidity, stress test, and living will 
requirements). In addition, the Federal Reserve has or shares important 
rulemaking authority for implementing the so-called ``Volcker Rule 
restrictions'' on proprietary trading and private fund activities of 
banking firms, credit risk retention requirements for securitizations, 
and restrictions on interchange fees for debit cards, among other 
provisions.
    All told, the act requires the Federal Reserve to complete more 
than 50 rulemakings and sets of formal guidelines, as well as a number 
of studies and reports, many within a relatively short period. We have 
also been assigned formal responsibilities to consult and collaborate 
with other agencies on a substantial number of additional rules, 
provisions, and studies. Overall, we have identified approximately 250 
projects associated with implementing the act. To ensure that we meet 
our obligations in a timely manner, we are drawing on expertise and 
resources from across the Federal Reserve System in areas such as 
banking supervision, economic research, financial markets, consumer 
protection, payments, and legal analysis. We have created a senior 
staff position to coordinate our efforts and have developed project-
reporting and tracking tools to facilitate management and oversight of 
all of our implementation responsibilities.
    The Federal Reserve is committed to its long-standing practice of 
ensuring that all its rulemakings be conducted in a fair, open, and 
transparent manner. Accordingly, we are disclosing on our public Web 
site summaries of all communications with members of the public--
including banks, trade associations, consumer groups, and academics--
regarding matters subject to a proposed or potential future rulemaking 
under the act.
    In addition to our own rulemakings and studies, we have been 
providing technical and policy advice to the Treasury Department as it 
works to establish the oversight council and the related Office of 
Financial Research. We are working with the Treasury to develop the 
council's organizational documents and structure. We are also assisting 
the council with the construction of its framework for identifying 
systemically important nonbank financial firms and financial market 
utilities, as well as with its required studies on the proprietary 
trading and private fund activities of banking firms and on financial-
sector concentration limits.
    Additionally, work is well under way to transfer the Federal 
Reserve's consumer protection responsibilities specified in the act to 
the new Bureau of Consumer Financial Protection. A transition team at 
the Board, headed by Governor Duke, is working closely with Treasury 
staff responsible for setting up the new agency. We have established 
the operating accounts and initial funding for the bureau, and we have 
provided the Treasury detailed information about our programs and 
staffing in the areas of rulemaking, compliance examinations, policy 
analysis, complaint handling, and consumer education. We are also 
providing advice and information about supporting infrastructure that 
the Bureau will need to carry out its responsibilities, such as human 
resource systems and information technology.
    Well before the enactment of the Dodd-Frank Act, the Federal 
Reserve was working with other regulatory agencies here and abroad to 
design and implement a stronger set of prudential requirements for 
internationally active banking firms. The governing body for the Basel 
Committee on Banking Supervision reached an agreement a few weeks ago 
on the major elements of a new financial regulatory architecture, 
commonly known as Basel III. By increasing the quantity and quality of 
capital that banking firms must hold and by strengthening liquidity 
requirements, Basel III aims to constrain bank risk-taking, reduce the 
incidence and severity of future financial crises, and produce a more 
resilient financial system. The key elements of this framework are due 
to be finalized by the end of this year.
    In concordance with the letter and the spirit of the act, the 
Federal Reserve is also continuing its work to strengthen its 
supervision of the largest, most complex financial firms and to 
incorporate macroprudential considerations into supervision. As the act 
recognizes, the Federal Reserve and other financial regulatory agencies 
must supervise financial institutions and critical infrastructures with 
an eye toward not only the safety and soundness of each individual 
firm, but also overall financial stability. Indeed, the crisis 
demonstrated that a too narrow focus on the safety and soundness of 
individual firms can result in a failure to detect and thwart emerging 
threats to financial stability that cut across many firms.
    A critical feature of a successful systemic or macroprudential 
approach to supervision is a multidisciplinary perspective. Our 
experience in 2009 with the Supervisory Capital Assessment Program 
(popularly known as the bank stress tests) demonstrated the feasibility 
and benefits of employing such a perspective. \1\ The stress tests also 
showed how much the supervision of systemically important institutions 
can benefit from simultaneous horizontal evaluations of the practices 
and portfolios of a number of individual firms and from employment of 
robust quantitative assessment tools. Building on that experience, we 
have reoriented our supervision of the largest, most complex banking 
firms to include a quantitative surveillance mechanism and to make 
greater use of the broad range of skills of the Federal Reserve staff.
---------------------------------------------------------------------------
     \1\ See, Ben S. Bernanke (2010), ``The Supervisory Capital 
Assessment Program--One Year Later'', speech delivered at the Federal 
Reserve Bank of Chicago 46th Annual Conference on Bank Structure and 
Competition, held in Chicago, Ill., May 6, www.federalreserve.gov/
newsevents/speech/bernanke20100506a.htm; and Daniel K. Tarullo (2010), 
``Lessons from the Crisis Stress Tests'', speech delivered at the 
Federal Reserve Board International Research Forum on Monetary Policy, 
Washington, March 26, www.federalreserve.gov/newsevents/speech/
tarullo20100326a.htm.
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    A final element of the Federal Reserve's efforts to implement the 
Dodd-Frank Act relates to the transparency of our balance sheet and 
liquidity programs. Well before enactment, we were providing a great 
deal of relevant information on our Web site, in statistical releases, 
and in regular reports to the Congress. Under a framework established 
by the act, the Federal Reserve will, by December 1, provide detailed 
information regarding individual transactions conducted across a range 
of credit and liquidity programs over the period from December 1, 2007, 
to July 20, 2010. This information will include the names of 
counterparties, the date and dollar value of individual transactions, 
the terms of repayment, and other relevant information. On an ongoing 
basis, subject to lags specified by the Congress to protect the 
efficacy of the programs, the Federal Reserve also will routinely 
provide information regarding the identities of counterparties, amounts 
financed or purchased and collateral pledged for transactions under the 
discount window, open market operations, and emergency lending 
facilities.
    To conclude, the Dodd-Frank Act is an important step forward for 
financial regulation in the United States, and it is essential that the 
act be carried out expeditiously and effectively. The Federal Reserve 
will work closely with our fellow regulators, the Congress, and the 
Administration to ensure that the law is implemented in a manner that 
best protects the stability of our financial system and strengthens the 
U.S. economy.

                                 ______
                                 
                  PREPARED STATEMENT OF SHEILA C. BAIR
            Chairman, Federal Deposit Insurance Corporation
                           September 30, 2010

    I appreciate the opportunity to testify on the priorities of the 
Federal Deposit Insurance Corporation (FDIC) for implementing the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-
Frank Act). I also want to thank the Committee Members and staff for 
their hard work to enact this landmark legislation. With new resolution 
powers for nonbank financial companies, the establishment of the 
Financial Stability Oversight Council and the creation of the Consumer 
Financial Protection Bureau (CFPB), the Dodd-Frank Act provides 
financial regulators with the tools that are needed to protect against 
future financial crises.
    In addition to specific requirements to strengthen our financial 
system, there are important areas where the Dodd-Frank Act establishes 
broad policy direction while leaving the details of implementation to 
financial regulators. Implementing the Dodd-Frank Act in a way that 
will enhance the stability of our financial system as Congress 
intended, and not just as a regulatory compliance exercise, is a 
responsibility that the FDIC views with utmost importance.
    The Dodd-Frank Act assigns the FDIC a large number of 
responsibilities for implementing reform. The FDIC is authorized to 
write 44 rulemakings--some of which are discretionary--including 18 
independent and 26 joint rulemakings, new or enhanced enforcement 
authorities, new reporting requirements and numerous other actions. 
Implementation will require extensive coordination among the regulatory 
agencies and will fundamentally change the way we regulate large 
complex financial institutions.
    It is imperative that regulators work together, with both speed and 
openness in the implementation of the Dodd-Frank Act in order to dispel 
uncertainties and foster a smooth transition by the industry. To 
achieve this end, the FDIC has already taken several steps to enhance 
the transparency of our rulemaking process. First, we announced that we 
would hold a series of public roundtables with external parties to 
discuss particular aspects of implementation and to provide input on 
draft regulations to carryout the Act. To date, we have held two 
roundtables. The first focused on the new orderly liquidation authority 
provisions of the Dodd-Frank Act. The second roundtable addressed the 
FDIC's current Deposit Insurance Fund (DIF) management and risk-based 
assessment system and changes made by the Dodd-Frank Act. Information 
on our roundtables is posted on our public Web site.
    The FDIC is also disclosing on our Web site the names and 
affiliations of private sector individuals who meet with senior FDIC 
officials to discuss how the FDIC should interpret or implement 
provisions of the Dodd-Frank Act that are subject to independent or 
joint rulemaking. Moreover, in addition to the longstanding practice of 
publishing public comments on our Web site that are received through 
our rulemaking process, we are encouraging general input from the 
public on how the FDIC should implement the new law. The comments 
already received have been published on our Web site and we will 
continue this practice in advance of formal rulemaking.

Implementation of Dodd-Frank
    The recent financial crisis exposed the short-comings of the 
current regulatory regime for addressing large, nonbank financial 
companies that posed systemic risk. Specifically, the Government was 
forced to either prop up a failing institution with expensive bailouts 
or allow a disorderly liquidation through the normal bankruptcy 
process. The bankruptcy of Lehman Brothers triggered a liquidity crisis 
that led to the bailout of AIG and massive public assistance to most 
major U.S. banking organizations. An orderly closure and liquidation is 
essential if we are to prevent such crises from occurring in the 
future. Many provisions of the Dodd-Frank Act are designed to reduce 
risk to the financial system and economy by enhancing the supervision 
of large nonfinancial companies or by facilitating their orderly 
closing and liquidation in the event of failure. The Dodd-Frank Act 
provides a new comprehensive regulatory regime that, coupled with 
higher capital standards, is designed to reduce risk in both individual 
firms and the wider financial system. Further, in order to reduce risk 
in the system to reasonable levels, it must be made clear to these 
companies that their financial folly could result in losses to 
shareholders and bondholders and in the dismissal of their senior 
managers.
    My testimony reviews the top priorities of the FDIC in implementing 
the Dodd-Frank Act, which include: resolution plan requirements and 
orderly liquidation authority, systemic risk oversight, capital and 
liquidity requirements, and consumer protection. In addition, I will 
discuss other important implementation issues with respect to reliance 
on credit rating agencies, back-up examination and enforcement 
authorities, supervision of State chartered thrifts and changes to the 
deposit insurance system that should smooth the effect of economic 
cycles on IDIs by maintaining steady assessment rates and allowing the 
FDIC to maintain a positive fund balance during a financial crisis.

Orderly Liquidation Authority and Resolution Plans
    The new resolution plan requirements and orderly liquidation 
authority are fundamental tools necessary to close large, systemically 
important financial companies and end ``Too Big to Fail.'' The new 
requirements will ensure that the largest nonbank financial companies 
can be wound down in an orderly fashion without costing taxpayers 
billions of dollars in the form of bailouts. From the FDIC's more than 
75 years of bank resolution experience, we have found that clear legal 
authority and transparent rules on creditor priority--coupled with 
adequate information and cooperation--are critical tools for the 
effective advance planning of a large, orderly liquidation.

Legal Authorities for Orderly Liquidation
    The Dodd-Frank Act provides for orderly liquidation of covered 
``financial companies''--that is, those financial companies (including 
bank holding companies) for which a systemic risk determination has 
been made that failure and resolution under otherwise applicable law 
would have ``serious adverse effects on financial stability in the 
United States.'' Title II of the Act vests the FDIC with legal 
resolution authorities similar to those for insured depository 
institutions (IDIs). Once the FDIC is appointed as receiver, it is 
required to carry out an orderly liquidation of the financial company. 
In order to implement this authority, the FDIC must determine: how a 
company will be closed; how assets of the receivership will be sold; 
how claims will be determined and paid; and what policies and 
safeguards must exist to ensure that the taxpayers do not bear losses. 
We are currently establishing processes needed to make these 
determinations.
    In August, the FDIC Board of Directors approved the creation of an 
Office of Complex Financial Institutions (OCFI), that will, among other 
things, carry out the FDIC's new authority to implement orderly 
liquidations of systemically important bank holding companies and 
nonbank financial companies that fail. I will discuss the new OCFI in 
more detail later.

Information Necessary for Liquidation
    Without access to information, the FDIC's legal authority for 
liquidation under the Dodd-Frank Act would be insufficient for 
implementing an effective and orderly liquidation process. For example, 
the court-appointed trustee overseeing the liquidation of Lehman 
Brothers found that Lehman Brothers' lack of a disaster plan 
``contributed to the chaos'' of its bankruptcy and the liquidation of 
its brokerage. \1\ This is fully consistent with the FDIC's experience. 
Without advance planning, the FDIC could not have effectively resolved 
the many insured banks that have failed. Recognizing this, the Dodd-
Frank Act created supervisory and regulatory powers designed to give 
the FDIC information and cooperation from the largest financial 
companies and other regulators, and the authority to conduct extensive 
advance planning.
---------------------------------------------------------------------------
     \1\ See, James W. Giddens, Trustee for the SIPA Liquidation of 
Lehman Brothers Inc., Trustee's Preliminary Investigation Report and 
Recommendations, United States Bankruptcy Court Southern District of 
New York, Case No. 08-01420 (JMP) SIPA, p. 8 ff.
---------------------------------------------------------------------------
    The new legislation requires the FDIC and the Board of Governors of 
the Federal Reserve System (FRB) to jointly issue regulations within 18 
months of enactment of the Dodd-Frank Act to implement new resolution 
planning and reporting requirements that apply to bank holding 
companies with total assets of $50 billion or more and nonbank 
financial companies supervised by the FRB. Importantly, the statute 
requires both periodic reporting of detailed information by the largest 
financial companies and the development and submission of a plan ``for 
rapid and orderly resolution in the event of material financial 
distress or failure.'' The resolution plan requirement in the Dodd-
Frank Act appropriately places the burden on financial companies to 
develop their own plans in consultation with the FDIC and the FRB.
    We are in the beginning phase of implementation and are closely 
coordinating the development of the resolution plan regulatory 
requirements with the FRB. This new resolution plan regulation will 
require financial companies to look critically at the often highly 
complex and interconnected corporate structures that have emerged 
within the financial sector. For a resolution plan to be viewed as 
credible and facilitating orderly resolution under the Bankruptcy Code 
as required by the Act, it must provide a clear discussion with regard 
to corporate structure and key business operations. The plan should 
describe which assets and liabilities belong to which legal entities, 
identify functions or services provided by third parties and who within 
the financial firm has the relevant information about these functions.
    These large complex firms are continuously growing and changing, 
which yields complex and opaque legal and operating structures. Over 
time, these can present obstacles not only to regulators, but also to 
the firm's management. Resolution plans can clarify a financial firm's 
risks and lines of authority and control, which can ultimately benefit 
the firm.
    The existence of a resolution plan will generate financial 
benefits, as inefficiencies associated with resolving a company without 
sufficient background information will be alleviated, financial system 
resiliency will be improved, and systemic risk will be reduced. Taken 
together, the new resolution powers, the enhanced regulatory and 
supervisory cooperation mandated in the law, and the resolution 
planning authority provide an infrastructure to end ``Too Big to 
Fail.''
    In fact, we view resolution planning as such a critical matter that 
we already have used the FDIC's preexisting authority to propose a 
requirement for resolution planning for certain large IDIs. In May of 
this year the FDIC issued a notice of proposed rulemaking which would 
set forth information-reporting requirements intended to provide the 
FDIC with key information regarding operations, management, financial 
aspects and affiliate relationships. Further, the proposed rulemaking 
would require a contingent resolution plan to be submitted to the FDIC 
that describes how the IDI could be effectively separated from the rest 
of the organization. The Dodd-Frank Act goes one step further by 
mandating an orderly resolution plan for the entire organization.
    The Dodd-Frank Act lays out steps that must be taken with regard to 
the resolution plans. First, the FRB and the FDIC must review the 
company's plan to determine credibility and utility in facilitating an 
orderly resolution under the Bankruptcy Code. Making these 
determinations will necessarily involve the agencies having access to 
the company and relevant information. If a plan is found to be 
deficient, the company will be asked to submit a revised plan to 
correct any identified deficiencies within a time period determined by 
the agencies. The revisions must demonstrate that the plan is credible 
and would result in an orderly resolution under the Bankruptcy Code. 
The revised plan could include changes in business operations and 
corporate structure to facilitate implementation of the plan. If the 
company fails to resubmit a plan that corrects the identified 
deficiencies, the Dodd-Frank Act authorizes the FRB and the FDIC to 
jointly impose more stringent capital, leverage or liquidity 
requirements. In addition, our agencies may impose restrictions on 
growth, activities or operations of the company or any subsidiary, 
until such time as an acceptable plan has been submitted. In certain 
cases we may force divestiture of portions of the nonbank financial 
firm.

Systemic Risk
    The Dodd-Frank Act addresses systemic risk in several ways. As 
discussed above, each systemically important financial company must 
submit a periodic orderly resolution plan that is reviewed by the FDIC 
and the FRB and assessed for its credibility and ability to facilitate 
an orderly resolution under the Bankruptcy Code. In addition, the FDIC 
will have the authority to liquidate such entities in the event of 
failure. The Act also addresses the macro-oversight of the financial 
industry by establishing the Financial Stability Oversight Council 
(Council), strengthening liquidity and capital requirements, and 
prohibiting the use of credit ratings for regulatory purposes.

Financial Stability Oversight Council
    The Dodd-Frank Act established the Council and vested it with the 
responsibility for identifying financial companies and practices that 
could create systemic risk in the future and taking actions to mitigate 
identified risks. The Council's success will be determined by the 
willingness of its members to work together closely and expeditiously 
to implement the Council's duties and to do so in a way that is not 
just a ``paper exercise.'' One of the highest priorities for the 
Council is to establish the criteria for identifying systemically 
important financial companies to be subject to enhanced prudential 
supervision by the FRB. The Dodd-Frank Act specifies a number of 
factors that can be considered when designating a nonbank financial 
company for enhanced supervision, including: leverage; off-balance-
sheet exposures; and the nature, scope, size, scale, concentration, 
interconnectedness and mix of activities.
    This process of identifying the nonbank financial companies that 
should be subject to FRB oversight is likely to be involved and take 
considerable time. It may be prudent to begin the process by qualifying 
a small group of companies that are clearly subject to this provision 
of the Act while the Council members work through the details necessary 
to identify the more nuanced cases. Once a nonbank financial company is 
identified and subject to FRB supervision, the company must file an 
orderly resolution plan with the FRB and the FDIC, as discussed 
earlier.
    Another key priority for the Council is to identify potentially 
systemic activities and practices. The Council needs to have a forward-
looking focus to identify emerging risks and recommend that the primary 
regulators take quick action to mitigate those risks. At the same time, 
the Council members must work together to develop the most effective 
recommendations for enhanced prudential standards for the range of 
potentially systemic financial companies and activities. It is 
important to remember that the Council was formed to take a long-term, 
macro viewpoint. It was not meant to interfere with or complicate the 
ability of the independent agencies to fulfill their statutory mandates 
and move ahead with clearly needed reforms. We look forward to 
collaborating with our colleagues to assure continued progress in 
strengthening the stability of our financial system and utilizing our 
respective authorities and individual areas of specialized expertise to 
close regulatory gaps which contributed so greatly to the financial 
crisis.
    In order to accomplish its challenging tasks, I believe that the 
Council should begin with experienced and capable staff from each of 
the member agencies to work as a team in implementing the Council's 
responsibilities. Interagency working groups should be established to 
take full advantage of the knowledge and unique perspective of each 
member agency.
    To meet these implementation objectives, as I previously mentioned, 
the FDIC has recently reorganized and established the OCFI to help 
carry out its responsibilities under the Act. To support the priority 
of systemic risk oversight, the OCFI will perform continuous review and 
oversight of bank holding companies with more than $100 billion in 
assets as well as nonbank financial companies designated as 
systemically important by the Council. It will also be responsible for 
carrying out the FDIC's new orderly liquidation authority over those 
systemic companies that fail. Further, the OCFI will monitor risks 
among the largest and most complex financial institutions and develop 
plans for the contingency that one or more of these companies might 
fail. The OCFI will work closely with our counterparts at the U.S. 
Department of the Treasury (the Treasury Department), the FRB, and the 
other banking agencies to ensure that the Dodd-Frank Act is implemented 
in a way that makes prudential supervision and orderly liquidation of 
designated nonbank financial companies as effective as possible.

Bank Capital and Liquidity Requirements
    One of the fundamental lessons of the financial crisis was the 
disastrous economic consequences of insufficient capital in the global 
banking system. Over time, the regulations that were in place allowed 
the financial system to become excessively leveraged and insufficiently 
liquid. Excessive leverage fueled a credit bubble and decreased the 
ability of financial institutions to absorb losses.
    Through the auspices of the Basel Committee on Banking Supervision 
(Basel Committee), the Federal Reserve Board, the FDIC and our fellow 
U.S. banking regulators have been working with other supervisors and 
central bank governors throughout the world to increase both the level 
and loss-absorption capacity of capital. While important work remains 
to be done, as I will describe later in this testimony, the agreements 
reached in July and September by the Basel Committee and it's oversight 
body--the Group of Central Bank Governors and Heads of Supervision 
(GHOS)--will do much to improve both the quantity and quality of 
capital and discourage excessive leverage and excessive risk-taking by 
large international banking organizations.
    The agreement sets out new explicit numerical minimum requirements 
for common equity, calculated for regulatory purposes in a way that is 
intended to ensure that such equity is fully available to absorb 
losses. It also includes capital buffers designed to encourage banks to 
hold capital well above regulatory minimums so they can absorb losses 
and keep lending during a crisis; increases in capital requirements for 
the counterparty credit risk arising from derivatives exposures; 
explicit regulatory liquidity ratios; and of critical importance, an 
internationally agreed leverage ratio. All of these elements are 
subject to an extraordinarily long phase-in period.
    A great deal of attention has been directed to the potential impact 
of these requirements. While the agreement does represent a significant 
strengthening of requirements, we believe achieving the new capital 
levels will be easily manageable with the extremely long transition 
period. First, none of these enhancements will take effect until 
January 1, 2013, over 2 years from now. At that time, a 3.5 percent 
minimum ratio of tier 1 common equity to risk-weighted assets is 
introduced--but without, at that time, a requirement for any of the new 
regulatory deductions. For U.S. banks, a 3.5 percent common equity 
requirement is clearly a nonevent.
    During the 5 years following January 1, 2013, new regulatory 
deductions from capital would be phased-in incrementally. In the U.S., 
the most important of these deductions would come from the phase-out of 
Bank Holding Companies' tier 1 capital recognition of trust preferred 
securities. This phase-out is part of both Basel III and the Dodd-Frank 
Act, and appropriately so since these instruments did not prove to be 
loss-absorbing in the crisis and their prevalence greatly weakened the 
capital strength of the U.S. banking industry and increased the FDIC's 
insurance losses.
    There is also a more-stringent cap on the recognition of deferred 
tax assets in tier 1 common equity. When the value of these assets 
depends on future income, they are not really available to absorb loss 
in a severe scenario. It is likely, however, that banks would avoid 
much of this deduction simply by realizing the value of these deferred 
tax assets over time through earnings.
    Another important deduction includes a tighter cap on the capital 
recognition of mortgage servicing rights and the deduction of all other 
intangible assets (goodwill, by far the largest category of intangible 
assets, has long been deducted from regulatory capital). While the 
value of mortgage servicing rights can be volatile, they clearly have 
value and the U.S. delegation argued successfully that the full 
deduction of this asset proposed by the Basel Committee in December was 
unwarranted. Finally, deductions of certain large financial equity 
investments and cross-holdings are designed to reduce the double-
counting of capital in the financial system. We anticipate banks will 
avoid many of these types of deductions simply by selling or 
restructuring their holdings.
    Just as these deductions would be phased in gradually, the higher 
numerical requirements would also be phased-in, even more gradually. 
This would include a capital buffer over and above the minimum common 
equity ratio. The minimum plus buffer for tier 1 common as a percentage 
of risk-weighted assets would increase from the 3.5 percent on January 
1, 2013, to 7 percent on January 1, 2019. Corresponding figures 
(minimum plus buffer) by 2019 for tier 1 and total capital would be 8.5 
percent and 10.5 percent respectively. The leverage requirement that 
tier 1 capital be at least 3 percent of the sum of balance-sheet assets 
and selected off-balance-sheet assets would not take effect until 
January 1, 2018.
    The agreement also includes important new requirements for 
liquidity. A new Liquidity Coverage Ratio requires banks to hold 
sufficient high quality liquid assets to meet cash needs during a 30-
day stress scenario. While simple in concept, implementing this ratio 
requires many key assumptions and definitions. The agreement includes 
an observation period to allow for potential adjustments if needed. 
Another proposed liquidity ratio, the Net Stable Funding Ratio, in 
essence attempts to ensure that illiquid assets are not funded with 
volatile liabilities. This ratio is still under development.
    Determining the amount of new capital that banks would ultimately 
need to retain through earnings or raise externally during the next 8 
years under these requirements is extremely difficult. Some of the 
specific required deductions may be avoidable as noted above. 
Deductions or extremely high capital charges affecting certain 
speculative grade or unrated securitizations may be largely avoidable 
as well, as banks sell, restructure or allow these exposures to pay 
down over time.
    Our own analysis, that assumes no mitigating actions by the banks 
and that the full increase in risk-weighted assets estimated by the 
Quantitative Impact Study (QIS) is realized, suggests that 
overwhelmingly, U.S. banks can meet the new requirements through 
retained earnings over time, with no need to tap external equity 
markets.
    Our view is that while the evidence supported the case for still 
higher requirements, the agreement is a major strengthening of current 
rules and an acceptable compromise given the multiple perspectives 
represented in the negotiations.
    Thus, the requirements agreed by the GHOS would go a long way to 
strengthen the U.S. banking system, but there is more to be done. 
First, the GHOS and the U.S. banking agencies have affirmed that 
further steps will be taken to augment the loss absorbing capacity of 
systemically important banks. The FDIC places a high priority on these 
efforts, and believes that they are needed to help avoid a recurrence 
of the events of the Fall of 2008.
    The Dodd-Frank Act establishes a mandate for the largest and most 
systemically important banks to have capital requirements that are 
higher than those applying to community banks, for systemically 
important nonbank financial companies to be subject to strong and 
appropriate capital regulation, and for depository institution holding 
companies to serve as a source of financial strength to banks. The 
Dodd-Frank Act requirement that is most critical to ensuring that all 
this happens is Section 171.
    Section 171 states that the generally applicable capital 
requirements shall serve as a floor for any capital requirement the 
agencies may require. Without this provision, the Nation's largest 
insured banks and bank holding companies could avoid being held to 
higher capital standards, simply by using their own internal risk 
metrics under the agencies' rules implementing Basel II's ``advanced 
approaches'' to compute the risk-weighted assets against which they 
hold capital. Section 171 also provides that the generally applicable 
insured bank capital requirements will serve as a floor for the capital 
requirements of depository institution holding companies, and of 
nonbank financial companies supervised by the FRB pursuant to the Dodd-
Frank Act. These important requirements will help ensure that holding 
companies do serve as a source of strength for their banks rather than 
as a vehicle for increasing leverage, and will address gaps and 
inconsistencies in regulatory capital between banking organizations and 
systemically important nonbank financial companies.
    The FDIC attaches enormous importance to working with our fellow 
regulators to promptly implement these important requirements of 
Section 171.

Limitation on Reliance on Credit Rating Agencies
    Another lesson of the financial crisis is the importance of 
performing independent due diligence on the underwriting standards and 
credit risks posed by credit exposures contained within structured 
products such as mortgage-backed securities and credit derivative 
products. To this end, the Dodd-Frank Act requires the regulatory 
agencies to remove all references to, or reliance on, credit ratings 
and substitute credit-worthiness standards developed by the agencies.
    On August 25, 2010, the banking agencies published a joint Advance 
Notice of Proposed Rulemaking seeking comment on a number of 
alternatives to the use of credit ratings within the various U.S. bank 
regulations and capital standards that reference such ratings. While we 
are interested in seeing industry comments on the alternatives, we also 
recognize the significant challenges involved with developing credit 
worthiness standards for the broad range of exposures and complex 
securities structures that exist within today's financial system.

Consumer Protection
    I have long argued for increased consumer protections and fully 
supported the creation of the CFPB. Put bluntly, consumer protections 
need to be beefed up especially for nonbank providers of financial 
services. There is ample evidence that consumers did not understand the 
consequences of the subprime and nontraditional mortgages that were 
sold to them during the buildup of the housing bubble. That is why 
basic consumer protections are a fundamental piece of our regulatory 
infrastructure, and the new CFPB has much work to do to bolster these 
protections.
    As you know, under the Dodd-Frank Act, the FDIC maintains 
compliance, examination and enforcement responsibility for over 4,700 
insured institutions with $10 billion or less in assets. The CFPB 
assumes responsibility to examine, and enforce for compliance with 
Federal consumer financial law, the 46 institutions we now supervise 
that have more than $10 billion in assets or that are affiliates of 
institutions with over $10 billion in assets. Even for these large 
organizations the FDIC will have back-up authority to enforce Federal 
consumer laws and address violations.
    The Committee has asked about the transfer of employees to the new 
CFPB. We recognize the tremendous importance of working closely with 
our colleagues at the Treasury Department and the other banking 
agencies to ensure a smooth transition and the need for ongoing agency 
coordination once the transition is complete. Above all, we are fully 
committed to a fair transition and the equitable treatment of 
employees. With these goals in mind, we have taken a number of 
preliminary steps to begin the transfer process.
    Initially, two senior employees are being detailed to the Treasury 
Department to work on a wide range of examination and legal issues that 
will confront the CFPB at its inception. We are also actively engaged 
with the Treasury Department in helping to determine staffing levels 
and identify skill sets needed for the CFPB. Recognizing that FDIC 
employees have developed expertise, skills, and experience in a number 
of areas to benefit the CFPB, we fully expect some employees will 
actively seek an opportunity to assist the CFPB in its earliest stages, 
or on a more permanent basis.
    Related to the creation of the CFPB, the Dodd-Frank Act changes the 
composition of the FDIC Board of Directors by replacing the position 
held by the Director of the Office of Thrift Supervision (OTS) with the 
Director of the CFPB. Given the importance of consumer protections as 
part of financial reform, it is appropriate that the Director of the 
CFPB is a member of our Board.
    In addition to this change to the Board's governance structure, the 
FDIC has taken steps to raise the stature and attention of consumer 
protections by creating a new division within FDIC with consumer 
protection as its focus. The new Division of Depositor and Consumer 
Protection will be created through the transition of staff from our 
existing Division of Supervision and Consumer Protection. We also will 
transfer employees from our existing research staff to the new Division 
to perform consumer research and Home Mortgage Disclosure Act (HMDA)/
fair lending analysis. We also are in the process of strengthening our 
legal workforce dedicated to supporting depositor and consumer 
protection functions. Finally, to maintain synergies between safety and 
soundness and consumer protection, FDIC risk management staff will 
continue to work closely with the FDIC's depositor and consumer 
protection staff.

Additional FDIC-Related Dodd-Frank Act Provisions
    The Dodd-Frank Act provides the FDIC with new and enhanced 
authorities related to examinations and supervision of nonbank 
financial companies supervised by the FRB, IDIs, and their holding 
companies. Among other things, the Act provides the FDIC with back-up 
examination authority for systemically important nonbank financial 
companies, and bank holding companies. The Act also transfers 
regulatory authority over State chartered thrifts from the OTS to the 
FDIC. In addition, the Act mandates changes to the DIF that will allow 
the FDIC to more effectively manage the Fund.

Back-up Examination and Enforcement Authority
    The Dodd-Frank Act grants the FDIC new authorities to examine 
systemically important nonbank financial companies and bank holding 
companies with at least $50 billion in assets for the purposes of 
implementing the FDIC's orderly liquidation authority. These back-up 
examinations may only be conducted in certain circumstances and only if 
the FDIC Board decides they are necessary to determine the condition of 
the company and other conditions are met.
    Before conducting a back-up examination, the FDIC will review 
available resolution plans submitted by the company, as well as 
available ``reports of examination.'' We will coordinate with the FRB 
to the maximum extent practicable to minimize duplicative or 
conflicting examinations. However, consistent with FDIC's methods for 
resolving IDIs, back-up examination authority likely would play a key 
role in the planning for any potential orderly liquidation of a 
systemically important financial company under Title II of the Dodd-
Frank Act. The information obtained from examinations (along with the 
information obtained through the resolution plan review process) is 
crucial for planning an effective liquidation.
    Similarly, the Dodd-Frank Act gives the FDIC back-up enforcement 
authority over a depository institution holding company if the conduct 
or threatened conduct of the holding company poses a risk to the DIF. 
This new authority recognizes that the activities and practices of the 
holding company may affect the safety and soundness of the IDI.
    With respect to our existing back-up examination authority for IDIs 
prior to passage of the Dodd-Frank Act, the FDIC Board voted on July 12 
to revise its Memorandum of Understanding (MOU) with the other primary 
Federal banking regulators to enhance the FDIC's existing back-up 
authorities over IDIs that the FDIC does not directly supervise. The 
revised agreement will improve the FDIC's ability to access information 
necessary to understand, evaluate, and mitigate its exposure as deposit 
insurer, especially to the largest and most complex firms.
    The complexity and opaqueness of large, complex depository 
institutions requires the FDIC to have a more active on-site presence 
and greater direct access to information and bank personnel in order to 
fully evaluate the risks to the DIF. The need to revise the existing 
MOU was previously identified in a report by the Offices of Inspector 
General of the FDIC and the Treasury Department. \2\ They criticized 
the then-existing MOU because it limited the FDIC's ability to make its 
own independent assessment of risk to the DIF and required the FDIC to 
place unreasonable reliance on the work of the primary Federal 
regulator.
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     \2\ Offices of Inspector General of the FDIC and The Treasury, 
Evaluation of the Federal Oversight of Washington Mutual Bank, Report 
No. EVAL-10-002, April 2010. http://www.fdicoig.gov/reports10/
10002EV.pdf.
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    Our new back-up supervision MOU meets the recommendations of the 
Inspectors' General report and the commitment for action that I made 
personally in response to the recommendations. Further, I believe that 
the new agreement strikes a reasonable balance between preserving the 
role of the primary Federal regulator and providing the FDIC with the 
information that is critical to meet our statutory responsibilities. 
While much work lies ahead in implementing the terms of the new MOU, 
the FDIC will benefit from the stronger and more robust agreement. 
However, we also recognize that our ultimate success will depend 
heavily upon our ability to work together collectively as regulators 
and to respect the roles and responsibilities that we have each been 
given to protect the financial system.

FDIC's Authority Over State Chartered Thrifts
    We have initiated discussions with the OTS, the Office of the 
Comptroller of the Currency (OCC), and the FRB to ensure a smooth 
transition of OTS personnel and the approximately 60 State-chartered 
OTS institutions that will become FDIC-supervised pursuant to the 
regulatory realignment in the Dodd-Frank Act. An implementation plan 
for the transfer of OTS powers and personnel will be developed in 
coordination with the other Federal banking agencies. As you know, the 
Act sets the transfer date for OTS functions at 1 year after enactment, 
with a possibility for a 6-month extension. Prior to the implementation 
date, the FDIC, in consultation with the OCC, will identify and publish 
a list of OTS orders and regulations that the FDIC will enforce. We 
plan to use the systems currently in place to communicate with the 
management of these institutions during the transition phase. We are 
confident that the FDIC will have the resources needed to effectively 
supervise these institutions.

Changes to the DIF Under the Dodd-Frank Act
    The FDIC has experienced two banking crises in the years following 
the Great Depression. In both of these crises, the balance of the 
insurance fund became negative, hitting a low of negative $20.9 billion 
in December 2009, despite high assessment rates and despite other 
extraordinary measures in the most recent crisis, including a special 
assessment of $5.5 billion. However, prepaid assessments of 
approximately $46 billion maintained the fund's liquidity.
    The FDIC has long advocated that the deposit insurance assessment 
system should smooth the effect of economic cycles on IDIs, not 
exacerbate them. In practice, however, the opposite has tended to 
occur--rates have been low during prosperous times and high during 
crises. At the very least, assessment rates should not increase during 
a crisis.
    In the Dodd-Frank Act, Congress granted the FDIC increased 
flexibility to manage the DIF to achieve goals for deposit insurance 
fund management that the FDIC has sought for decades but has lacked the 
tools to achieve. The provisions of the Act, used to their fullest 
extent, should allow the FDIC to maintain a positive fund balance even 
during a banking crisis and maintain steady assessment rates throughout 
economic and credit cycles.
    Specifically, the Dodd-Frank Act raised the minimum level for the 
Designated Reserve Ratio (DRR) from 1.15 percent to 1.35 percent and 
removed the requirement that the FDIC pay dividends of one-half of any 
amount in the DIF above a reserve ratio of 1.35 percent. The new 
legislation also allows the FDIC Board, in its sole discretion, to 
suspend or limit dividends when the reserve ratio reaches 1.50 percent. 
Going forward, the dividend policy set by the Board (combined with 
assessment rates) will directly determine the size of the DIF.
    The FDIC has analyzed various trade-offs among assessment rates, 
dividend policies and reserve ratio targets. The analysis shows that 
the dividend rule and the reserve ratio target are among the most 
important factors in maximizing the probability that the DIF will 
remain positive during a crisis, when losses are high, and in 
preventing sharp swings in assessment rates, particularly during a 
crisis. This analysis also shows that the DIF minimum reserve ratio 
(DIF balance/estimated insured deposits) should be about 2 percent in 
advance of a banking crisis in order to avoid high deposit insurance 
assessment rates when IDIs are strained by a crisis and least able to 
pay.
    The FDIC Board will soon be considering a long-term strategy for 
DIF management, including assessment rates, a target reserve ratio, and 
a dividend policy, consistent with long-term FDIC goals and achieving 
the statutorily required 1.35 percent DIF reserve ratio by September 
30, 2020. It is important to take advantage of this new fund management 
authority while the need for a sufficiently large fund and stable 
premiums are apparent to most. Memories of the last two crises will 
eventually fade and the need for a strong fund will become less 
apparent. Action taken now by the FDIC's present Board, taking 
advantage of the tools granted by the Dodd-Frank Act, will make it 
easier for future Boards to resist inevitable calls to reduce 
assessment rates or pay larger dividends at the expense of prudent fund 
management.
    In addition, among the various rulemakings that will be required to 
implement the DIF-related provisions in the Dodd-Frank Act, the FDIC 
Board will issue notice-and-comment rulemaking later this fall to 
implement the requirement that we change the assessment base from 
domestic deposits to average assets less average tangible equity.
    This change, in general, will result in shifting more of the 
overall assessment burden toward the largest institutions, which rely 
less on domestic deposits for their funding than do smaller 
institutions.

Conclusion
    In creating the Dodd-Frank Act, Congress enacted an historic 
package of financial reforms that will shape the financial industry for 
decades to come. Not only are these reforms needed to address the 
problems and abuses that led to the crisis, but they also offer the 
opportunity to create a financial system that will once again support 
the American economy, and not the other way around. A stable, 
profitable and internationally competitive U.S. financial services 
industry is in everyone's interest.
    This financial reform is about better aligning incentives--
internalizing the costs of leverage and risk taking--so that financial 
institutions can safely and efficiently channel capital to its highest 
and best use in our economy. If our economy is to prosper and if our 
Nation is to meet the economic challenges looming ahead, our financial 
sector simply must do its job better.
    As we meet today, much remains to be done. The FDIC has begun its 
rulemaking tasks and is committed to a quick, transparent process to 
allow the financial industry to readily adapt to the new environment. 
We have reorganized ourselves internally to produce the focus and 
accountability needed to ensure the orderly liquidation of nonbank 
financial entities, the control of systemic risk, and the enhancement 
of consumer protections. We are working with our regulatory 
counterparts to quickly and carefully issue regulations to implement 
the Dodd-Frank Act. We are approaching these complex tasks with both a 
sense of urgency and a view toward their long-run efficacy.
    The stakes are high. If we fail to create effective frameworks now 
for exercising our authorities under Dodd-Frank, we will have forfeited 
this historic chance to put our financial system on a sounder and safer 
path in the future. We must not let this tremendous opportunity go to 
waste. Thank you for today's hearing. I look forward to answering any 
questions.

                                 ______
                                 
                 PREPARED STATEMENT OF MARY L. SCHAPIRO
              Chairman, Securities and Exchange Commission
                           September 30, 2010

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee: 
Thank you for inviting me to testify today on behalf of the Securities 
and Exchange Commission regarding our implementation of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'' or 
``Act''). As you know, the Dodd-Frank Act fills a number of significant 
regulatory gaps, brings greater public transparency and market 
accountability to the financial system, and gives the SEC important 
tools to better protect investors.
    The Act includes over 100 rulemaking provisions applicable to the 
SEC, many of which require action within 1 year. It also requires the 
SEC to conduct more than twenty studies and create five new offices. 
While this is a very significant task, we are fully committed to 
fulfilling our mandates under the Act, as well as our preexisting 
responsibilities.
    My testimony today will describe our progress and plans for 
implementing the Dodd-Frank Act, particularly with respect to those 
issues that you specifically inquired about: derivatives regulation, 
clearance and settlement activities, registration of private fund 
advisers, credit rating agency regulation, corporate governance and 
executive compensation regulation, reforms to the asset-backed 
securitization process, the standard of care applicable to financial 
intermediaries, and other improvements to investor protection.
Process and Priorities
    Let me begin by discussing our overall approach to implementing the 
new rules, studies, reports, offices and other actions mandated or 
contemplated by the Dodd-Frank Act.

Internal Processes
    To hit the ground running, we established new internal processes 
and formed cross-disciplinary working groups for each of the major 
rulemaking initiatives and studies, and designated team leaders for 
each effort. Our rule-writing divisions and offices are meeting weekly 
to review the status of rulemakings and studies and to plan for the 
upcoming weeks. My office and the Office of the General Counsel oversee 
and coordinate much of this planning effort, and all Commissioners are 
provided with both written weekly updates and monthly oral briefings on 
status.

Public Consultation
    We also have enhanced our public consultative process by expanding 
the opportunity for public comment beyond what is required by law. To 
maximize the opportunity for public comment and to provide greater 
transparency, less than a week after the President signed the Act, we 
made available to the public a series of e-mail boxes to which 
interested parties can send preliminary comments before the various 
rules are proposed and the official comment periods begin. \1\ These e-
mail boxes are on the SEC Web site, organized by topic. Since July 
27th, the public has been providing preliminary comments on 31 topics, 
including over-the-counter (OTC) derivatives, private funds, corporate 
disclosure, fiduciary duty, credit rating agencies, and other areas in 
which the SEC will be conducting rulemaking and studies over the next 
12 to 18 months. We also specifically solicited comment on the 
definitions contained in Title VII of the Act, \2\ on the interim final 
rule on temporary municipal advisor registration and on the study we 
have undertaken regarding the effectiveness of the existing legal and 
regulatory standards of care for broker-dealers and investment advisers 
when providing personalized investment advice about securities to 
retail investors. \3\
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     \1\ SEC Chairman Schapiro Announces Open Process for Regulatory 
Reform Rulemaking, Press Release 2010-135 (July 27, 2010), http://
www.sec.gov/news/press/2010/2010-135.htm.
     \2\ Advance Joint Notice of Proposed Rulemaking--Definitions 
Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Rel. No. 34-62717 (Aug. 13, 2010), http://www.sec.gov/
rules/concept/2010/34-62717.pdf.
     \3\ Study Regarding Obligations of Brokers, Dealers, and 
Investment Advisers, Rel. No. 34-62577 (July 27, 2010), http://
www.sec.gov/rules/other/2010/34-62577.pdf.
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    Through this process, we are receiving a wide variety of views. 
Indeed, our request for comment on the investment adviser/broker-dealer 
study alone has generated over 3,000 individualized comments.

Transparency
    We recognize that the process of establishing regulations works 
best when all stakeholders are engaged and contribute their combined 
talents and experience, and our staff and Commissioners are trying, 
within reasonable time constraints, to meet with anyone who seeks to 
meet with us on these issues. We have increased transparency for 
meetings with interested members of the public. \4\ We are asking those 
who request meetings to provide an agenda, and we are posting on our 
Web site the agendas and names of individuals participating in these 
meetings, along with copies of any written materials that are 
distributed at those meetings. In addition, staff will reach out as 
necessary to solicit views from affected stakeholders who do not appear 
to be fully represented by the developing public record on a particular 
issue. Thus far, our approach has resulted in meetings with a broad 
cross-section of interested parties. To further this public outreach 
effort, the Commission is holding public roundtables and hearings on 
selected topics. For example, to further inform our OTC derivatives 
rulemaking efforts under Title VII of the Act, our staff has held three 
joint roundtables with the CFTC staff regarding key swap and security-
based swap matters. \5\
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     \4\ See, SEC Press Release 2010-135 (July 27, 2010), http://
www.sec.gov/news/press/2010/2010-135.htm.
     \5\ Joint Public Roundtable on Swap Execution Facilities and 
Security-Based Swap Execution Facilities, Rel. No. 34-62864 (Sept. 8, 
2010), http://www.sec.gov/rules/other/2010/34-62864.pdf; Joint Public 
Roundtable to Discuss Data for Swaps and Security-Based Swaps, Swap 
Data Repositories, Security-Based Swap Data Repositories, and Real-Time 
Public Reporting, Rel. No. 34-62863 (Sept. 8, 2010), http://
www.sec.gov/rules/other/2010/34-62863.pdf; and Joint Public Roundtable 
on Governance and Conflicts of Interest in the Clearing and Listing of 
Swaps and Security-Based Swaps, Rel. No. 34-62725 (Aug. 16, 2010) 
http://www.sec.gov/rules/other/2010/34-62725.pdf.
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Coordination With Other Regulators
    We are meeting regularly, both formally and informally, with other 
financial regulators. Staff working groups consult and coordinate with 
the staffs of the CFTC, Federal Reserve Board and other prudential 
financial regulators, as well as the Department of the Treasury, the 
Department of State, the Commerce Department, and the Comptroller 
General. Because the world today really is a global marketplace and 
what we do to implement many provisions of the Act will affect foreign 
entities that do business within our shores, our Office of 
International Affairs is consulting bilaterally and through 
multilateral organizations with counterparts abroad, and is meeting 
biweekly with our rule-writing staff to ensure appropriate coordination 
with our foreign counterparts. In short, we remain committed to working 
closely, cooperatively and regularly with our fellow regulators to 
strengthen our regulatory structure.

Priorities
    To help us timely complete all rulemakings, as well as studies, 
reports, and other actions, required under the Act, we have prioritized 
our activity into four principal categories.
    The first category includes all matters that require very rapid 
action. A number of provisions of the Dodd-Frank Act became effective 
immediately upon, or shortly after, the Act's date of enactment, and 
required prompt interpretive guidance, changes to administrative 
practice, or removal of inconsistent regulations, including:

    Adopting an interim final rule that establishes a procedure 
        for municipal advisors to satisfy temporarily the requirement 
        that they register with the Commission by October 1, 2010, as 
        required by Section 975 of the Act; \6\
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     \6\ Temporary Registration of Municipal Advisors, Rel. No. 34-
62824 (Sept. 1, 2010), http://www.sec.gov/rules/interim/2010/34-
62824.pdf.

    Amending our rules that were in conflict with Dodd-Frank's 
        provision that the auditor attestation requirement of Section 
        404(b) of the Sarbanes-Oxley Act does not apply with respect to 
        nonaccelerated filers; \7\
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     \7\ Internal Control Over Financial Reporting in Exchange Act 
Periodic Reports of Non-Accelerated Filers, Rel. No. 33-9142 (Sept. 15, 
2010), http://www.sec.gov/rules/final/2010/33-9142.pdf.

    Issuing an interpretation clarifying the requirement for 
        audits of broker-dealers pending implementation of the 
        authority over such audits granted to the Public Company 
        Accounting Oversight Board by the Dodd-Frank Act; \8\ and
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     \8\ Commission Guidance Regarding Auditing, Attestation, and 
Related Professional Practice Standards Related to Brokers and Dealers, 
Rel. No. 34-62991 (Sept. 24, 2010), http://www.sec.gov/rules/interp/
2010/34-62991.pdf.

    Providing interim guidance on calculating the net worth 
        standard for an accredited investor, to reflect the elimination 
        of a person's principal residence in the calculation, as 
        required by Section 413 of the Act; \9\
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     \9\ Interpretation of Section 413(a): Corporation Finance 
Compliance & Disclosure Interpretation Section 179.01 (July 23, 2010); 
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-
interps.htm.

    The second category of priorities includes matters that require 
action within 1 year from the date of enactment of the Act. This 
category includes the bulk of the rulemakings, reports, and studies 
about which the Committee inquired. As discussed in more detail below, 
we have made significant progress on many of the action items in this 
category. We have performed analyses, reviewed preliminary comments 
received in response to our public solicitation for comment, and are 
making substantial progress in preparing draft rule proposals for 
public comment.
    The third category of priorities includes items that require action 
more than 1 year from the date of enactment, and the fourth category 
includes items for which there is no prescribed statutory deadline.
    To help the public track our progress as we take actions to 
implement the Act, we have created a new section on our Web site that 
provides greater detail about our schedule for implementation, along 
with links to completed actions. \10\ We think this will provide a 
useful reference tool to both the investing public and the financial 
industry as we proceed with implementation.
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     \10\ See, http://www.sec.gov/spotlight/dodd-frank.shtml.
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    I will now turn to the specific items raised by the Committee.

Reform Initiatives
OTC Derivatives
    Title VII of the Dodd-Frank Act provides a comprehensive framework 
for the regulation of the OTC derivatives market. Working with other 
regulators, and the CFTC in particular, we are writing rules that 
address, among other issues, capital and margin requirements; mandatory 
clearing; the operation of execution facilities and data repositories; 
business conduct standards for swap dealers; and public transparency 
for transactional information. Under the Act, primary jurisdiction over 
swaps is divided between the SEC and the CFTC. The SEC has primary 
jurisdiction over security-based swaps, and the CFTC has primary 
jurisdiction over other swaps, such as energy and agricultural swaps. 
To prevent gaps, regulatory arbitrage and confusion, the SEC and CFTC 
will engage in joint rulemaking regarding issues including the 
definition of terms like ``swap,'' ``security-based swap'' and 
``security-based swap agreement.''
    We have done much already in preparation for making rule proposals 
in this area. Jointly with the CFTC, we have held three staff 
roundtables on the topics of conflicts of interest, data repositories, 
reporting and dissemination, and execution facilities. We also 
solicited comment in our Advance Joint Notice of Proposed Rulemaking 
regarding key definitional terms. Based on input from these roundtables 
and the comment letters on key definitions, as well as other comment 
letters received, we anticipate soliciting public comment on a number 
of proposed rulemakings in this area in the coming months.
    As part of our collaborative outreach, our rulemaking teams are 
working closely with the corresponding teams at the CFTC to coordinate 
our efforts. While the Act requires the SEC and CFTC to adopt joint 
rules further defining key definitional terms relating to jurisdiction 
and certain categories of market participants, we believe that 
collaboration with the CFTC, the Federal Reserve Board and other 
prudential regulators also is essential for the rulemakings where joint 
action is not required by the Act. Our overarching goal is to build on 
the foundation established by Congress in Title VII of the Act to 
create a robust and workable framework for regulating the derivatives 
market.
    We expect to propose and adopt Title VII rules in a series of 
actions, beginning in October and proceeding over the next few months. 
We fully expect to meet the deadlines described in the Act.

Clearance and Settlement
    Our staff also is working closely with the Federal Reserve Board 
and the CFTC to develop, as required by Title VIII of the Act, a new 
framework to supervise systemically important financial market 
utilities, including clearing agencies registered with the Commission. 
For example, Commission staff has been actively coordinating with the 
other agencies to develop rules regarding submission of notices by 
systemically important financial market utilities with respect to 
rules, procedures, or operations that may materially affect the risks 
presented.
    Commission staff also has discussed with the other agencies the new 
authority granted to SEC and CFTC to develop standards for these 
financial market utilities. Moreover, the SEC and CFTC staffs have 
begun working with staff from the Federal Reserve Board to develop a 
framework for consulting and working together on exams of systemically 
important financial market utilities consistent with Title VIII. This 
added layer of protection, or ``second set of eyes,'' called for by the 
Act provides assurance that the U.S. financial system receives well 
coordinated oversight from all relevant supervisory authorities.
    We expect to propose our first set of Title VIII rules in December.

Private Fund Adviser Registration and Reporting
    By July 2011, all large hedge fund advisers and private equity fund 
advisers will be required to register with the Commission. \11\ Under 
the Act, venture capital advisers and private fund advisers with less 
than $150 million in assets under management in the United States will 
be exempt from the new registration requirements, although the Act does 
provide for record keeping and reporting by these advisers. \12\ In 
addition, family offices will not be subject to registration. \13\ In 
order to implement the exemptions, the Commission must propose and 
adopt rules. The staff is planning to propose rules on all of these 
matters between October and December of this year.
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     \11\ See, Title IV of the Dodd-Frank Act.
     \12\ See, Section 408 of the Dodd-Frank Act.
     \13\ See, Section 409 of the Dodd-Frank Act.
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    Our staff also has begun work regarding the collection of systemic 
risk information from private fund advisers as required by Title IV of 
the Act. In this regard, our staff has had informal discussions with 
staffs from the CFTC and other regulators regarding what categories of 
potentially reportable information would be consistent with the Act. In 
addition, we are working with the International Organization of 
Securities Commissions and various foreign regulators, most 
particularly the United Kingdom Financial Services Authority, regarding 
hedge fund systemic risk reporting. The goal of these consultations is 
to gain a better understanding about what categories of data would be 
useful and necessary for assessing the potential systemic risks posed 
by hedge funds, and how comparable this data would be with data from 
other countries.

Credit Rating Agency Initiatives
    The Dodd-Frank Act requires the SEC to establish a new Office of 
Credit Ratings, conduct annual exams of each nationally recognized 
statistical rating organization (NRSRO), report on the collective 
results of those exams, and conduct studies relating to credit rating 
agencies regarding, among other things, NRSRO independence, \14\ 
conflicts of interest \15\ and standardizing ratings terminology. \16\ 
We are in the process of establishing this office, and are actively 
recruiting for its new director. We also are identifying the staff from 
existing divisions who should be transferred to this new office, and 
have posted 25 new credit rating agency examination positions.
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     \14\ See, Section 939C of the Dodd-Frank Act.
     \15\ See, Section 939F of the Dodd-Frank Act.
     \16\ See, Section 939 of the Dodd-Frank Act.
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    The Commission is required to undertake approximately a dozen 
NRSRO-related rulemakings. The Act requires the SEC to address internal 
controls and procedures, conflicts of interest, credit rating 
methodologies, rating methodology transparency and performance, analyst 
training, credit rating symbology, and disclosures accompanying asset-
backed securities ratings. \17\ To meet the July 2011 deadline for 
these rules, the staff plans to recommend rule proposals to the 
Commission by early next year. In addition, the SEC, and all other 
Federal agencies, must review and report to Congress on existing 
references to credit ratings in their rules and undertake rulemaking to 
eliminate these references. \18\ SEC staff has begun this review in 
preparation for drafting the report and proposed rulemaking.
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     \17\ See, Subtitle C, Title IX of the Dodd-Frank Act.
     \18\ See, Section 939A of the Dodd-Frank Act.
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    In addition, this week the Commission issued an amendment to 
Regulation FD that implements Section 939B of the Act, which requires 
that the SEC amend Regulation FD to remove the specific exemption from 
the rule for disclosures made to NRSROs and credit rating agencies for 
the purpose of determining or monitoring credit ratings. The amendment 
will be effective upon publication in the Federal Register.
    Many of the credit rating agency provisions of the Act became 
effective immediately upon enactment. Therefore, shortly after the Act 
was signed by the President, we sent letters to each NRSRO asking how 
it planned to comply with these new requirements. In addition, SEC 
staff asked each NRSRO to describe the impact of the repeal of the 
expert liability exemption formerly available to NRSROs for ratings 
used as part of a securities registration statement. We are evaluating 
the responses to these requests, will conduct appropriate follow-up, 
and will examine these issues as part of our annual examinations of the 
NRSROs.

Corporate Governance and Executive Compensation Reforms
    Section 951 of the Act requires a shareholder advisory ``say-on-
pay'' vote on executive compensation at least once every 3 years and a 
separate advisory vote at least once every 6 years on whether the say-
on-pay resolution will be presented for shareholder approval every 1, 
2, or 3 years. In addition, in any proxy statement asking shareholders 
to approve a merger or similar transaction, the Act requires disclosure 
about, and a shareholder advisory vote to approve, compensation related 
to the transaction, unless the arrangements were already subject to the 
periodic say-on-pay vote. The Act also requires every institutional 
investment manager subject to Exchange Act Section 13(f) to report at 
least annually how it voted on any of the required votes. The staff is 
preparing rule proposals to address each of these new requirements. The 
Commission's goal is to adopt final rules in time to inform the 2011 
proxy season. We anticipate that the Commission will propose rules 
designed to implement these provisions in the next few weeks.
    The Act also requires the rules of each national securities 
exchange to be amended to prohibit brokers from voting uninstructed 
shares on the election of directors (other than uncontested elections 
of directors of registered investment companies), executive 
compensation, or any other significant matter, as determined by the 
Commission by rule. \19\ The Commission previously approved changes to 
New York Stock Exchange (NYSE) Rule 452 to prohibit broker voting of 
uninstructed shares in director elections, as well as similar changes 
for several other national securities exchanges. \20\ On September 9, 
2010 the Commission approved further changes to the NYSE rules to 
prohibit broker voting on all executive compensation matters. \21\ On 
September 24, 2010, the Commission approved corresponding changes to 
the Nasdaq rules, \22\ and we anticipate that corresponding changes to 
the rules of other national securities exchanges will be considered by 
the Commission in the near future.
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     \19\ See, Section 957 of the Dodd-Frank Act.
     \20\ See, New York Stock Exchange Rule 452.11(19) and Listed 
Company Manual Section 402.08(B)(19); Securities Exchange Act Release 
No. 34-60215 (July 1, 2009), http://www.sec.gov/rules/sro/nyse/2009/34-
60215.pdf; Securities Exchange Act Release No. 34-61732 (March 18, 
2010), http://www.sec.gov/rules/sro/cboe/2010/34-61732.pdf; Securities 
Exchange Act Release No. 34-61733 (March 18, 2010), http://www.sec.gov/
rules/sro/chx/2010/34-61733.pdf; Securities Exchange Act Release No. 
34-61292 (January 5, 2010), http://www.sec.gov/rules/sro/nyseamex/2010/
34-61292.pdf; and Securities Exchange Act Release No. 34-62775 (August 
26, 2010), http://www.sec.gov/rules/sro/phlx/2010/34-62775.pdf.
     \21\ See, Securities Exchange Act Release No. 34-62874 (September 
9, 2010), http://www.sec.gov/rules/sro/nyse/2010/34-62874.pdf.
     \22\ See, Securities Exchange Act Release No. 34-62992 (September 
24, 2010), http://www.sec.gov/rules/sro/nasdaq/2010/34-62992.pdf.
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    By April 2011, the Commission is required to adopt--jointly with 
other financial regulators--incentive-based compensation regulations or 
guidelines that apply to covered financial institutions, including 
broker-dealers and investment advisers, with assets of $1 billion or 
more. \23\ The regulations or guidelines will prohibit incentive-based 
compensation practices that encourage firms to take inappropriate risks 
and will require firms to disclose to their respective appropriate 
financial regulator their incentive-based compensation structures. The 
Commission staff has met with other regulators in preparation for 
drafting either proposed regulations or guidelines. To meet the April 
2011 adoption deadline, we anticipate that the staff will submit 
proposed rules to the Commission for consideration as soon as December.
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     \23\ Section 956 requires the SEC to adopt these regulations or 
guidelines jointly with the Federal Reserve, Office of the Comptroller 
of the Currency, the FDIC, the Office of Thrift Supervision, the 
National Credit Union Administration Board, and the Federal Housing 
Financing Agency.
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    The Dodd-Frank Act also requires the Commission to write rules 
mandating new listing standards relating to the independence of 
compensation committees and establishing new disclosure requirements 
and conflict of interest standards that boards must observe when 
retaining compensation consultants. \24\ Under the Act, these rules 
must be adopted by the Commission within 360 days from the date of 
enactment of the Act, and we anticipate that the staff will submit 
proposed rules for the Commission's consideration by year end.
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     \24\ See, Section 952 of the Dodd-Frank Act.
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    In addition, the Act requires the Commission to amend our executive 
compensation disclosure rules to require public companies to disclose 
information showing the relationship between executive compensation 
actually paid and the financial performance of the company, \25\ as 
well as information about the total annual compensation of the chief 
executive officer, the median annual total compensation of all other 
employees, and the ratio of these two amounts. \26\ Rule amendments 
also are mandated that will require public companies to disclose in 
their annual meeting proxy materials whether any employee or director 
is permitted to purchase financial instruments designed to hedge any 
decrease in market value of equity securities granted as part of their 
compensation. \27\ Finally, the Act requires the Commission to adopt 
rules mandating changes to listing standards requiring companies to 
implement and disclose ``clawback'' policies for recovering from 
current and former executive officers incentive-based compensation paid 
during any 3-year period preceding a material accounting restatement. 
\28\ We currently anticipate that the staff will submit proposed rules 
for the Commission's consideration by the middle of next year.
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     \25\ See, Section 953(a) of the Dodd-Frank Act.
     \26\ See, Section 953(b) of the Dodd-Frank Act.
     \27\ See, Section 955 of the Dodd-Frank Act.
     \28\ See, Section 954 of the Dodd-Frank Act.
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    Also related to corporate governance, the Act confirmed the 
Commission's authority to adopt rules that facilitate shareholders' 
ability to nominate director candidates. \29\ The Commission had 
proposed such rules in May 2009, before the Act's enactment, and we 
approved final rules on August 25, 2010. \30\ Further, Section 972 of 
the Act requires the Commission to adopt rules requiring an issuer to 
disclose in its annual proxy statement the reasons why it has chosen 
the same or different people to serve as chairman of the board and 
chief executive officer. The Commission adopted Item 407(h) of 
Regulation S-K in December 2009, which requires this information to be 
disclosed.
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     \29\ See, Section 971 of the Dodd-Frank Act.
     \30\ See, Release No. 33-9136, Facilitating Shareholder Director 
Nominations (Aug. 25, 2010), http://www.sec.gov/rules/final/2010/33-
9136.pdf.
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Asset-Backed Securities
    Section 943 of the Dodd-Frank Act requires the Commission to adopt 
rules on the use of representations and warranties in the market for 
asset-backed securities (ABS). Also, Section 945 of the Act requires 
the Commission to issue rules requiring an asset-backed issuer in a 
Securities Act registered transaction to perform a review of the assets 
underlying the ABS, and disclose the nature of such review. Under the 
Act, both sets of rules must be adopted by the Commission by January 
14, 2011, and we expect to propose rules in these areas within the next 
few weeks. We also are working on rules prohibiting material conflicts 
of interest in certain securitizations \31\ and rules requiring the 
disclosure of information regarding the assets backing each tranche or 
class of security. \32\ We expect that these rules also will be 
proposed by the end of the calendar year, and considered for adoption 
in early 2011.
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     \31\ See, Section 27B of the Securities Act, as added by Section 
621 of the Dodd-Frank Act.
     \32\ See, Section 942(b) of the Dodd-Frank Act.
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    Our efforts to advance the securitization reform envisioned by the 
Act are not limited to writing new rules. The Act also addresses risk 
retention (i.e., the requirement that a securitizer retain an economic 
interest in a material portion of the credit risk for any asset that it 
transfers, sells, or conveys to a third party) in connection with 
securitization. The Act mandates two studies on risk retention: one to 
be conducted by the Federal Reserve Board in coordination and 
consultation with the Commission, among other agencies, which is due 
October 19, 2010. The other study is to be conducted by the Chairman of 
the Financial Stability Oversight Council, and it is due January 14, 
2011. \33\ Accordingly, we are providing advice and assistance to the 
Federal Reserve Board in connection with the first study. We are 
working with other regulators to jointly create the risk retention 
rules, including the appropriate amount, form and duration of required 
risk retention, and the definition of qualified residential mortgages. 
For example, to encourage discussion of these issues, the staff in the 
Division of Corporation Finance communicated with Treasury and other 
regulators shortly after the Act's enactment, raised relevant questions 
and provided preliminary staff thoughts on the risk retention 
provision. In light of the Act's April 15, 2011, deadline for 
prescribing rules in this area, we currently are planning for 
Commission consideration of proposed risk retention rules by year end.
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     \33\ As a member of the Financial Stability Oversight Council, the 
Chairman of the SEC is actively participating in this study.
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Municipal Securities
    Section 979 of the Dodd-Frank Act requires the SEC to establish an 
Office of Municipal Securities to administer the rules pertaining to 
broker-dealers, advisors, investors, and issuers of municipal 
securities. The new office will coordinate with the Municipal 
Securities Rulemaking Board on rulemaking and enforcement actions. We 
expect to create the new office by the end of October, transfer 
existing staff performing these duties to that office, and begin 
recruiting for the new director, who will report directly to the 
Chairman.
    Section 975 of the Act also requires the registration of municipal 
advisors with the Commission. This new registration requirement becomes 
effective on October 1, 2010. On that date, it becomes unlawful for any 
municipal advisor to provide advice to a municipality unless registered 
with the Commission. As noted above, on September 1, the Commission 
adopted an interim final rule establishing a temporary means for 
municipal advisors to satisfy the registration requirement. The SEC 
staff is working on proposed final registration rules for the 
Commission's consideration.

Studies and Reports
    The Dodd-Frank Act requires the Commission to conduct a significant 
number of studies and issue numerous reports, some on a periodic basis. 
As with our rulemaking efforts, we have prioritized these studies and 
reports and assigned teams to address each of them. While I have 
already referenced some of the studies we are conducting in conjunction 
with rule writing, I want to share with you our progress on three 
studies that relate to topics about which the Committee specifically 
requested information.

Investment Adviser-Broker Dealer Standard of Care Study
    Section 913 of the Dodd-Frank Act mandates that we study the 
effectiveness of existing legal or regulatory standards of care for 
broker-dealers and investment advisers for providing personalized 
investment advice and recommendations about securities to retail 
customers. Under Section 913, we must produce a report on the study to 
the Senate Committee on Banking, Housing, and Urban Affairs, and the 
House of Representatives' Committee on Financial Services. The report 
regarding the study is due to the Committees in January 2011.
    We are moving rapidly to meet the report's January deadline. Six 
days after the date of enactment of the Dodd-Frank Act, we published a 
request for public input, comments, and data on issues related to the 
effectiveness of existing standards of care for brokers-dealers and 
investment advisers, and whether there are gaps, shortcomings, or 
overlaps in the current legal or regulatory standards. In response, we 
received more than 3,000 individualized letters, including letters from 
investors, financial professionals, industry groups, academia, and 
other regulators. Staff is reviewing the comments, and the views of 
these commenters will be reflected in the report on our study.
    We established a cross-divisional working group to implement the 
study. To help further inform our study and consistent with our public 
outreach on these issues, from August to October, the working group is 
meeting with as many interested parties representing a variety of 
perspectives as possible. We also requested assistance from State 
regulators and FINRA with the aspects of the study involving their 
efforts, such as examinations and enforcement.
    At the completion of the study, the Act gives the SEC the authority 
to write rules, including rules that could create a uniform standard of 
conduct for professionals who provide personalized investment advice to 
retail customers. Under the Act, any new standard can be ``no less 
stringent'' than the standard applicable to investment advisers under 
sections 206(1) and (2) of the Investment Advisers Act of 1940. The 
Commission's ultimate rulemaking in this area will, of course, be 
informed by what we learn from our study and from the comments we 
receive.

Internal Operations
    A top challenge is continuing to strengthen the SEC's organization 
itself--its structure, daily operations, personnel, technological 
infrastructure, and resources--to meet its statutory responsibilities 
and adapt to the ever changing realities of our dynamic markets. To 
assist the SEC in assessing its operational efficiency, Section 967 of 
the Dodd-Frank Act directs the agency to engage the services of an 
independent consultant to study a number of specific areas of SEC 
internal operations and the SEC's relationship with self-regulatory 
organizations (SROs).
    To quickly implement this provision, we sought and received formal 
reprogramming approval from our House and Senate Appropriations 
Subcommittees to fund the study. On August 3, 2010, the SEC's Office of 
Acquisitions issued a formal solicitation (a Request for Quotation, or 
RFQ) describing the work to be performed and asking contractors to 
submit bids that describe their qualifications and discuss their plans 
to carry out the work. Bids were required to be submitted by August 27. 
Once a contract is awarded, the contractor will be given 150 days to 
conduct its study, and to prepare recommendations to the SEC and to 
Congress. We have already formed the working team of staff that will be 
made available to assist the consultant as requested.

Financial Literacy
    Section 917 requires the Commission to conduct a broad study 
regarding the financial literacy of investors. The study will focus on, 
among other things, the current level of financial literacy of 
individual investors and how to increase the transparency of expenses 
and conflicts of interest in investment products such as mutual funds. 
Additionally, we will be studying the most effective private and public 
efforts to educate investors. I have asked the Commission's Office of 
Investor Education and Advocacy (OIEA), which is focused in this area, 
to take the lead on the study. The staff is currently working on a 
project plan, including developing an organizational framework, an 
analysis of required resources, and a calendar of expected completion 
dates of various project milestones. I expect OIEA will complete the 
study within the next 18 months, and we will be prepared to submit the 
required report to Congress within the two-year period reflected in the 
statute.

Agency Growth and Infrastructure
New Offices
    The Act requires the SEC to establish five new offices, four of 
which will report directly to the Chairman. We are consulting with our 
appropriations committees regarding the reprogramming of funds needed 
to establish these new offices. I have previously mentioned the new 
Office of Credit Ratings and Office of Municipal Securities in 
connection with rulemaking in these areas. The other three offices are:
    Whistleblower Office. Section 924 requires us to establish a new 
Whistleblower Office. We already have posted a job announcement for the 
head of the new office, and we expect the office to include a senior 
special counsel and at least four additional employees. The office will 
be located within the Division of Enforcement and will work closely 
with that division's Office of Market Intelligence, which is dedicated 
to the handling of tips, complaints, and referrals. The primary 
functions of the new office will include: (1) performing intake, 
tracking, and record keeping of whistleblower tips; (2) overseeing the 
review process for eligible whistleblower claims and presenting 
recommendations concerning whistleblower awards; and (3) communicating 
with the general public, the Commission, and reporting to Congress on 
the whistleblower program. The first report to Congress on the 
whistleblower program will be provided on October 30, 2010.
    Staff in the Division of Enforcement, with assistance from other 
divisions and offices, is actively working to draft implementing 
regulations for the whistleblower program. Pending the issuance of 
these regulations (due no later than 270 days after the date of 
enactment of the Act), the staff has been and will continue to be able 
to receive whistleblower complaints. Also, information for potential 
whistleblowers has been posted on our Web site. \34\ Already, since the 
passage of the Act, we have seen a slight uptick in the number of tips 
and complaints received, and, more importantly, an uptick in the 
quality of complaints.
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     \34\ See, http://www.sec.gov/complaint.shtml.
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    Office of the Investor Advocate. Section 915 requires the SEC to 
establish an Office of the Investor Advocate, headed by an Investor 
Advocate who reports directly to the Chairman. The office will assist 
retail investors in resolving significant problems they may have with 
the Commission or with SROs. The Investor Advocate also will identify 
areas in which investors would benefit from changes in Commission 
regulations or SRO rules; identify problems that investors have with 
financial service providers and investment products; and analyze the 
potential impact on investors of proposed Commission regulations and 
SRO rules. The Investor Advocate must report to Congress annually on 
its activities, including information on the steps the Investor 
Advocate has taken to improve investor services and responsiveness of 
the Commission and SROs to investor concerns; a summary of the most 
serious problems encountered by investors; and recommendations for 
administrative and legislative actions to resolve problems encountered 
by investors. The Investor Advocate also must hire an Ombudsman, whose 
activities will be included in the Advocate's reports to Congress. The 
Commission must adopt regulations establishing procedures for 
responding to all recommendations submitted to the Commission by the 
Investor Advocate. We have developed a position description, and are 
actively recruiting.
    Office of Minority and Women Inclusion. Section 342 requires 
specified financial agencies, including the SEC, to establish an Office 
of Minority and Women Inclusion that is responsible for all matters of 
the agency relating to diversity in management, employment, and 
business activities, other than enforcement of civil rights laws. The 
director of this Office will report to the Chairman. The director will 
develop and implement standards for: equal employment opportunity and 
the racial, ethnic, and gender diversity of the workforce and senior 
management of the SEC; increased participation of minority-owned and 
women-owned businesses in the programs and contracts of the agency, 
including standards for coordinating technical assistance to such 
businesses; and assessing the diversity policies and practices of 
entities regulated by the SEC.
    Additionally, the director will advise the Chairman on the impact 
of the policies and regulations of the SEC on minority-owned and women-
owned businesses. We have solicited comments from our internal 
Diversity Council on the structure of this new office, as well as 
several external groups. This is an area in which our request for 
suggestions from the public has been helpful. We are drafting the 
director position description, and plan to begin recruiting for this 
position very soon.

Hiring
    As noted earlier, the Dodd-Frank Act not only requires the 
Commission to complete a significant number of rulemakings, studies, 
and reports, it also expands the role of the SEC in the regulation of 
OTC derivatives, private fund advisers, credit rating agencies, and 
other areas of the financial industry. To enable us to carry out these 
new responsibilities, we will need additional resources, and in 
particular, additional staff.
    We have been working to develop estimates of the resources that 
will be needed to achieve the full implementation of Congress' 
regulatory reform mandate. While the dollar cost of full implementation 
will depend greatly on the effective date of new rules, the timing of 
hiring, and other factors, we currently estimate that the SEC will need 
to add approximately 800 new positions over time in order to carry out 
the new or expanded responsibilities given to the agency by the 
legislation.
    If Congress were to appropriate the funds to support this increase 
in the agency's workforce, then the SEC would need to be ready to act 
swiftly to recruit and hire hundreds of additional personnel. To 
accomplish this, the SEC is enhancing our human resources staff and 
streamlining our hiring process. Improvements include simplifying the 
application process and maintaining a searchable database of 
applicants, so that it is possible to interview for a vacancy as soon 
as it appears rather than having to go through the lengthy posting 
process each time. Being able to better tailor, target and speed 
recruiting will enhance the quality of the applicant pool and help the 
agency more efficiently acquire the necessary talent to perform 
effectively in an increasingly complex financial environment. The 
expanded streamlined hiring authority included in the Dodd-Frank Act 
will help these efforts.

Technology
    The SEC's Office of Information Technology is currently 
collaborating with the principal rule-writing divisions and offices to 
gather and develop the technology requirements that will be necessary 
to implement the legislation and the associated rulemaking. We 
currently anticipate technology investment will be required to 
implement a variety of changes to our responsibilities included in the 
Dodd-Frank Act, such as those relating to SRO rulemaking, regulation of 
security-based swap intermediaries, disclosure filing requirements, 
regulation of security-based swap execution facilities and data 
repositories, advisor registration, equipment to enable improved audits 
of market participants, end user equipment for additional staff 
expected to be hired, and changes to our filing and registration 
management and reporting systems.
    Our ``EDGAR'' team, which operates our disclosure system for public 
company filings, will assist in the deployment of changes to the asset-
backed securities disclosure system in December 2010, and changes to 
existing forms, items, and exhibits to improve disclosure. While many 
of the technology requirements remain under development at this stage, 
the Office of Information Technology, under the leadership of our new 
Chief Operating Officer, will remain closely engaged with our operating 
divisions and offices and work to provide responsive solutions to 
enable implementation of the legislation.

Conclusion
    The Dodd-Frank Act provides the SEC with important tools to better 
meet the challenges of today's financial marketplace. While 
implementation of the Act clearly will require a major effort, this 
effort is already well underway at the SEC. While we undoubtedly will 
encounter some bumps along the way, we are on track to meet the goals, 
mandates and deadlines specified in the Act and to do so in a 
transparent and inclusive manner. As we proceed with implementation, we 
look forward to continuing to work closely with Congress, our fellow 
regulators and members of the financial and investing public. Thank you 
for inviting me here today to share with you our progress on and plans 
for implementation. I look forward to answering your questions.

                                 ______
                                 
                   PREPARED STATEMENT OF GARY GENSLER
             Chairman, Commodity Futures Trading Commission
                           September 30, 2010

    Good morning Chairman Dodd, Ranking Member Shelby, and Members of 
the Committee. I thank you for inviting me to today's hearing on 
implementing the Dodd-Frank Wall Street Reform and Consumer Protection 
Act. I am honored to appear at today's hearing alongside fellow 
regulators with whom we are working so closely to implement the Dodd-
Frank Act. I also look forward to joining my fellow panelists as 
members of the new Financial Stability Oversight Council (FSOC). I am 
pleased to testify on behalf of the Commodity Futures Trading 
Commission (CFTC). I also thank my fellow Commissioners for their hard 
work and commitment on implementing the legislation.
    Before I move into the testimony, I want to thank Chairman Dodd for 
his leadership on the Banking Committee and in the Senate. On a 
personal note, I would like to thank Chairman Dodd for his support over 
the last 13 years. I first worked with Chairman Dodd in the late 1990s 
during my time in the Treasury Department. I again worked closely with 
Chairman Dodd on the Sarbanes-Oxley Act. He actually introduced the 
first bill in committee on that issue before Chairman Sarbanes did so. 
I am honored and pleased to have had this most recent chance to once 
again work with Chairman Dodd on what became the Dodd-Frank Wall Street 
Reform and Consumer Protection Act.

Implementing the Dodd-Frank Act
    The Dodd-Frank Act brings three critical reforms to the previously 
unregulated swaps marketplace. These reforms lower interconnectedness 
and risk in the financial system while promoting transparency. First, 
the Act requires swap dealers to come under comprehensive regulation. 
Second, the Act moves the bulk of the swaps marketplace onto 
transparent trading facilities--either exchanges or swap execution 
facilities (SEFs). Third, the Act requires clearing of standardized 
swaps by regulated clearinghouses to lower risk in the marketplace.
    The Dodd-Frank Act is very detailed, addressing all of the key 
policy issues regarding regulation of the swaps marketplace. To 
implement these regulations, the Act requires the CFTC and Securities 
and Exchange Commission (SEC), working with our fellow regulators, to 
write rules generally within 360 days. That means that we have 289 days 
left. At the CFTC, we have organized our effort around 30 teams who 
have been actively at work. We had our first meeting with the 30 team 
leads the day before the President signed the law.
    Two principles are guiding us throughout the rule-writing process. 
First is the statute itself. We intend to comply fully with the 
statute's provisions and Congressional intent to lower risk and bring 
transparency to these markets.
    Second, we are consulting heavily with both other regulators and 
the broader public. We are working very closely with the SEC, the 
Federal Reserve, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency and other prudential regulators. 
Within 24 hours of the President signing the Dodd-Frank Act, more than 
20 of our rule-writing team leads were meeting at the SEC with their 
counterparts. Our staff was having similar meetings the following week 
with staff from the Federal Reserve.
    Specifically, our rule-writing teams are working with the Federal 
Reserve in several critical areas: swap dealer regulation, 
clearinghouse regulation and swap data repositories, though we are 
consulting with them on a number of other areas as well. With the SEC, 
we are working on the entire range of rule writing, including those 
previously mentioned as well as trading requirements, real time 
reporting and key definitions. To the best of our ability, we will be 
aligning our public meeting schedule with the SEC. Tomorrow, the CFTC 
will hold a public meeting to consider rules relating to (1) an interim 
final rule relating to the time frame for reporting preenactment 
unexpired swaps to a swap data repository or to the Commission, (2) 
proposed rules regarding financial resources of clearing organizations 
and (3) proposed rules regarding governance of clearinghouses, 
designated contract markets (DCMs) and SEFs.
    Coordination with the SEC, the Federal Reserve and other regulators 
has been strong both at the staff level and at the Chairman's level. I 
have personally met with leaders at each of my fellow regulators 
testifying here this morning, starting the week the President signed 
the bill. In each circumstance, we have continued the active dialogue, 
including both exchanging written materials as well as having 
additional meetings.
    In addition to working with our American counterparts, we have 
reached out to and are actively consulting with international 
regulators to harmonize our approach to swaps oversight. I returned 
yesterday from Brussels where I met with senior European regulators. In 
particular, our early discussions have focused on clearing 
requirements, clearinghouses more generally and data repositories. Two 
weeks ago, the European Commission released their detailed proposal to 
bring regulation to the swaps marketplace. Based upon their release and 
the Dodd-Frank Act, I am confident that we will bring strong and 
consistent regulation to the American and European swaps markets. Each 
of our rule-writing teams will be referring to these new proposals in 
Europe as we seek consistency in our regulatory approaches.
    We also are soliciting broad public input into the rules. This 
began the day the President signed the Dodd-Frank Act when we listed 
the 30 rule-writing teams and set up mailboxes for the public to 
comment directly. We want to engage the public as broadly as possible 
even before publishing proposed rules.
    In some circumstances, we are organizing roundtables with the SEC 
to hear specifically on particular subjects. We have had three days of 
meetings to date, which have been very beneficial. So far we have heard 
from investors, market participants, end-users, academics, exchanges 
and clearinghouses on key topics including governance and conflicts of 
interest, real time reporting, swap data record keeping, and SEFs. 
Based on how helpful these have been, we intend to have additional 
roundtables in the next month or two.
    Additionally, many individuals have asked for meetings with either 
our staff or Commissioners to discuss swaps regulation. In the first 
seven weeks after the bill was signed, we had more than 141 such 
meetings. We are now posting on our Web site a list of all of the 
meetings CFTC staff or I have with outside organizations, as well as 
the participants, issues discussed and all materials given to us.
    We plan to actively publish proposed rules in the fall, using 
weekly public Commission meetings for this purpose. Our first such 
meeting will be tomorrow at 9:30 am. Public meetings will allow us to 
propose rules in the open. With each proposed rulemaking, we will 
solicit public comments for a period not less than 30 days. Since a 
number of the rules we are publishing have Paperwork Reduction Act 
requirements and thus must stay open for public comment for at least 60 
days, we have to publish our proposed rulemakings quickly. This is as 
it generally takes us four to 6 months to review all of the public 
comments on proposed rules and finalize those rules. Though as with any 
such plan, some things may be delayed, our current goal is to publish 
the vast majority of our proposed rules by the end of December.
    We already have published one final rulemaking regarding retail 
foreign exchange transactions. Further, with the SEC, we have published 
an advanced notice of proposed rulemaking seeking comments on the 
definitions of key terms in the Dodd-Frank Act.

Regulating the Dealers
    Now I will address just a few of the key areas where we will write 
rules regulating the swaps marketplace. The first is regulating the 
dealers. Six of our rule teams are focused specifically on this area. 
One team is working jointly with the SEC on defining key terms, such as 
``swap dealer'' and ``major swap participant.'' Another team is working 
on registration requirements for dealers. We also have teams working on 
business conduct standards, capital and margin requirements and rules 
for segregating customer funds.
    It is estimated that as many as 200 entities may register with the 
CFTC as swap dealers. This includes:

    Approximately 80 global and regional banks currently known 
        to offer swaps in the U.S. Of the International Swaps and 
        Derivatives Association's (ISDA) 830 members, 209 are ``Primary 
        Members.'' Under ISDA's bylaws, a firm is only eligible for 
        primary member status if it deals in derivatives for purposes 
        other than ``risk hedging or asset or liability management.'' 
        Though many of the dealers in emerging markets may not seek to 
        register in the U.S., it is likely that most, if not all, of 
        ISDA's global and international members would;

    Approximately 60 affiliates of existing swap dealers, based 
        upon the Dodd-Frank Act's Section 716 requirement that banks 
        push out their swaps desks to affiliates;

    Approximately 40 nonbank swap dealers currently offering 
        commodity and other swaps; and

    Approximately 20 potential new market makers that wish to 
        become swap dealers.

    I would emphasize, however, that at this point these numbers are 
only preliminary estimates. The final numbers will, of course, depend 
upon the decisions of market participants as well as the outcome of the 
rulemaking process.
    In addition to regulating dealers, we also are tasked with 
regulating major swap participants. The major swap participant category 
is comprised of entities that are not swap dealers but whose 
participation in the swaps market is substantial enough to 
significantly affect or present systemic risks to the economy or the 
financial system as a whole.

Transparent Trading Requirement
    In addition to regulating swap dealers, the Dodd-Frank Act brings 
transparency to the swaps marketplace by requiring standardized swaps 
to trade on exchanges or SEFs. A SEF is ``a trading system or platform 
in which multiple participants have the ability to execute or trade 
swaps by accepting bids and offers made by multiple participants.'' We 
have five teams focused on writing rules related to trading. It is 
anticipated that as many as 30 new entities will register as SEFs or 
DCMs. That is in addition to the 16 futures exchanges that we already 
regulate.
    Congress also mandated that if a swap both is clearable and it is 
``made available for trading'' on a SEF or an exchange, then there is a 
mandate that it be traded on such a facility. Congress also has been 
very specific that market participants and end-users will benefit from 
real time reporting and that such posttrade transparency must be 
achieved ``as soon as technologically practicable'' after a swap is 
executed. Further, the statute says that one of the goals of SEFs is 
``to promote pretrade transparency in the swaps market,'' though it 
appropriately authorizes the CFTC to write rules to facilitate block 
trades.

Centralized Clearing
    The Dodd-Frank Act requires that standardized derivatives be 
cleared through central clearinghouses. At the CFTC, we have six teams 
focused on rules related to clearing, including determining which 
contracts will be subject to the mandatory clearing requirement. Though 
we do not yet know the total number of contracts that will be submitted 
for clearing, and the Commission may be able to group many by class, 
the largest swaps clearinghouse currently clears nearly one million 
unique contracts. It is anticipated that the number of registered 
derivatives clearing organizations will increase from 14 to around 20 
as a result of the Dodd-Frank Act.
    Furthermore, for the first time, some derivatives clearinghouses 
may be designated systemically important by the FSOC. For those 
clearinghouses, there will be enhanced rules for financial resources, 
risk management and other prudential standards. In this regard, we are 
consulting very closely with the Federal Reserve and international 
regulators. We recognize the need for very robust risk management 
standards, particularly as more swaps are moved into central 
clearinghouses.

Data
    Moreover, the Dodd-Frank Act for the first time sets up a new 
registration category called swap data repositories (SDRs). The bill 
requires registrants--including swap dealers, major swap participants, 
SEFs and DCMs--to have robust record keeping and reporting, including 
an audit trail, for swaps, and to report each swap to an SDR or to the 
regulators.
    We anticipate rules in this area to require SDRs to perform their 
core function of collecting and maintaining swaps data and making it 
directly and electronically available to regulators. We also anticipate 
rules governing how data must be maintained by registrants and sent to 
the data repositories.

Position Limits
    In January, the CFTC proposed rules to restore position limits in 
the four major energy futures contracts. Position limits have long been 
relied upon in futures market regulation to address the effects of 
excessive speculation and position concentration. Fixed limits that had 
been in effect for energy contracts were removed in 2001. Under the 
Dodd-Frank Act, the CFTC now is required to publish rules setting 
aggregate position limits on exempt and agricultural commodities across 
markets, including futures, swaps that perform significant price 
discovery functions and linked contracts on foreign boards of trade 
that operate in the U.S. As a result, the CFTC has withdrawn its 
January proposed rule and will build off that proposal and comments 
that were received as we write a new rule that satisfies the Dodd-Frank 
Act's mandate.
    The Commission currently administers position limits on nine 
exchange-listed agricultural futures contracts. Under the Dodd-Frank 
Act, the CFTC is required to set position limits on more than 30 
commodities. In general, the Act requires that rules establishing 
position limits be completed within 180 days from the date of enactment 
for energy and metals and within 270 days for agricultural contracts.

Foreign Boards of Trade
    The Dodd-Frank Act empowers the CFTC to require that a foreign 
board of trade (FBOT) offering direct access to U.S. persons register 
with the Commission. This requirement replaces the agency's no-action 
regime, under which FBOTs were permitted to offer access to U.S. 
investors upon meeting certain conditions.

Conclusion
    The next year of rule writing will test the very talented staff of 
the CFTC. Our staff has significant expertise regulating the on-
exchange derivatives markets that will translate well into regulating 
the over-the-counter swaps markets. Still, we need significant new 
resources.
    The President's budget called for $261 million for the CFTC for 
fiscal year 2011, which is a substantial boost in funding. The House 
Appropriations Subcommittee with jurisdiction over the CFTC matched the 
President's request. The Senate Appropriations Subcommittee with 
jurisdiction over the CFTC boosted that amount to $286 million. Though 
we have the resources to write the rules required by Dodd-Frank, we 
will need more staff to implement and enforce them in the years to 
come.
    The CFTC faces challenges in the months ahead, but we are prepared 
and geared up to meet those challenges. We look forward to continuing 
our excellent collaboration with other regulators to implement the 
Dodd-Frank Act. Thank you, and I would be happy to take questions.

                                 ______
                                 
                    PREPARED STATEMENT OF JOHN WALSH
 Acting Comptroller of the Currency, Office of the Comptroller of the 
                                Currency
                           September 30, 2010

Statement Required by 12 U.S.C. 250: The views expressed herein are 
those of the Office of the Comptroller of the Currency and do not 
necessarily represent the views of the President.
    Chairman Dodd, Senator Shelby, and Members of the Committee, I 
appreciate the opportunity to describe the initiatives the Office of 
the Comptroller of the Currency (OCC) has undertaken to implement the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act). The Committee's letter of invitation asked the OCC to address 
several key topics: (1) the OCC's priorities in implementing the Dodd-
Frank Act and the progress we have made; (2) the OCC's plans for 
integrating the staff and functions of the Office of Thrift Supervision 
(OTS) into the OCC; (3) the OCC's plans for identifying employees for 
transfer to the Bureau of Consumer Financial Protection (CFPB); and (4) 
our views about how Basel III will further the objectives of the Dodd-
Frank Act. My testimony addresses each of these areas in turn. We also 
offer some additional thoughts for the Committee's consideration on a 
few aspects of the legislation that present particular implementation 
challenges.

Rulemaking and Policy Initiatives
    The Dodd-Frank Act directs the OCC to draft rules, some jointly 
with other agencies and others on a coordinated basis, on a broad range 
of topics, including: regulatory capital; permissible proprietary 
trading, hedge fund, and private equity fund investments (the so-called 
``Volcker rule''); derivatives margin requirements; executive 
compensation; and real estate appraisals, among others. The OCC will 
need to revise some regulations to address statutory changes. Moreover, 
our new role as primary supervisor for Federal savings associations 
will require us to review and republish rules issued by the OTS. For 
each of these rulemaking obligations, we have established an 
interdisciplinary team of agency experts dedicated to lead the OCC's 
efforts and to work with interagency teams, where appropriate, to 
develop the new rules.
    The legislation also requires other financial regulatory agencies 
to consult with primary supervisors as those other agencies draft 
studies or develop regulations or standards, since there may be 
implications for the safety and soundness of depository institutions. 
Accordingly, we have designated OCC experts to advise the other 
financial regulatory agencies about the potential impact on the 
institutions we supervise and their customers.
    Taken together, these responsibilities constitute an implementation 
challenge of unprecedented scale. A large number of staff professionals 
will be assigned to work on the financial regulatory reform provisions 
of the Dodd-Frank Act, and we have established a senior management 
oversight group within the OCC to direct and coordinate our effort.
    Among our efforts, the OCC is supporting the organization of the 
Financial Stability Oversight Council (FSOC), which is chaired by the 
Secretary of the Treasury and includes as members, among others, the 
heads of the Federal banking agencies, including the Comptroller of the 
Currency; the Director of the CFPB; the Chairs of the Securities and 
Exchange Commission (SEC) and Commodities Future Trading Commission 
(CFTC); and the Director of the Federal Housing Finance Agency (FHFA). 
The FSOC's mission is to identify risks to financial stability that 
could arise from the activities, material financial distress, or 
failure of large, interconnected financial companies; to recommend 
standards for implementation by the agencies in specified areas; to 
promote market discipline; and to respond to emerging threats to the 
stability of the U.S. financial system.
    In addition, a number of implementation projects are already 
underway. In August, we sought comment through an Advance Notice of 
Proposed Rulemaking (ANPR) on the implementation of section 939A of the 
Dodd-Frank Act. This section directs the Federal agencies to review 
regulations that require an assessment of the creditworthiness of a 
security or money market instrument, and remove any references or 
requirements involving credit ratings and substitute an alternative 
standard of creditworthiness. Apart from capital rules, the OCC's 
regulations use credit ratings in several different ways, most 
significantly in setting the criteria for determining which 
``investment securities'' national banks may acquire as permissible 
investments. Through the ANPR, the OCC sought comment on the 
implementation of section 939A with respect to these regulations and 
others governing securities offerings and international activities 
where credit ratings are referenced. The ANPR also set forth 
considerations underlying the reliance on credit ratings and requested 
comments on potential alternatives to the use of credit ratings.
    Separately, we also joined in an interagency ANPR to assess the 
impact of section 939A on the banking agencies' regulatory capital 
rules, which currently reference credit ratings in four general areas: 
(1) the assignment of risk weights to securitization exposures; (2) the 
assignment of risk weights to claims on, or guaranteed by, qualifying 
securities firms; (3) the assignment of certain regulatory capital add-
ons for trading assets held by banks with large trading portfolios; and 
(4) the determination of the eligibility of certain guarantors and 
collateral for purposes of the credit risk mitigation framework under 
the advanced approaches rules.
    One active interagency project involves standards for uncleared 
swaps. Sections 731 and 764 of the Dodd-Frank Act require the banking 
agencies, the Farm Credit Administration, and the FHFA to promulgate 
margin requirements for uncleared swap transactions by swap dealers and 
major swap participants subject to the agencies' jurisdiction. The 
agencies are engaged in discussions to establish the design of the 
margin requirements and margin levels, in light of the risk standards 
for such rules established by the Dodd-Frank Act.
    On another front, an interagency group consisting of the Federal 
banking agencies, the SEC, Housing and Urban Development (HUD), and the 
FHFA, has begun to discuss the design of several rulemakings mandated 
by section 941 risk-retention requirements. Section 941 generally 
mandates that the agencies publish rules requiring securitizers (and in 
some cases, originators of securitized assets) to retain at least 5 
percent of the credit risk of the loans they package and sell through 
securitizations. Lower risk retention levels may be allowed for 
specific loans, particularly mortgages, if they are underwritten 
according to prudential standards to be set by the agencies through the 
rulemaking process.
    The OCC has also begun work on the provisions in section 956 which 
require the Federal agencies jointly to prescribe regulations or 
guidelines requiring the disclosure of certain incentive-based 
compensation arrangements and prohibiting compensation arrangements 
that encourage inappropriate risk-taking by financial institutions.
    In addition, an interagency working group consisting of the FSOC's 
member agencies has begun providing input to the FSOC as it initiates 
its study of proprietary trading and hedge fund and private equity fund 
investments with a view to making recommendations to the banking 
agencies and the SEC when they promulgate regulations for the 
implementation of section 619.
    As we begin to implement the Dodd-Frank Act, we also have 
identified some notable implementation challenges that may be of 
interest to the Committee. These include the practical effects of 
prohibiting the use of credit ratings in regulations under section 
939A. Ambiguities in section 171, relating to baselines for existing 
and future leverage and risk-based capital requirements, also raise a 
number of issues that pose implementation challenges and, as in the 
case of section 939A, could pose significant burdens on smaller banking 
institutions. There also appears to be an inconsistency in the duties 
assigned to the banking agencies and the CFPB with regard to fair 
lending that creates confusion in responsibilities. These issues are 
more fully discussed in Attachment A to this testimony.

Transfers of Agency Functions
    The Dodd-Frank Act transfers from OTS to the OCC supervisory 
responsibilities for Federal savings associations, as well as 
rulemaking authority relating to all savings associations. Under the 
statute, all OTS employees will be transferred to either the OCC or the 
Federal Deposit Insurance Corporation (FDIC) no later than 90 days 
after the ``transfer date,'' which is 1 year after enactment unless 
extended for an additional 6 months by the Secretary of the Treasury. 
The allocation is to be based generally on the proportion of Federal 
versus State savings associations regulated by the OTS.
    The Dodd-Frank Act also establishes the CFPB as an independent 
bureau in the Federal Reserve System. Certain existing authorities of 
the banking agencies, HUD, and the FTC for consumer protection 
regulations are to be transferred to the CFPB, along with 
responsibility for overseeing compliance with a number of listed 
consumer protection standards applicable to depository institutions 
with assets of more than $10 billion. Employees from the banking 
agencies, HUD, and the FTC will be transferred to the CFPB as part of 
this process.
    Thus, the OCC is uniquely challenged with respect to transfers of 
functions under the Dodd-Frank Act because we are both absorbing 
significant new functions and a significant number of new staff as a 
result of the integration of the OTS into the OCC, while at the same 
time transferring functions and some associated personnel in connection 
with the organization of the CFPB.

Integration of Specified OTS Functions Into the OCC
    Although the legislation preserves the thrift charter and the Home 
Owners' Loan Act, the OTS is abolished 90 days after the transfer date. 
The OCC recognizes its important responsibilities under the Dodd-Frank 
Act to ensure the orderly and effective transfer of functions and 
personnel from the OTS to the OCC and to assure efficient and effective 
supervision and regulation of Federal thrifts, and we have already 
taken a number of steps to begin this process. To centralize efforts in 
this area, the OCC established a transition team and appointed a senior 
agency official to coordinate and supervise the implementation of all 
issues involving the integration of OTS functions and responsibilities. 
Transition team members have begun working with their counterparts at 
other agencies to identify and address mutual concerns and issues for 
resolution. While it is early in that process, and many details are yet 
to be determined, I can provide some details regarding our planning for 
the transfer of personnel and supervisory functions, as well as the 
transfer of funds, property, and systems.
    Transfer of Personnel and Supervisory Functions. The Dodd-Frank Act 
provides that the OCC will become the appropriate Federal banking 
agency for Federal savings associations, and the FDIC will assume that 
role for State savings associations. All OTS employees are to be 
transferred to the OCC or FDIC no later than 90 days after the transfer 
date. The Director of the OTS, the Comptroller of the Currency, and the 
Chairperson of the FDIC will jointly determine the number of OTS 
employees needed to perform the functions transferred and identify 
employees for transfer to the OCC or FDIC. While the final number of 
OTS employees who will transfer to the OCC has not yet been determined, 
the preponderance of OTS-supervised institutions are Federal savings 
associations that will be supervised by the OCC and, thus, under the 
personnel transfer provisions in the Dodd-Frank Act, a correspondingly 
large portion of OTS employees would be transferred to the OCC. We 
believe that the orderly transfer of these individuals from the OTS to 
the OCC is essential to the success of integrating the supervision of 
federally chartered savings associations into the OCC. We also 
recognize that these staff members have critical knowledge and insight 
into the unique mission and resulting supervisory challenges associated 
with the thrift industry. The OCC is working with the OTS to plan and 
ensure an orderly transfer of authority and responsibilities to ensure 
the effective supervision of both national banks and Federal thrifts.
    To ensure the success of this transition, we are guided by a basic 
principle that informs the legislation, that there will be no gaps in 
supervision as we expand our supervisory framework to include Federal 
thrifts. Our goal is a rigorous, consistent, and balanced supervisory 
approach for all of the institutions that we will supervise.
    The 1,300 nationally chartered community banks that we currently 
supervise use a variety of business models, including a significant 
number of institutions that look very similar to thrifts with a 
preponderance of long-term assets. We also supervise other types of 
specialized institutions, including credit card banks and trust banks. 
Because of this diversity of experience, our examiners understand the 
importance of evaluating the condition and future prospects of each 
institution based on its unique characteristics and performance, as 
well as its local market conditions.
    We also recognize the importance of communicating regularly with 
the industry throughout this process. Among other things, the OCC is 
developing an outreach program for thrift executives to provide 
information and perspective on the OCC's approach to supervision and 
regulation. This one-day program will be held at various locations 
throughout the country and will be cohosted by an OCC District Deputy 
Comptroller and an OTS Regional Director. During these sessions, our 
senior examiners will explain how we examine banks, including the 
development of individually tailored supervisory strategies based on 
the unique risks facing each institution. The program also will 
describe the functions of our district counsel and district licensing 
activities. We expect these events to take place in the first and 
second quarters of 2011.
    In addition to the thrift-focused programs, OCC bank supervision 
managers have begun participating in industry events that provide 
interaction with thrift executives in group settings as well as 
individual conversations to expand the industry's awareness of the OCC, 
its policies, procedures, and supervision philosophy. I also sent a 
personal letter to the chief executive officers of all Federal savings 
associations to begin the process of communication that will be so 
important to the transition.
    As part of our transition effort, our human resources specialists 
are also working closely with their OTS counterparts to review employee 
positions, duties, and responsibilities to ensure proper alignment of 
transferring OTS staff in the combined organization. Consistent with 
the legislation, this process will ensure that OTS employees are 
treated equitably with regard to status and tenure, and that pay and 
other benefits will be protected.
    We are undertaking a business line approach in these early stages. 
Each of our business units is coordinating with its counterparts at the 
OTS to review positions, responsibilities, and business processes to 
determine the best means of integrating staff and their functions into 
the OCC. We have found this interaction at a business line level 
promising in establishing relationships and identifying issues of 
mutual concern. To the extent practicable, transferred employees will 
be placed in OCC positions with functions and duties similar to those 
they had prior to their transfer. In some instances, we already have 
jointly identified opportunities to detail OTS staff to assist with our 
current responsibilities.
    Our general intent is to integrate transferred employees into the 
OCC's organizational structure and pay plan as soon as possible and to 
maintain existing OCC human resources policies. At the same time, we 
will work closely with our OTS counterparts to review and analyze 
personnel policies and practices and to identify and resolve any 
significant differences.
    The transition team also is reviewing and comparing employee 
benefits and any related contracts, including those under the Financial 
Institutions Retirement Fund (FIRF), which covers some OTS employees, 
and other supplemental retirement benefits. The OCC is reviewing the 
FIRF plan to determine what actions need to be taken to ensure that it 
is in a position to meet obligations to employees and retirees under 
that program. As reported in the OTS Annual Report for fiscal year 
2009, the estimated OTS FIRF pension shortfall as of July 1, 2009, was 
$80.7 million.
    One area that we have identified as critical to the combined 
success of the OCC and the OTS is the role of training, even at this 
early stage in the integration process. As a result, we have begun to 
review each agency's training and certification programs to ensure that 
existing and transferred employees have the training and skills 
necessary to supervise both national banks and Federal savings 
associations. This review will identify areas where OCC and OTS 
training programs overlap, as well as gaps that need to be addressed. 
While the legislation does not require additional certification for 
transferred OTS employees to continue supervising the types of 
institutions that they supervised prior to the transfer, additional 
training may be required before transferred employees can supervise 
national banks. As a first step in integrating our examination 
workforce, we are developing plans to enroll recent OTS hires in OCC 
national bank examiner training courses.
    Effective communication is key to managing organizational change as 
large as this and, as we work through these details over the next 10 
months, I recognize the importance of keeping employees fully informed. 
Our communications staff and bank supervision leadership team are 
working closely with OTS managers to keep employees informed throughout 
this transition, to demonstrate that the OCC recognizes the importance 
and value of OTS employee experience, to communicate expectations 
clearly, and to ensure that OTS employees are aware of the value 
provided by the OCC's professional work environment and comprehensive 
benefits and compensation package. While we are still working on 
answers to many employee questions, establishing regular communication 
helps to ensure that employees remain focused on their mission while 
having access to information they need to make informed decisions about 
their careers.
    As OTS employees look toward this transition, I am confident they 
will find the OCC a supportive and rewarding place to continue their 
careers. We are proud that responses from our own employees documented 
by the Office of Personnel Management's Employee Viewpoint Survey 
placed the OCC in the top five places to work among more than 220 
Federal agency subcomponents. As our staff expands to include former 
OTS employees, we will continue our commitment to providing a 
competitive, comprehensive package of compensation and benefits that 
meets our employees' needs and allows us to retain and attract the 
talent and experience necessary to perform our important and expanded 
mission.
    Transfer of Funds, Property, and Systems. The OCC's Chief Financial 
Officer is working closely with his counterparts to review the 
financial position, statements, and existing obligations of the OTS to 
ensure that the OCC will have the financial resources necessary to 
support the supervision of the Federal savings associations and meet 
the obligations the OCC must assume in the transfer, particularly 
relating to the unfunded OTS liabilities of the FIRF noted previously. 
This review includes determining any changes that may be needed to the 
assessment structure to provide for combined supervision in the future. 
As this review progresses, the OCC is committed to working closely with 
the OTS and the FDIC to keep supervised financial institutions fully 
informed.
    Also, as we review the financial considerations associated with 
integrating the OTS into the OCC, we are working closely with the OTS 
to review the status of leased office space supporting the mission of 
thrift supervision, including the leasing decisions required over the 
next 2 years. This review includes an assessment of space needs to 
support thrift supervision staff throughout the country, as well as the 
continuing space requirements for more than 3,000 current OCC 
employees.
    Another important issue relating to the transfer of OTS functions 
to the OCC involves the transfer and integration of information 
technology systems and assets. The OCC's Chief Information Officer is 
working closely with his OTS counterpart to develop a comprehensive 
inventory of assets and systems, to compare OCC and OTS systems, and to 
determine the most effective method of integrating these assets and 
systems. In developing this transition plan, the OCC is sensitive to 
the impact that systems change can have on the employees, as well as 
the industry, and will take care to minimize any potential disruption.
    While today's testimony provides a high-level view of the processes 
the OCC has begun to ensure the effective transfer of staff and 
functions from the OTS to the OCC, the OCC also is working with the 
OTS, FDIC, and Federal Reserve Board to develop the report to Congress 
that is due in January 2011. This report will provide additional 
details of the initiatives taken to implement the Dodd-Frank Act.

Transfers of Specified Functions to the CFPB
    The Dodd-Frank Act transfers to the CFPB authorities of specified 
agencies to issue rules, orders, and guidelines under certain Federal 
consumer financial laws, plus the authority of the Federal banking 
agencies to supervise and examine insured depository institutions of 
over $10 billion in asset size for compliance with enumerated Federal 
consumer financial laws.
    In addition, the legislation provides for the transfer of personnel 
to the CFPB for two purposes. First, each transferor agency, including 
the OCC, must jointly determine with the CFPB the number of employees 
necessary to support the rulemaking and supervision examination 
functions transferred to the CFPB. Second, the CFPB and each of the 
agencies must jointly determine the number of employees necessary to 
perform certain additional functions that are authorized to the CFPB, 
but that also continue to be performed by the agencies. These functions 
include, for example, research, financial literacy, and responses to 
consumer complaints.
    We are working with the Treasury staff that are organizing the CFPB 
until a Director is appointed to set up a process to identify personnel 
that could be transferred. This involves identifying those OCC 
employees who have both the skills needed by the CFPB and are 
interested in transferring to the CFPB. To facilitate this, we have 
solicited expressions of interest from employees who may be interested 
in moving to the CFPB.
    To further the understanding of our current operations, we also 
have provided extensive materials to Treasury staff, including 
organizational charts describing our consumer protection functions, 
details about the national banks with more than $10 billion in assets 
that the CFPB will assume responsibility to examine, position 
descriptions, and FTE requirements for supervision. In addition, we 
have provided extensive information about the complaint processing 
function performed by the OCC's Customer Assistance Group, including 
key operating statistics. As the CFPB's organizational activities 
accelerate, we are prepared to work with appropriate Treasury staff 
that is working on the CFPB start-up to follow-through on all these 
areas.

Relationship Between the Dodd-Frank Act and Basel III
    The recent initiatives of the Basel Committee on Banking 
Supervision (Basel Committee), including establishing additional 
prudential standards for large, internationally active banks and 
setting contingent capital requirements, are focused on many of the 
same issues and concerns that the Dodd-Frank Act sought to address.
    In response to the financial crisis, the Basel Committee initiated 
a comprehensive reform package designed to strengthen global capital 
and liquidity requirements and promote a more resilient banking sector. 
These reforms, often referred to as ``Basel III,'' seek to improve the 
ability of banks to absorb the shocks of economic stress, thereby 
strengthening the financial system and reducing risks to the real 
economy. As described in more detail below, the OCC believes that 
implementation of the Basel III rules by the Federal banking agencies 
will serve to advance the objectives of the Dodd-Frank Act, and certain 
other Basel-initiated measures may also satisfy particular requirements 
of Dodd-Frank.

Current Basel III Proposal
    The Basel Committee published two consultative papers in December 
2009, seeking comment on a series of substantive changes to the 
standards governing internationally active banks. These changes 
involved the tightening of the definition of what counts as regulatory 
capital by placing greater reliance on higher quality capital 
instruments, expanding the types of risk captured within the capital 
framework, establishing more conservative minimum capital ratio and 
buffer requirements, providing a more balanced consideration of 
macroprudential and systemic risks in bank supervision practices and 
capital rules, and establishing for the first time an international 
leverage ratio requirement and global minimum liquidity standards. As a 
complement to the consultation process, the Basel Committee also 
initiated a quantitative impact study to better assess the impact of 
these proposals on individual banks.
    On July 26, 2010, the Group of Governors and Heads of Supervision 
(GHOS), the oversight body of the Basel Committee, reached broad 
agreement on the overall design of the capital and liquidity reform 
package. On September 12, 2010, the GHOS and the Basel Committee 
announced an agreement on the remaining major elements of the Basel III 
revisions--the calibration of the new, higher capital ratios that banks 
will be expected to maintain and phase-in arrangements of the revised 
framework. A more detailed description of the enhancements introduced 
by the Basel III rules is provided in Attachment B to this document.
    The establishment of higher minimum ratios significantly 
strengthens existing capital requirements by requiring more capital per 
dollar of measured exposure. This change alone will materially enhance 
the resiliency of the banking sector and broader financial system to 
economic shocks. The September GHOS agreement also sets forth 
harmonized implementation and transition arrangements for national 
authorities, with implementation of the new requirements beginning 
January 1, 2013, with all aspects of the revisions fully phased-in by 
2019. This transition period is intended to give institutions the 
opportunity to implement the new prudential standards over time, and 
thus alleviate the potential for associated short-term pressures on the 
cost and availability of credit to households and businesses.

The Dodd-Frank Act and Basel III
    The provisions of the Dodd-Frank Act relating to capital and 
liquidity share the broad objectives and address many of the same 
issues as the Basel III enhancements noted above. Since the Basel III 
enhancements can take effect in the U.S. only through formal rulemaking 
by the banking agencies, the steps the OCC and other agencies are 
taking to implement Dodd-Frank may present an opportunity to integrate 
the Basel III agreement with the heightened standards required by Dodd-
Frank in various areas.
    Enhancing the Level, Quality, and Stringency of Capital 
Requirements. Basel III and the Dodd-Frank Act both seek to establish 
conservative, stringent capital standards, especially for large 
financial institutions. In addition, Basel III and the Dodd-Frank Act 
enhance the quality and consistency of regulatory capital, limiting the 
ability of trust-preferred securities and other similar instruments to 
qualify as Tier 1 capital. More generally, Basel III raises the level, 
quality, consistency, and transparency of capital instruments. 
Significantly, the Basel Committee has focused considerable attention 
on common equity, which is superior to other capital instruments in its 
ability to absorb losses, and articulated a more conservative basis for 
what qualifies as regulatory capital. Basel III also revises regulatory 
requirements to ensure that all material risks confronting financial 
companies--especially the risks held in trading portfolios and the 
risks posed by complex structured finance transactions, including 
certain securitization positions--are appropriately reflected in 
regulatory capital requirements. Finally, Basel III establishes 
materially higher minimum ratio requirements for internationally active 
banks.
    Macroprudential and Systemic Risk Considerations. Both Basel III 
and the Dodd-Frank Act focus increased attention on macroprudential and 
systemic risk considerations in bank supervision practices and capital 
rules, including efforts to address excessive interconnectedness of 
financial sector exposures and the establishment of improved incentives 
for the use of central clearing houses for OTC derivatives. The Dodd-
Frank Act also establishes more formal mechanisms and requirements to 
identify risks to the financial stability of the U.S. through the 
establishment of the FSOC and compels action to prevent or mitigate 
such risks, especially as they relate to large, interconnected 
financial institutions.
    Mitigating Procyclicality of Regulatory Requirements. Both Basel 
III and the Dodd-Frank Act focus on cyclicality concerns and the 
potential benefits of contingent capital instruments. Basel III seeks 
to mitigate procyclicality in the regulatory capital regime through the 
development of countercyclical buffers and the study of the potential 
uses and design of contingent capital instruments. Similarly, the Dodd-
Frank Act requires the Federal banking agencies to make capital 
standards countercyclical and provides the agencies discretion to 
require large interconnected financial institutions to maintain a 
minimum amount of contingent capital that is convertible to equity in 
times of financial stress.
    Leverage Ratio Requirements. Basel III and the Dodd-Frank Act 
advance similar objectives in seeking to limit excessive leverage in 
the banking system. Basel III establishes for the first time an 
international leverage ratio requirement that seeks to discourage 
excessive leverage in the banking system. The U.S. currently limits 
leverage based only on a bank's on-balance sheet assets. However, the 
Basel III leverage ratio also accounts for certain off-balance sheet 
exposures that could contribute to the build-up of leverage. Along the 
same lines, the Dodd-Frank Act mandates that large, interconnected 
financial institutions be subject to more stringent prudential 
standards and requirements, including standards relating to leverage 
limits.
    Liquidity Requirements. Both the Dodd-Frank Act and Basel III call 
for the establishment of minimum liquidity standards to promote bank 
resilience to stressed funding conditions, such as those experienced 
during the recent financial crisis. In this regard, Basel III addresses 
both short-term resilience and long-term structural liquidity 
mismatches. Basel standards are consistent with the Dodd-Frank Act, 
which mandates that large, interconnected financial institutions be 
subject to more stringent prudential standards and requirements 
relating to liquidity.

Next Steps
    While the key elements of the Basel III framework have been set 
forth, much work will be needed to implement those enhancements plus 
the related elements of the Dodd-Frank Act. For example, over the 
remaining months of 2010, the international agreements need to be more 
fully articulated as a concrete set of standards. This will be followed 
in the U.S. by a formal rulemaking process that will take into account, 
through public notice and comment, the views of all interested parties. 
In addition, there are also many details in terms of the interaction 
between the Dodd-Frank Act and Basel III provisions that need to be 
sorted out.
    The OCC fully supports the Basel III reforms to capital and 
liquidity standards. The agreements represent a significant step 
forward in reducing the likelihood and severity of financial crises, 
and lay the foundation for a more stable banking system that is both 
less prone to excessive risk-taking and better able to absorb losses. 
We think the framework strikes an appropriate balance between 
introducing more stringent requirements for banks, while allowing the 
banking system to continue to perform its essential function of 
providing credit to creditworthy households and businesses. 
Furthermore, the extended transition period minimizes any short-term 
disruptions in financial services during a period of fragile economic 
conditions.

Conclusion
    The OCC appreciates the opportunity to testify on the initiatives 
we have taken to date to implement the provisions of the Dodd-Frank 
Act. We also would be pleased to provide additional information as the 
Committee continues to review Dodd-Frank Act implementation.





















        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                       FROM NEAL S. WOLIN

Q.1. Secretary Wolin, does the Obama administration believe 
that ``too-big-to-fail'' is dead?

A.1. Through the creation of an orderly liquidation authority, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
(DFA) ends ``too-big-to-fail.'' Under the DFA, the Federal 
Deposit Insurance Corporation has the authority to wind down 
any firm whose failure would pose substantial risks to our 
financial system. Under this liquidation authority, failing 
firms will be placed into a Government-run receivership, 
holders of common stock and other providers of regulatory 
capital to the firm will be forced to absorb any losses, and 
culpable management of the firm will be terminated.

Q.2. Section 155 of Dodd-Frank requires that during the 2-year 
period following enactment the Federal Reserve Board provide to 
the Office of Financial Research ``an amount sufficient to 
cover the expenses of the Office.''
    Secretary Wolin, what has Treasury determined to be the 
amount necessary to cover expenses of the Office of Financial 
Research for the remainder of the year?

A.2. The Office of Financial Research (OFR) submitted an 
initial funding request of $2.1 million to the Federal Reserve 
Board. These funds are being used for planning and initial 
implementation of Congressional mandates for the OFR. Estimated 
expenses for all of FY2011 and FY2012 will be reflected in the 
President's Budget for FY2012. We will provide details 
regarding those estimates once the Budget is published.

Q.3. Chairman Bernanke and Secretary Wolin, the Fed and 
Treasury provided extraordinary Government support when it 
bailed out AIG during the recent crisis. The spirit of part of 
Title II of Dodd-Frank is to promote transparency of Fed 
emergency actions. In that same spirit, I wonder if you can 
provide some information about taxpayer investments in AIG.
    First, how much taxpayer-funded assistance did the 
Government provide to AIG? Second, to date, and given current 
market prices of AIG financial instruments--not projections of 
future values--how much have U.S. taxpayers lost because of 
that bailout?

A.3. Aggregate peak Federal Reserve Bank of New York and 
Treasury commitments to AIG totaled $180 billion. The aggregate 
amount of outstanding Government support to AIG is 
approximately $93 billion. When that support is valued using 
current market prices, the taxpayer has not incurred a loss. 
Instead, the current market value of the $93 billion of 
taxpayer investment (in the form of loans to and investments in 
AIG and its related entities)--based on AIG's closing stock 
price on January 26--is approximately $120 billion. This 
represents approximately $27 billion of profit to the taxpayer.

Q.4. Secretary Wolin, the new ``Assistant to the President and 
Special Advisor to the Secretary of the Treasury on the 
Consumer Financial Protection Bureau,'' Elizabeth Warren, 
writes the following in Chapter 6 of her populist 2003 book 
titled The Two Income Trap: ``The only way to stop predatory 
lending once and for all is to go directly to the heart of the 
loan--the interest rate. Limiting the amount of interest that 
creditors can charge avoids the hide-and-seek game over what is 
and what is not `predatory,' offering instead a simple, 
effective means of regulation.''
    Secretary Wolin, given Ms. Warren's calls for usury 
ceilings on allowable interest rates and other forms of price 
controls in credit markets, and given her Special Advisor 
status, does Treasury plan to have the CFPB set allowable 
prices for credit and nationwide ceilings on interest rates?

A.4. The Treasury does not plan to have the Bureau of Consumer 
Financial Protection (``Consumer Financial Protection Bureau'' 
or ``CFPB'') set allowable prices for credit and nationwide 
ceilings on interest rates.

Q.5. Secretary Wolin, you testified that Treasury and those in 
charge of ``standing up'' the CFPB will ``soon'' have a 
transparency policy available. When do you expect to have a 
transparency policy available?
    When will Treasury make available, publicly and to this 
Committee, the names, affiliations and agendas of individuals 
who meet with Treasury officials, including Assistant to the 
President and Special Advisor to the Secretary of the Treasury 
on the Consumer Financial Protection Bureau Ms. Elizabeth 
Warren?

A.5. The Department of the Treasury strongly supports increased 
transparency in Government, and the Secretary has committed to 
implementing the DFA in an open and transparent manner. On 
November 1, 2010, Treasury implemented a transparency policy 
that applies to in-person meetings in which Treasury employees 
who are Deputy Assistant Secretaries or Treasury officials of 
equal or higher rank participate. Meetings involving Special 
Advisor to the Secretary Elizabeth Warren are subject to the 
transparency requirements promulgated under this policy.
    Treasury's transparency policy requires meetings between 
these Treasury officials and private sector individuals or 
entities and nongovernmental organizations that are set up to 
discuss policy implementation of the Dodd-Frank Act be posted 
to the Treasury Department's Web site. Disclosure consists of: 
(1) the date of the meeting; (2) the names and titles of all 
covered Treasury participants; (3) the names and affiliations 
of all non-Treasury participants, and; (4) a list of the 
primary topics of conversation related to Dodd-Frank 
implementation.
    Meeting disclosures will be posted to the Treasury Web site 
by the last day of each month, covering meetings that took 
place during the previous month. For example, the first posting 
occurred on December 30, 2010, and covered meetings that took 
place in November 2010.
    In addition, on a monthly basis, Professor Warren posts her 
full calendar--with minimal redactions--on the Treasury Web 
site.

Q.6. Mr. Wolin, while the Dodd-Frank Act prohibits Treasury 
from creating any new programs under the Troubled Asset Relief 
Program (TARP), it does not affect the TARP's October 3, 2010, 
expiration as defined in the Emergency Economic Stabilization 
Act (EESA). While some say that Dodd-Frank ends TARP, it is 
important to remain clear that TARP bailout money will continue 
to flow even with provisions of the Dodd-Frank Act.
    According to the Congressional Oversight Panel's September 
16, 2010, report titled September Oversight Report: Assessing 
the TARP on the Eve of Its Expiration, with respect to the 
Treasury Secretary's authority under TARP:

        EESA, which was signed into law on October 3, 2008, is 
        clear that the Secretary cannot extend his authority 
        under the TARP beyond October 3, 2010. Section 120(b) 
        of EESA reads: `The Secretary, upon certification to 
        Congress, may extend the authority under this Act to 
        expire not later than 2 years from the date of 
        enactment of this Act.' The phrase `the authority under 
        this Act' would seem to capture all authority provided 
        under EESA; however, the statute allows for one 
        exception. Section 106(e) of EESA stipulates: `The 
        authority of the Secretary to hold any troubled assets 
        purchased under this Act before the termination date in 
        Section 120, or to purchase or fund the purchase of a 
        troubled asset under a commitment entered into before 
        the termination in Section 120, is not subject to the 
        provisions of Section 120.'

        Section 106(e) provides Treasury with two specific 
        authorities. First, it allows Treasury to hold its 
        investments made through the TARP after October 3, 
        2010. Second, it allows Treasury to continue to use the 
        TARP to fund TARP commitments, provided Treasury had 
        made those commitments prior to October 3. Treasury has 
        committed TARP funding to a variety of programs that it 
        has not yet fully funded to their allocated amounts. 
        Many of these programs will continue to receive TARP 
        funding well beyond October 3, 2010. HAMP represents 
        the largest commitment of TARP dollars yet to be 
        expended. Treasury considers its HAMP contracts to be 
        `financial instruments' or `commitments to purchase 
        troubled assets' and, therefore, captured under Section 
        106(e). According to Treasury, the modification 
        payments `made to servicers are the purchase prices for 
        the financial instruments' or troubled assets. As a 
        result, Treasury plans to continue to fund HAMP and 
        make modification payments to mortgage servicers in the 
        years ahead.

        Treasury has noted to the Panel that it will lose some 
        of its flexibility to alter operational aspects of HAMP 
        after October 3. First, it will not be able to enlist 
        new servicers to HAMP. Treasury has explained to the 
        Panel that in its view the authority under Section 
        106(e) `to purchase or fund the purchase of a troubled 
        asset under a commitment entered into before the 
        termination' of TARP requires Treasury to have entered 
        into a HAMP contract with a mortgage servicer on or 
        prior to October 3, 2010. Treasury has also explained 
        to the Panel that it will lose its ability to use 
        committed dollars under HAMP if a servicer were to drop 
        from the program after TARP's expiration. To provide it 
        with more flexibility and maximize HAMP committed 
        dollars, Treasury has informed the Panel that it is 
        exploring changes to the way in which purchase prices 
        are calculated for HAMP contracts. Currently, the 
        purchase price in a HAMP contract is a set dollar 
        amount under Treasury's proposed plan, purchase prices 
        will instead be based on a formula. This change will 
        enable Treasury to preserve RAMP funding after TARP's 
        expiration date. According to Treasury, under the new 
        arrangement, if a servicer were to discontinue 
        participation in HAMP, the funds that had been 
        committed to that servicer would not lapse, or become 
        unavailable for further use, but instead would be 
        spread among the remaining servicers. The change would 
        be made by issuance of a supplemental directive. 
        (Footnotes in original text omitted.)

    Mr. Wolin, would you elaborate on any changes in Treasury's 
TARP programs designed to maintain TARP money availability for 
future uses, to ensure that money will be available so that 
programs can continue to receive TARP funding ``well beyond 
October. 3, 2010,'' or so that Treasury can preserve TARP 
funding after TARP's expiration date?

A.6. Treasury has implemented its TARP programs-including the 
housing programs described above-pursuant to its statutory 
authority under the Emergency Economic Stabilization Act 
(EESA). As you note, EESA requires that purchases or 
commitments to purchase troubled assets be entered into by 
October 3, 2010.
    In regard to the Home Affordable Modification Program 
(RAMP), Treasury entered into contracts with various mortgage 
servicers prior to October 3, 2010. Each contract originally 
specified a maximum purchase price by Treasury--a fixed dollar 
amount that represented the maximum amount of TARP funding 
available to each servicer under the program. Treasury 
periodically adjusted the maximum purchase prices based on its 
analysis of the respective servicers' volume of eligible loans 
and their performance under the program.
    On October 1, 2010, Treasury issued revised guidance 
regarding each servicer's maximum purchase price. According to 
the guidance, each servicer's maximum purchase price will be 
adjusted in the future--beginning on January 1, 2011, and 
updated at the beginning of each calendar quarter, or at other 
intervals chosen by Treasury--pursuant to a preestablished, set 
formula. It is important to note that the revised guidance did 
not change the total funding that already had been committed 
under RAMP, or the participants in the program. Instead, it 
merely provided a mechanism to shift resources among servicers 
based on their capacity and implementation of the program. In 
other words, it ensured that taxpayer resources are being 
allocated in an effective and efficient manner.

Q.7. The Financial Stability Oversight Council is an important 
feature of Dodd-Frank. During the conference, my amendment was 
adopted to clarify the role of the Council and the Federal 
Reserve. My amendment gave the Council responsibility for 
financial stability regulation. Up to that point, the 
legislation had colocated this responsibility at the Fed and 
the Council. The Congressional intent is clear that you, as 
members of the Council, are responsible for all policy matters 
related to financial stability. After the Council acts, 
implementation of your policy determinations will fall to the 
individual Federal financial regulators, including, of course, 
the Fed.
    With this in mind, I would like each of you to comment on 
your preparations to serve on the Council: Have you directed 
your staff to examine and study all of the issues that will 
come before you? Are you prepared to participate on the 
Council, not as a rubber stamp for the Chairman of the Council, 
but as a fully informed individual participant?

A.7. As Chair of the Financial Stability Oversight Council 
(FSOC), Treasury is fully prepared to participate, together 
with the other members of the Council, in all aspects of the 
FSOC's work and is committed to ensuring that the FSOC 
accomplishes its objectives.
    The duties of the FSOC commenced upon enactment and the 
work of implementation started immediately. Member agencies 
have been full participants in the FSOC's work addressing 
matters related to financial stability.
    The FSOC has already taken important steps to fulfill its 
duties in a rigorous, transparent manner. At its first three 
meetings, the FSOC released requests for public comment 
regarding the criteria for designations of nonbank financial 
firms and financial market utilities for supervision by the 
Federal Reserve. In addition, the FSOC released an integrated 
implementation roadmap reflecting the priorities and statutory 
requirements of the FSOC and its member agencies over the first 
18 months of implementation of the Dodd-Frank Act.
    In its most recent meeting, the FSOC released a study on 
effective implementation of the Volcker rule (Section 619 of 
the DFA) and the concentration limit on growth by acquisition 
(Section 622 of the DFA). The FSOC also released a notice of 
proposed rulemaking on the process and criteria to designate 
nonbank financial firms for consolidated supervision. We intend 
to build upon this collaborative approach for all matters that 
come before the FSOC.

Q.8. Secretary Geithner has argued that there is a strong case 
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published 
a paper that proposes Government guarantees of a wide range of 
asset backed securities, including those backed by mortgages, 
credit cards, autos, student loans, commercial real estate, and 
covered bonds. While some may believe that the Government will 
charge fair prices for Government guarantees, the history of 
Government run insurance programs suggests that things will not 
go well.
    Does anyone on the panel support extending or increasing 
Government insurance against losses on asset backed securities 
which, it seems to me, socializes risk, puts taxpayers on the 
hook for losses, and protects Wall Street against losses?

A.8. The Administration is committed to carefully considering a 
wide range of reform alternatives. Treasury is performing 
thorough analysis of these alternatives and consulting with a 
wide array of stakeholders in order to determine the potential 
consequences of various reform proposals.
    It is important to emphasize that the current level of 
Government involvement in the market is neither sustainable nor 
desirable. In formulating its plan for reform, the 
Administration is committed to crowding in private capital as 
soon as is practicable and places a high priority on ensuring 
significant private sector involvement in the future structure 
of mortgage finance. Should any form of Government guarantee 
survive the rigorous review of alternatives by Congress, it 
would have to be accurately priced to reflect the risk.

Q.9. Please provide the Committee with an implementation 
schedule that includes:
    (a) a list of the rules and studies that your agency is 
responsible for promulgating or conducting under Dodd-Frank and 
the date by which you intend to complete each rule or study; 
and
    (b) a list of the reorganizational tasks your agency will 
undertake to fulfill the mandates of Dodd-Frank and the date by 
which you intend to complete each task.

A.9. Please see attached timelines.















        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM NEAL S. WOLIN

Q.1. Over the last 15 years, the 6 biggest banks grew from 
having assets equal to 17 percent of GDP to 63 percent of GDP. 
The four largest banks control about 48 percent of the total 
assets in the Nation's banking system. And the 5 largest dealer 
banks control 80 percent of the derivatives market and account 
for 96 percent of the exposure to credit derivatives.
    Part of the Volcker Rule, section 622 of the Dodd-Frank 
Act, requires the Financial Stability Oversight Council (FSOC), 
to study and make recommendations concerning the effects of 
financial sector concentration on financial stability, moral 
hazard, efficiency, and competitiveness in the financial 
system. Subject to these recommendations, no company will be 
permitted to hold more than 10 percent of the liabilities held 
by all financial companies, with some significant exceptions.
    What are effects does concentration in the financial 
industry have on financial stability, moral hazard, efficiency, 
and competitiveness?

A.1. The FSOC believes that the concentration limit that is 
contained in Section 622 of the DFA will have a positive impact 
on U.S. financial stability. Specifically, the FSOC believes 
that the concentration limit will reduce the risks to U.S. 
financial stability created by increased concentration arising 
from mergers, consolidations or acquisitions involving the 
largest U.S. financial companies. Restrictions on future growth 
by acquisition of the largest financial companies ultimately 
will prevent acquisitions that could make these firms harder 
for their officers and directors to manage, for the financial 
markets to understand and discipline, and for regulators to 
supervise. The concentration limit, as structured, could also 
have the beneficial effect of causing the largest financial 
companies to either shed risk or raise capital to reduce their 
liabilities so as to permit additional acquisitions under the 
concentration limit. Such actions, other things equal, would 
tend to reduce the chance that the firm would fail.
    Although the FSOC expects the impact of the concentration 
limit on moral hazard, competition, and the availability of 
credit in the U.S. financial system to be generally neutral 
over the short- to medium-term, over the long run the FSOC 
expects the concentration limit to enhance the competitiveness 
of U.S. financial markets by preventing the increased dominance 
of those markets by a very small number of firms.

Q.2. Given that the six biggest banks alone have about $7.4 
trillion in liabilities, almost 53 percent of GDP, do you think 
this provision will meaningfully restrict the size of financial 
institutions?

A.2. The concentration limit is one of several regulatory 
tools, including the tougher prudential standards for the 
largest, most interconnected financial institutions and the new 
orderly liquidation authority, designed to work in a 
complementary fashion to restrain the risks posed to financial 
stability by the largest, most interconnected firms.

Q.3. The Basel Committee on Banking Supervision set the so-
called ``Basel III'' minimum capital requirements for banks at 
8 percent, with an additional 2.5 percent buffer. But a recent 
study by the Bank for International Settlements (BIS) suggests 
that the optimal capital ratio would actually be about 13 
percent. The Financial Stability Oversight Council (FSOC), of 
which your organizations are a member, will recommend capital 
requirements for systemically important financial companies.
    Do you favor increasing capital for systemically important 
financial companies above the 10.5 percent Basel ITI ratio, and 
closer to the 13 percent number?

A.3. A subsequent amendment to Basel II by the Basel Committee 
(effective at the beginning of 2012) will increase capital 
requirements on risky securitizations and bank trading book 
activities that affect the largest banks, thereby reducing the 
perverse incentives for these banks to engage in such 
activities. The Basel Committee estimates these changes will 
increase the capital requirements for these activities by a 
factor of three to four times.
    Basel III substantially increases the quantity of common 
equity required to absorb losses, while also increasing the 
deductions from the amount of common equity for risky 
activities. These changes will increase the common equity 
requirement by more than three times, before even considering 
more stringent capital deductions that will mostly affect the 
largest banks. Capital requirements for counterparty credit 
risk, which particularly affects the largest banks, are also 
being increased. Moreover, Basel III introduces, for the first 
time, a global leverage ratio standard and a global liquidity 
ratio standard. The Basel III requirements are rigorous and are 
designed to ensure that major banks hold enough capital to 
withstand losses as large as what we saw in the depths of this 
recession and still have the ability to operate without turning 
to the taxpayer for extraordinary help. We are confident this 
agreement will make our financial system more stable and more 
resilient.
    The Basel Committee has stated that it is ``conducting 
further work on systemic banks and contingent capital in close 
coordination with the FSB.'' As our supervisors and regulators 
work to meet the requirements of the Dodd-Frank Act, it is 
important to align international financial rules so as to 
ensure  level playing field.

Q.4. Would you be comfortable establishing progressive capital 
requirements that increase as institutions grow larger?

A.4. We fully endorse the Dodd-Frank Act which requires that 
the largest firms face higher prudential standards, including 
higher capital requirements. These firms should be forced to 
internalize the cost of the risks they impose on the financial 
system, and to strengthen their ability to withstand shocks and 
downturns.
    Basel III effectively will increase capital requirements 
for the largest banks by increasing the quantity and quality of 
capital that banks must hold, as well as the capital 
requirements for securitization, trading book activities, and 
counterparty credit risk. These new standards will better align 
regulatory capital requirements with the risks to which banks 
are exposed.
    The Basel Committee has stated that it is ``conducting 
further work on systemic banks and contingent capital in close 
coordination with the FSB.'' As our supervisors and regulators 
work to meet the requirements of the Dodd-Frank Act, it is 
important to align international financial rules so as to 
ensure a level playing field.

Q.5. Wall Street often argues that higher capital means higher 
costs for borrowers, and DIS has estimated that for each 1 
percent of increased capital, banks will have to raise rates by 
15 basis points (0.15 percent). Do you believe that banks could 
adapt to new capital requirements in ways that do not pass 
costs on to customers and borrowers, for example, by cutting 
outsized salaries and bonuses?

A.5. We are confident that the increased capital standards will 
make the system safer and provide an economic benefit in the 
long run. Basel III gives banks a meaningful transition period 
to meet the new standards. The new capital standards will not 
become effective until the beginning of 2013, and banks will 
not have to meet the full minimum common equity capital 
requirement until the beginning of 2015. The definition of 
capital will become progressively more stringent between 2013 
and 2018. U.S. banks moved quickly to raise capital after the 
2009 stress tests, and as a result, U.S. financial institutions 
should be in a very strong position to adopt the new global 
standards. Banks should be able to meet these new requirements 
through future earnings or equity issuance.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                       FROM NEAL S. WOLIN

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in 
rulemaking, the Consumer Financial Protection Bureau shall 
consider ``the impact of proposed rules on covered persons, as 
described in section 1026, and the impact on consumers in rural 
areas.''
    What specific processes and infrastructure will the Bureau 
develop to ensure that it has adequate understanding of the 
impact of proposed rules on community banks and credit unions 
with assets of less than $10 billion?
    How will Treasury work with the FDIC, the Federal Reserve 
and NCUA to ensure that Bureau has the institutional knowledge 
to understand the impact of proposed consumer protection 
regulations on community banks and credit unions?
    What infrastructure will you develop to ensure the 
coordination and sharing of information between the Bureau and 
the FDIC and the Federal Reserve in cases in which the rule 
writing and examination and enforcement authority is split 
among agencies?

A.1. The Bureau of Consumer Financial Protection (Consumer 
Financial Protection Bureau or CFPB) implementation team is 
building infrastructure and processes to enable CFPB to acquire 
the knowledge it needs to understand and fully consider the 
impact of any future proposed rules on rural consumers and on 
banks and credit unions With assets of less than $10 billion.
    The implementation team plans to work with Federal 
supervisors of these institutions to develop processes for 
consultation. The implementation team is also working with 
other Federal supervisors on written agreements for exchanging 
supervisory information about institutions SQ that CFPB can 
maintain an ongoing understanding of their business models and 
conditions.
    The implementation team is also making preparations to 
comply with obligations under the Regulatory Flexibility Act to 
consider the impact of proposed regulations on the smallest 
banks and credit unions and, in certain cases, to establish 
panels to seek direct input from such institutions before 
proposing a regulation.
    The CFPB implementation team is analyzing what other 
processes and infrastructure will be useful in this effort. 
Elizabeth Warren, Special Advisor to Secretary Geithner, is 
meeting regularly with community bankers across the country to 
get their perspectives on the impact of consumer protection 
regulations on community banks and credit unions.

Q.2. Mr. Wolin, during your testimony you referenced efforts 
that Treasury is undertaking to develop a simpler mortgage 
disclosure form to provide better choices for consumers. Over 
the past several years, Congress has enacted a number of 
mortgage disclosure provisions which in some cases have led to 
more paperwork without necessarily better informing consumers.
    As it relates to mortgage disclosure, will the Bureau be 
conducting an analysis of all existing disclosure requirements 
to simplify requirements or will these efforts be layered on 
top of existing requirements? Will the Bureau evaluate the 
effectiveness of existing efforts and eliminate requirements 
that are ineffective?

A.2. The CFPB is currently reviewing mortgage disclosure 
requirements as a whole and working to ensure that they promote 
informed consumers and competitive markets and do not impose 
unnecessary requirements on banks. The CFPB will not simply 
layer new requirements upon requirements that are outdated or 
ineffective. As part of this process, the CFPB will consolidate 
Federal mortgage disclosures as required by the DFA. This 
consolidation will improve disclosure for consumers and reduce 
unwarranted burdens for banks.

Q.3. Will the Treasury Department designate a senior staff 
member who is participating in the transition efforts of the 
Consumer Financial Protection Bureau to serve as a liaison to 
community banks and credit unions, specifically those with 
assets of less than $10 billion?

A.3. The CFPB implementation team is setting up a robust 
outreach function for the CFPB, including creating an office 
devoted to small business and community banks. Staff is already 
working with small banks and credit unions, expanding the 
outreach efforts of Elizabeth Warren and making certain that 
the perspectives of small banks and credit unions are well-
represented: within the consumer agency.

Q.4. Can you provide me an update on your agencies progress in 
implementing the property appraisal requirements of Title XIV 
of Dodd-Frank? What process will you use to develop and 
implement these requirements?

A.4. Section 1472 of Title XIV adds a new section to the Truth 
in Lending Act. This provision vests the initial responsibility 
to implement appraisal independence requirements with the 
Federal Reserve Board (Board). As the statute requires, the 
Board released an interim final rule on October 18, 2010.
    With the exception of the Board's interim final rule, 
Section 1472 provides joint rule-writing authority for 
appraisal independence to the Board, the Comptroller of the 
Currency, the Federal Deposit Insurance Corporation, the 
National Credit Union Administration Board, the Federal Housing 
Finance Agency, and the Consumer Financial Protection Bureau. 
Similarly, Sections 1471 and 1473 amend the Truth in Lending 
Act and provide joint rulemaking authority to those same 
agencies with respect to requirements for in-person appraisals 
and appraisal management companies. As with other rules that 
are required to be implemented on an interagency basis, we 
expect the agencies to work cooperatively to adopt all the 
rules relating to appraisals under Title XIV by the statutory 
deadline of January 21, 2013.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
                       FROM NEAL S. WOLIN

Q.1. Title XII of Dodd Frank ``encourage[s] initiatives for 
financial products and services that are appropriate and 
accessible for millions of Americans who are not fully 
incorporated into the financial mainstream.'' I helped author 
Section 1206 of the Act which enables the Community Development 
Financial Institutions Fund to establish a grant program within 
to encourage affordable small dollar lending through loan-loss 
reserve funds and provision of technical assistance. Can you 
please describe the Department's implementation plan for these 
new programs?

A.1. The Treasury Department's Community Development Financial 
Institutions and Office of Financial Education and Financial 
Access are working together to ensure the agency is ready to 
implement Title XII once appropriations are secured. In the 
near future, the Treasury Department will publish in the 
Federal Register one or more ``Request for Comments'' 
documents, so that it can better gauge from the public the key 
issues to consider when standing up these new initiatives, 
should appropriations be made available.
    Although we have begun these initial steps, appropriated 
resources will be needed to implement the Small Dollar Loan 
Program and other proposed programs, such as Bank On USA, which 
are envisioned under Title XII. Funding for Title XII 
initiatives is necessary to capitalize on the important 
economic empowerment opportunities provided by Dodd-Frank.
    In the mean time, we will continue to work with community 
based organizations, financial institutions, financial 
education providers, and local officials to ensure that we will 
be able to quickly implement Title XII programs once funding 
becomes available.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM NEAL S. WOLIN

Q.1. We need to fix our Nation's broken housing finance system 
and reduce the Government's involvement in the housing market 
from current levels where the GSEs and FHA are guaranteeing 
about 95 percent of all new mortgages. According to the August 
FHFA report, Fannie Mae and Freddie Mac have burnt through $226 
billion in capital since the middle of the 2007. Some 
alternatives being discussed range from a completely privatized 
housing finance system to a system in which the Government 
takes the first-loss position in the entire conforming mortgage 
market.
    Please describe the options and rationale in each category 
the Administration is considering for its comprehensive reform 
proposal for the GSEs?

A.1. The Administration is considering a wide range of reform 
proposals in conjunction with its commitment to present a 
proposed reform white paper, as mandated by the DFA. The 
Administration is committed to meeting with and collecting 
input from a wide range of stakeholders to ensure that options 
and rationale for each type of reform is carefully considered. 
We look forward to working with Congress to deliver a reformed 
housing finance system as soon as practical.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                      FROM BEN S. BERNENKE

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in 
rulemaking, the Consumer Financial Protection Bureau shall 
consider ``the impact of proposed rules on covered persons, as 
described in section 1026, and the impact on consumers in rural 
areas.''
    What specific guidance and resources will the FDIC and the 
Federal Reserve provide to the Bureau to ensure that it can 
adequately understand the impact of proposed rules on community 
banks with assets of less than $10 billion?

A.1. Where our experience as the supervisor of community banks 
suggests that a proposed rule could create compliance 
difficulties for these banks or affect credit availability, the 
Federal Reserve would use the public comment process to offer 
its analyses on the impact of the proposed rule. In addition, I 
would expect our analyses to suggest possible alternatives that 
would also be effective in protecting consumers.

Q.2. What infrastructure will the Fed and FDIC develop to 
ensure the coordination and sharing of information with the 
Bureau in cases in which the rule writing and examination and 
enforcement authority is split among agencies?

A.2. With the implementation of the Dodd-Frank Act, the 
Director of the Consumer Financial Protection Bureau will join 
the Federal Reserve and the other depository institution 
supervisory agencies as a member of the Federal Financial 
Institutions Examination Council (FFIEC). The Consumer 
Compliance Task Force of the FFIEC promotes policy 
coordination, a common supervisory approach, and uniform 
enforcement with respect to consumer protection laws and 
regulations. The member agencies of the FFIEC have processes in 
place to share appropriate supervisory information among the 
agencies, as needed. The Bureau's participation in the FREC 
should ensure that it is in the same position as the other 
agencies with regard to information sharing.

Q.3. Can you provide me an update on your agencies progress in 
implementing the property appraisal requirements of Title XIV 
of the Dodd-Frank Act? What process will you use to develop and 
implement these requirements?

A.3. Sections 1471 and 1472 of the Dodd-Frank Act amend the 
Truth in Lending Act (TILA). Section 1471 establishes certain 
property appraisal requirements for a category of loans 
designated ``higher-risk mortgages,'' including a physical 
property inspection of the interior of the mortgage property in 
connection with a higher risk mortgage and a second appraisal 
of such properties under certain circumstances. Rulemaking 
authority under Section 1471 is delegated to the Federal 
Reserve Board (Board), FDIC, OCC, NCUA, FHFA, and Bureau. 
However, those rules must be based on final rules to be issued 
under Section 1411, which establishes minimum lending standards 
for residential mortgage loans. The rules under Section 1471, 
like all other rules required under Title IV where no specific 
deadline is provided, must be issued within 18 months after 
July 21, 2011.
    Section 1472 of the Dodd-Frank Act amends TILA to establish 
requirements for appraisal independence in connection with 
home-secured loans. Section 1472 mandates that the Board issue 
interim final rules within 90 days after enactment. On October 
18, 2010, the Board issued an interim final rule implementing 
the appraisal independence, mandatory reporting, and customary 
and reasonable fee requirements of section 1472. Section 1472 
also authorizes the Board, FDIC, OCC, NCUA, FHFA, and Bureau to 
jointly issue regulations to address appraisal report 
portability.
    Section 1473 of the Dodd-Frank Act directs the Board, FDIC, 
OCC, NCUA, FHFA, and the Bureau to jointly develop rules for 
appraisal management companies and automated valuation models. 
These mandates have been identified in the Board's Dodd-Frank 
related project work and will require the formation of an 
interagency working group to draft proposed regulations for 
comment and, after consideration of these comments to issue 
final regulations. This section also directs the Board, FDIC, 
OCC, and NCUA, in consultation with the Bureau, to assess the 
agencies' appraisal regulatory threshold for 1-to-4 single 
family residences for reasonable protection of consumers. All 
rules required under section 1473 must be issued within 18 
months after July 21, 2011.
    Section 1473 also directs the agencies to address the 
requirements for appraisal reviews in their appraisal 
regulations. It should be noted that the agencies already 
address appraisal review practices in the Interagency Appraisal 
and Evaluation Guidelines and, more recently, the agencies 
issued proposed revisions to these guidelines. Appraisal review 
practices are addressed in the proposed revisions to these 
guidelines. The section also prohibits in conjunction with the 
purchase of a consumer's principal dwelling the use of broker 
price opinions as the primary basis to determine the value of a 
piece of property for the purpose of a loan origination of a 
residential mortgage loan secured by such piece of property. 
While the Act does not direct the agencies to issue regulations 
to implement this requirement, the Board will consider this 
mandate in safety and soundness regulations and guidance on 
collateral valuation practices.
    Other provisions of section 1473 of the Dodd-Frank Act 
direct the FFIEC Appraisal Subcommittee to take certain 
actions, including its operations, the oversight of State 
appraisal regulatory authorities, and appraisal management 
companies. The Board has a representative on the Appraisal 
Subcommittee. Similar to the Dodd-Frank Act project planning 
that is occurring at the Board, the Appraisal Subcommittee is 
developing its own plan and time table for implementing the 
Dodd-Frank mandates. This month, as mandated by the Dodd-Frank 
Act, the Appraisal Subcommittee adopted an increase in the 
National Appraiser Registry fee from $25 to $40. To provide the 
State appraiser regulatory agencies with sufficient time to 
implement this change, the new fee becomes effective on January 
1, 2012.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                      FROM SHEILA C. BAIR

Q.1. Chairman Bair, Section 331 of Dodd-Frank requires that the 
FDIC change its assessment base for computing insurance 
premiums.
    When will the FDIC change its insurance premium assessment 
base, and will the change be effective on a specific future 
date that the FDIC chooses or will it be retroactive?

A.1. As a result of the Dodd-Frank Act, an insured depository 
institution's (IDI's) assessment base will be calculated using 
average consolidated total assets less average tangible equity 
(with the possible exception of banker's banks and custodial 
banks, which the Dodd-Frank Act allows the FDIC to treat 
differently). This change constitutes a substantial revision to 
the deposit assessment system, which, by statute, can only be 
made after notice and opportunity for comment. On November 9, 
2010, the FDIC Board of Directors adopted a notice of proposed 
rulemaking with request for comment on the changes to the 
assessment base mandated by Section 331 of the Dodd-Frank Act 
and their anticipated effect. The proposal has a 45-day comment 
period. The FDIC also proposes to make the changes effective 
April 1, 2011, and looks forward to the comments on all aspects 
of the proposed rulemaking.
    The FDIC is committed to implementing the Dodd-Frank Act in 
the most expeditious manner possible and considered the 
possibility of making the application of the new assessment 
base retroactive to passage of the Dodd-Frank Act. However, to 
determine assessments using the new assessment base requires 
that a number of changes be made to the Consolidated Reports of 
Condition (Call Report) and Thrift Financial Report (TFR) that 
render retroactive application of the new assessment base 
operationally infeasible, both for insured depository 
institutions and the FDIC. Additionally, retroactively applying 
such changes could introduce significant legal complexity and 
introduce unacceptable levels of litigation risk. For these 
reasons, the FDIC did not propose applying the new assessment 
base retroactively.

Q.2. Chairman Bair, your testimony identifies that Dodd-Frank 
address macro-oversight of the financial industry in part by 
prohibiting the use of credit ratings for regulatory purposes.
    Given that interpretation of the law, what is the FDIC 
going to eliminate credit ratings from regulations and when 
will the process be completed?

A.2. On August 10, 2010, the FDIC and the other Federal banking 
agencies issued an advanced notice of proposed rulemaking 
(ANPR) seeking comment on alternatives to the use of credit 
ratings. The ANPR listed a number of principles that the 
agencies believe any alternative standard of creditworthiness 
must meet, described the use of credit ratings in the agencies' 
capital rules, and discussed possible approaches to alternative 
standards of creditworthiness. The comment period closed on 
October 25, 2010. To date the FDIC has received 23 comments, 
which we are reviewing. The FDIC and the other banking agencies 
also held a roundtable discussion on this issue with industry 
and other participants in early November. A summary of the 
items discussed and other materials from the participants will 
be posted on the FDIC and Federal Reserve Websites. In 
addition, the FDIC Board, on November 9, 2010, approved the 
issuance of a notice of proposed rulemaking to update the 
FDIC's risk-based assessment system for large banks. This rule 
proposes eliminating any reliance on long-term debt issuer 
ratings in determining risk-based assessments for large banks.
    We anticipate timely completion of all the necessary 
rulemaking to implement Section 939A of the Dodd-Frank Act.

Q.3. Chairman Bair, under Dodd-Frank, certain firms in distress 
may be resolved under an alternative process to bankruptcy 
which would be managed by the FDIC, if regulators so desire. 
The idea seems to be to provide the firm, or some or all of its 
counterparties, with funds, or ``additional payments,'' that 
would not be available in a bankruptcy. There are then 
mechanisms available for the Government to try to recover funds 
over time from the firm's assets, creditors, or industry. 
Recently, you stated that ``The authority to differentiate 
among creditors will be used rarely and only where such 
additional payments are `essential to the implementation of the 
receivership or any bridge financial company.' ''
    Chairman Bair, what criteria would or could the FDIC use to 
determine whether payments are ``essential'' to implementation 
of a receivership or bridge company, and what protections exist 
to ensure that the criteria do not include political 
considerations?

A.3. On October 4, 2010, the FDIC issued a notice of proposed 
rulemaking addressing certain orderly liquidation authority 
provisions of the Dodd-Frank Act. Of particular significance, 
the proposed rule would clarify that the authority to make 
additional payments to certain creditors will never be used to 
provide additional payments, beyond those appropriate under the 
statutorily defined priority of payments, to shareholders, 
subordinated debt holders and bondholders. The FDIC, in this 
proposed rule, is proposing that these three types of creditors 
of the covered financial company could never, as a legal 
matter, meet the statutory criteria for receiving such 
additional payments.
    To emphasize that all unsecured creditors should expect to 
absorb losses along with other creditors, the proposed rule 
clarifies the narrow circumstances and procedures under which 
other creditors, including short-term debt holders, could 
receive any additional payments or credit amounts under 
Sections 210(b)(4), (d)(4), or (h)(5)(E). Under the proposed 
rule, such payments or credit amounts could be provided to a 
creditor only if the FDIC Board of Directors, by a recorded 
vote, determines that the payments or credits are necessary (i) 
to maximize the value of the assets of the covered financial 
company; (ii) to initiate and continue operations essential to 
implementation of the receivership or any bridge financial 
company; (iii) to maximize the present value return from the 
sale or other disposition of the assets of the covered 
financial company; or (iv) to minimize the amount of any loss 
realized upon the sale or other disposition of the assets of 
the covered financial company. The proposed rule further 
provides that the authority of the Board to make this decision 
cannot be delegated to management or staff of the FDIC. By 
requiring a vote by the Board, the proposed rule would require 
a decision on the record and ensure that the governing body of 
the FDIC has made a specific determination that such payments 
are necessary to the essential operations of the receivership 
or bridge financial company, to maximize the value of the 
assets or returns from sale, or to minimize losses.
    Fundamental to an orderly liquidation of a covered 
financial company is the ability to continue key operations, 
services, and transactions that will maximize the value of the 
firm's assets and avoid a disorderly collapse in the 
marketplace. The FDIC has long had authority under the Federal 
Deposit Insurance Act to continue operations after the closing 
of a failed insured bank, if necessary, to maximize the value 
of the assets in order to achieve the ``least costly'' 
resolution or to prevent ``serious adverse effects on economic 
conditions or financial stability'' (12 U.S.C. 1821(d) and 
1823(c)). Under the Dodd-Frank Act, the corresponding ability 
to continue key operations, services, and transactions is 
accomplished, in part, through authority for the FDIC to 
charter a bridge financial company. The bridge financial 
company is a completely new entity that will be freed from the 
shareholders, debt, senior executives, or bad assets and 
operations that contributed to the failure of the covered 
financial company or that would impede an orderly liquidation. 
Shareholders, debt holders, and creditors will receive 
``haircuts'' based on a clear priority of payment set out in 
section 210(b). As in prior bridge banks used in the resolution 
of large insured depository institutions, however, the bridge 
financial company authority will allow the FDIC to stabilize 
the key operations of the covered financial company by 
continuing valuable, systemically important operations in order 
to maximize value.

Q.4. Recent news reports have detailed disturbing information 
about servicers' foreclosure processes. Allegations have ranged 
from forged documents to the signing of eviction notices 
without review.
    What evidence have your agencies found in regards to these 
charges?
    What actions have been undertaken by your agencies both to 
address this situation and to prevent future abuses?
    What policies and procedures have your agencies put in 
place to ensure compliance with State laws, and when were they 
implemented?

A.4. The FDIC is very concerned about the devastating impact 
foreclosures are having on homeowners, the American economy and 
the banking industry. As the primary Federal supervisor for 
nearly 5,000 State-chartered insured institutions, we 
vigilantly monitor compliance with consumer protection 
requirements and aggressively pursue enforcement actions to 
address any violations of law. Upon initial review, it appears 
that FDIC-supervised nonmember State banks have not engaged in, 
and have limited exposure to, loans with affidavits signed by 
``robo-signers.'' However, the FDIC is closely monitoring the 
situation and will continue to work closely with State 
officials to ensure compliance with applicable Federal and 
State banking laws and regulations.
    We have contacted the FDIC's loss-share and LLC partners 
and are receiving certifications that all past and future 
foreclosure claims filed under the loss-share agreement are 
compliant with the law. We will deny loss-share payments for 
any foreclosures that are found not to be compliant with State 
laws or not fully remediated. We are independently verifying 
full compliance, with a priority on owner-occupied properties.
    Through our backup examination authority, our examiners 
also are working with other regulators on site at the major 
mortgage servicers. Our activities include direct verification 
of the loan file documentation handled by the ``robo-signers'' 
and review of the servicer's loan modification practices and 
their record keeping for ownership of the underlying loans. The 
agencies also are working together to evaluate the role played 
by the Mortgage Electronic Registry Service or ``MERS.''
    Once we have complete and thorough information regarding 
the extent of the foreclosure documentation problems on an 
individual and systemwide basis, we will be in a better 
position to determine what actions should be taken to prevent a 
recurrence of this situation.

Q.5. Chairman Bernanke and Chairman Bair, have your agencies 
developed prototypes or templates for what information will be 
contained in living wills and for how frequently updates of 
living wills might be required of certain financial 
institutions?
    Do you intend to develop living wills in concert with the 
international regulatory community and, if so, have you made 
any progress yet?

A.5. The FDIC and the Federal Reserve Board are in the initial 
stages of exploring the joint rulemaking on Resolution Plans 
(or ``living wills'') required by Section 165(d) of the Dodd-
Frank Act. We will work with the Federal Reserve Board to 
produce a consensus template on information to be contained in 
the living wills and the required updating frequency within the 
18 month timeframe required by the Act. In addition to the 
Dodd-Frank Act requirements, the FDIC already has been working 
extensively with domestic and international supervisors, 
especially over the past 2 years, to establish requirements for 
living wills with respect to certain large and complex, 
internationally active financial firms.

    In May 2010, the FDIC issued a notice of proposed 
rulemaking entitled ``Special Reporting, Analysis and 
Contingent Resolution Plans at Certain Large Insured Depository 
Institutions'' (75 FR 27464 (May 17, 2010)). This proposed rule 
would require specific reporting and resolution planning by 
insured depository institutions with greater than $10 billion 
in total assets that are owned or controlled by a parent with 
total assets of more than $100 billion. This proposed rule 
articulated minimum requirements for a resolution plan, 
including information on organizational structure; business 
activities, relationships and counterparty exposures; capital 
structure; intragroup funding, transactions, accounts, 
exposures and concentrations; cross-border elements and any 
other material factors. The proposed rule would require annual 
updates with the additional proviso that ``material information 
elements should be updated more frequently as reasonable and 
necessary, given the risk profile and structure of the 
institution relative to its affiliates and to demonstrate the 
capacity to provide specific information when needed (e.g., 
deposit flows, intragroup funding flows, short-term funding, 
derivatives transactions, or material changes to capital 
structure or sources).''
    Additionally, at the 2009 Pittsburgh G20 Summit, in 
response to the recent financial crisis, the G20 Leaders called 
on the Financial Stability Board (FSB) to propose possible 
measures to address the ``too-big-to-fail'' and moral hazard 
concerns associated with systemically important financial 
institutions. Specifically, the G20 Leaders called for the 
development of ``internationally consistent firm-specific 
contingency and resolution plans.'' The FSB considered the 
issue and presented its Principles for Cross-border Cooperation 
on Crisis Management in April 2009 at the London G20 Summit. 
The FSB principles were based on the ongoing work of the Basel 
Committee on Banking Supervision's Cross-border Bank Resolution 
Group (CBRG) (cochaired by the FDIC since 2007). The CBRG's 
detailed final Report and Recommendations were issued on March 
18, 2010, emphasizing the importance of preplanning and the 
development of practical and credible plans to promote 
resiliency in periods of severe financial distress and to 
facilitate a rapid resolution should that be necessary.
    The FSB's Principles for Cross-Border Cooperation on Crisis 
Management commit national authorities to ensure that firms 
develop adequate contingency plans and highlight that 
information needs are paramount, including information 
regarding group structure and legal, financial and operational 
intragroup dependencies; the interlinkages between the firm and 
financial system (e.g., in markets and infrastructures) in each 
jurisdiction in which it operates; and potential impediments to 
a coordinated solution stemming from the legal frameworks and 
bank resolution procedures of the countries in which the firm 
operates. The FSB Cross-border Crisis Management Working Group 
has recommended that supervisors ensure that firms are capable 
of supplying in a timely fashion the information that may be 
required by the authorities in managing a financial crisis. The 
FSB recommendations strongly encourage firms to maintain 
contingency plans and procedures for use in a wind-down 
situation (e.g., fact sheets that could easily be used by 
insolvency practitioners) and to regularly review these plans 
to ensure that they remain accurate and adequate.
    U.S. and international supervisors, along with the firms, 
have been active and responsive to the FSB's requirements. 
Development of resolution plans is progressing well in most 
jurisdictions, with individual countries being at various 
stages of development. Crisis management group sessions have 
been conducted and the FDIC and its sister agencies are 
committed and engaged in the iterative process of establishing 
viable crisis management plans.

Q.6. The Financial Stabilty Oversight Council is an important 
feature of Dodd-Frank. During the conference, my amendment was 
adopted to clarify the role of the Council and the Federal 
Reserve. My amendment gave the Council responsibility for 
financial stability regulation. Up to that point, the 
legislation had colocated this responsibility at the Fed and 
the Council. The Congressional intent is clear that you, as 
members of the Council, are responsible for all policy matters 
related to financial stability. After the Council acts, 
implementation of your policy determinations will fall to the 
individual Federal financial regulators, including, of course, 
the Fed.
    With this in mind, I would like each of you to comment on 
your preparations to serve on the Council: Have you directed 
your staff to examine and study all of the issues that will 
come before you? Are you prepared to participate on the 
Council, not as a rubber stamp for the Chairman of the Council, 
but as a fully informed individual participant?

A.6. As you point out, when the Dodd-Frank Act established the 
Council, it vested the Council with the responsibility for 
identifying financial companies and practices that could create 
systemic risk and taking action to mitigate those identified 
risks. In order to accomplish these challenging tasks, the 
Council needs experienced and capable staff from each of the 
member agencies to work as a team in implementing the Council's 
responsibilities. The FDIC is an active participant on a number 
of staff-level interagency working groups analyzing and 
providing input on the development of study reports and 
rulemakings. These working groups develop proposals with 
appropriate direction and review from senior agency management, 
including the FDIC Chairman. For example, prior to the first 
meeting of the Council on October 1, 2010, an interagency 
working group developed and vetted the Advance Notice of 
Proposed Rulemaking aimed at collecting information on the 
types of things the Council should consider when deciding 
whether a nonbank financial company should be subject to 
heightened prudential supervision by the Federal Reserve and 
subject to the resolution plan requirement in section 165(d) of 
the Act.
    With this in mind, we have a significant number of staff 
throughout the FDIC in various disciplines that are diligently 
and carefully analyzing and developing positions on Council-
related issues. In addition, the FDIC recently established the 
Office of Complex Financial Institutions, which, in part, was 
created to support the priority of systemic risk oversight.
    The FDIC is committed to participating on the Council as a 
fully informed and engaged participant. In many ways, the 
Council's success will be determined by the willingness of its 
members to work together closely to implement the Council's 
duties. And, while the FDIC looks forward to collaborating with 
our colleagues to assure continued progress in strengthening 
the stability of our financial system, I also value the diverse 
views and opinions that each agency's unique perspective and 
expertise will bring to the table. By utilizing each agency's 
respective authorities and individual areas of specialized 
expertise to close regulatory gaps, the Council will be able to 
successfully carry out its objectives and prevent financial 
crises in the future.

Q.7. Secretary Geithner has argued that there is a strong case 
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published 
a paper that proposes Government guarantees of a wide range of 
asset backed securities, including those backed by mortgages, 
credit cards, autos, student loans, commercial real estate, and 
covered bonds. While some may believe that the Government will 
charge fair prices for Government guarantees, the history of 
Government run insurance programs suggests that things will not 
go well.
    Does anyone on the panel support extending or increasing 
Government insurance against losses on asset backed securities 
which, it seems to me, socializes risk, puts taxpayers on the 
hook for losses, and protects Wall Street against losses?

A.7. Asset-backed securitization has grown in recent decades 
into an important means of channeling global savings into 
credit products for U.S. businesses and households outside of 
the traditional banking system. However, misaligned incentives 
and risky practices in this ``shadow banking system'' directly 
contributed to the housing bubble and the financial crisis. 
While the Dodd-Frank Act contains a number of measures to 
reform private securitization and the institutions that engage 
in this process, future legislation will be needed to reform 
the Government-sponsored mortgage enterprises (GSEs), whose 
implicit Federal backing also contributed to excessive growth 
and risk taking by these companies.
    The financial reforms of the 1930s were designed to provide 
greater stability in our economy and to ensure that credit 
remains available to U.S. businesses and households in good 
times and bad. Following the recent financial crisis, more 
research should be done on the nature of the market failures 
that can arise in securitized asset markets and the extent to 
which Government backing is needed to address those market 
failures.
    Any proposal for either a continuation of Federal backing 
for mortgage instruments or an expanded Federal role in backing 
other types of assets must meet three basic tests. First, it 
must respond to a clearly defined market failure that can be 
addressed by Government involvement. Second, any Government 
backstop must be explicit in nature, clearly delineated in 
advance and accounted for in a transparent fashion on the 
Government balance sheet. Third, any type of explicit 
Government backstop must be actuarially priced so that its 
direct beneficiaries--the lenders and borrowers in these 
markets--end up footing the bill instead of taxpayers.
    These are the basic rules that govern the FDIC's program of 
Federal deposit insurance. The confidence of the American 
public in the FDIC guarantee was one of the stabilizing forces 
in this crisis that helped to prevent an outcome that could 
have been far worse. As financial markets continue to evolve in 
the future, there will always be an essential role for the 
Federal Government in preserving financial stability. But it is 
incumbent on us, as stewards of that Government involvement, to 
write and enforce a clear set of rules that protect taxpayers 
and prevent bailouts that undermine both fairness and financial 
stability.

Q.8. Please provide the Committee with an implementation 
schedule that includes a list of the rules and studies that 
your agency is responsible for promulgating or conducting under 
Dodd-Frank and the date by which you intend to complete each 
rule or study.

A.8. The FDIC has committed to implement the reforms required 
by the Dodd-Frank Act as quickly and transparently as possible, 
and within the statutory deadlines, where applicable. As part 
of the FDIC's efforts to improve transparency, the agency posts 
its planned and completed initiatives to the publicly available 
FDIC Initiatives Web site. The site, available at http://
www.tdic.gov/regulations/reform/initiativcs.html and presented 
at the end of this response, includes the FDIC's financial 
reform initiatives completed to date and projected through the 
end of the first quarter of 2011. This site is updated weekly 
to reflect progress made. We hope this site will be a useful 
tool for finding up-to-date information on the FDIC's financial 
reform efforts. By the end of this quarter, the projections 
will be extended to the second quarter of 2011 and will 
continue to be updated quarterly. An additional resource for 
financial reform implementation information is the U.S. 
Department of the Treasury's Integrated Implementation Roadmap, 
available at http://www.treasury.gov/FSOC/docs/
FSOC%20Integrated%20Roadmap%20-%20October%201.pdf. This 
document includes implementation information for many of the 
interagency rules, with timelines extending through the end of 
2011.
    The following table includes the rules the FDIC is 
responsible for promulgating, as well as the applicable 
statutory deadlines, if any. Items currently included on the 
FDIC Initiatives Web site with a projected completion date are 
marked with an asterisk. In some instances, the Dodd-Frank Act 
provides for agency discretion in rulemaking. Where the FDIC 
has exercised its discretion not to promulgate a rule at this 
time, it has not been listed below.



















Q.9. Please provide the Committee with an implementation 
schedule that includes a list of the reorganizational tasks 
your agency will undertake to fulfill the mandates of Dodd-
Frank and the date by which you intend to complete each task.

A.9. 1. In August, the FDIC Board of Directors approved the 
creation of an Office of Complex Financial Institutions (OCFI) 
that will:

    perform continuous review and oversight of banks 
        and bank holding companies with more than $100 billion 
        in assets, as well as nonbank financial companies 
        designated as systemically important by the FSOC to be 
        supervised by the FRB;

    monitor risks among the largest and most complex 
        financial institutions and develop plans for the 
        contingency that one or more of these companies might 
        fail; and

    carry out the FDIC's new authority to implement 
        orderly liquidations of systemically important bank 
        holding companies and nonbank financial companies that 
        fail.

    2. We are establishing a new division within FDIC with 
consumer protection as its focus. The new Division of Depositor 
and Consumer Protection will be created through the transition 
of staff from our existing Division of Supervision and Consumer 
Protection. We also will transfer employees from our existing 
research staff to the new division to perform consumer research 
and Home Mortgage Disclosure Act (HMDA)/fair lending analysis. 
On October 12, the FDIC announced the appointment of Mark 
Pearce as director of the new division. He will assist in the 
orderly set-up of the division by January 2011. We also are in 
the process of strengthening our legal workforce dedicated to 
supporting depositor and consumer protection functions.
    3. In addition, the FDIC--jointly with the Board of 
Governors, the OCC, and the OTS--is developing an 
implementation plan for the transfer of OTS powers and 
personnel. Upon completion of the implementation plan, it will 
be forwarded to the Committee on Banking, Housing, and Urban 
Affairs, among others, for review. Any additional 
organizational changes required will be outlined in that 
document.
    4. Section 342 of the Dodd-Frank Act requires the FDIC and 
other specified agencies to establish an Office of Minority and 
Women Inclusion (OMWI) within 6 months of enactment of the new 
law, which is January 21, 2010. We are currently considering 
how many additional staff will be needed, how best to integrate 
the work of the OMWI with our operating divisions, and whether 
to advertise the position of Office Director for applicants 
outside the FDIC. While our Board of Directors has not yet made 
any final decisions on how the Office will be organized and led 
or how many staff will be authorized, the FDIC is having robust 
discussions among senior management on how to best transition 
our existing functions to the OMWI and expand the functions to 
include the important new responsibilities under Section 342 of 
the Dodd-Frank Act.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                      FROM SHEILA C. BAIR

Q.1. Over the last 15 years, the 6 biggest banks grew from 
having assets equal to 17 percent of GDP to 63 percent of GDP. 
The four largest banks control about 48 percent of the total 
assets in the Nation's banking system. And the 5 largest dealer 
banks control 80 percent of the derivatives market and account 
for 96 percent of the exposure to credit derivatives.
    Part of the Volcker Rule, section 622 of the Dodd-Frank 
Act, requires the Financial Stabilty Oversight Council (FSOC), 
of which your organizations are a member, to study and make 
recommendations concerning the effects of financial sector 
concentration on financial stability, moral hazard, efficiency, 
and competitiveness in the financial system. Subject to these 
recommendations, no company will be permitted to hold more than 
10 percent of the liabilities held by all financial companies, 
with some significant exceptions.
    What effect does concentration in the financial industry 
have on financial stability, moral hazard, efficiency, and 
competitiveness?

A.1. Financial firms can reduce risk by diversifying across 
product lines and by serving wider geographic areas. The risk 
reducing benefit is realized as a financial firm grows in size 
and is able to offer more products and operate in wider 
markets. However, once a firm operates across almost all 
available business lines on a nationwide basis, it has 
exhausted any benefit from diversification. At this point, the 
firm has a risk profile that mirrors the overall risk of the 
market and general economic conditions. Risk is further 
concentrated when these financial firms become important 
counterparties and service providers to many transactions that 
facilitate financial intermediation in the economy. These 
issues became apparent during the financial crisis when large, 
complex financial organizations--because they are so 
interconnected--contributed to instability of the financial 
system.

Q.2. Given that the six biggest banks alone have about $7.4 
trillion in liabilities, almost 53 percent of GDP, do you think 
this provision will meaningfully restrict the size of financial 
institutions?

A.2. Section 622 will restrict growth through merger that would 
put the combined firm above the 10 percent limit as implemented 
by regulation. However, as this question and the preamble 
suggest, this still represents significant concentration of 
industry assets and liabilities in a handful of companies.
    As we have discussed in prior testimony, the notion of 
``Too-Big-to-Fail'' (TBTF) led to a system of ``privatized 
profits and socialized risks.'' This was exacerbated by other 
misaligned incentives throughout the financial system that led 
to a substantial buildup of risks in the system and the 
resulting crisis. The key to addressing the concentration and 
moral hazard issue is not only setting size and market share 
limits, but more importantly, addressing market perceptions 
that certain institutions are TBTF. If TBTF can be effectively 
eliminated, it will realign systemically important 
institutions' risk and reward framework and instill market 
discipline on investors and counterparties.

Q.3. How should this rule be implemented to address financial 
stability, moral hazard, efficiency, and competitiveness?

A.3. We are in agreement that limiting a single institution's 
size is prudent and helps reduce concentration risk to not only 
the deposit insurance fund but to the broader financial system. 
The FDIC and other members of the FSOC are participating in the 
study and recommendations required by Section 622 of the Dodd-
Frank Act. The study should address many of your concerns about 
concentration in the financial industry including how 
concentration affects financial stability, moral hazard, and 
the efficiency and competitiveness of U.S. financial firms. The 
results of the study are due in January.

Q.4. Can you identify any potential loopholes in the existing 
provision?

A.4. Section 622 gives the FSOC wide latitude to make 
recommendations to the Board of Governors to issue regulations 
under the section, including definition of terms, as necessary. 
This allows the FSOC and the Board to close loopholes that may 
appear.

Q.5. As I've made clear before, I think the largest financial 
firms in this country are just too large, and that their 
massive size threatens our economic security and puts us at 
risk in future crises.
    I think the rise of proprietary trading was one of the key 
drivers behind the massive growth in our largest financial 
institutions. Firms were taking on ever increasing prop trading 
positions, often with highly unstable short term financing, and 
when things froze up, the house of cards collapsed. The Volcker 
Rule looks to stop this risk.
    I know that my colleagues, Senator Merkley and Senator 
Levin, drafted section 619 of the Dodd-Frank Act to ensure 
broad coverage of the prohibition on proprietary trading by 
banks, and meaningful restrictions on the largest nonbank 
financial firms. Nevertheless, one of the concerns I have is 
that firms may try to evade the restrictions. Particularly, I'm 
concerned that if the regulators set a definition of ``trading 
account'' that is too narrow, it might not capture all of the 
risks of proprietary trading. These evasions could only happen 
if the regulators ignore the clear direction of the law to stop 
proprietary trading.
    Are you prepared to take a broad view on the definition of 
``trading account'' and examine and prevent proprietary 
trading, wherever it occurs?

A.5. Historically, regulatory capital requirements for trading 
positions have been lower than requirements for banking 
positions, providing firms with an incentive to take a broad 
view of the trading account. However, we understand that the 
advent of the Volcker Rule could realign these incentives such 
that firms may be motivated to move some proprietary trading 
positions outside the trading account. As a result, we agree 
that the definition of ``trading account'' should be viewed 
broadly.
    We believe the exemptions to the prohibition on proprietary 
trading--particularly the exemptions related to customer 
accommodation, hedging, and market-making and underwriting--
present a more significant threat to the adoption of a 
meaningful ban on proprietary trading. We will work with the 
other regulators to define these exemptions as narrowly as 
possible.

Q.6. In short, are you prepared to use the full power of the 
Merkley-Levin provisions to cut the size and riskiness of our 
banks so they get back to the business of lending to families 
and businesses?

A.6. The provisions that strictly limit investments in hedge 
funds and private equity firms are important checks on the 
ability of banking organizations to increase both their size 
and risk profile through opaque structures.
    The Basel Committee on Banking Supervision set the so-
called ``Basel II'' minimum capital requirements for banks at 8 
percent, with an additional 2.5 percent buffer. But a recent 
study by the Bank for International Settements (BIS) suggests 
that the optimal capital ratio would actually be about 13 
percent. Going forward, the FSOC will recommend capital 
requirements for systemically important nonbank financial 
companies.

Q.7. Do you favor increasing capital for systemically important 
financial companies above the 10.5 percent Basel III ratio, and 
closer to the 13 percent number?

A.7. The regulatory capital requirements for banks should 
reflect the risk of the bank itself and the risk the bank poses 
to the broader financial system. For large systemically 
important banks, we have been working with the Basel Committee 
on Banking Supervision and the Financial Stability Board, as 
well as the other banking regulators, to develop systemic 
capital surcharges for systemically important banks. The total 
risk-based capital requirement as proposed by the Basel 
Committee is 10.5 percent. Any systemic surcharge would be 
added on top of that 10.5 percent minimum requirement.

Q.8. Would you be comfortable establishing progressive capital 
requirements that increase as institutions grow larger?

A.8. The regulators are discussing how we might apply a 
graduated surcharge for systemically important banks. It is 
certainly a credible option.

Q.9. Wall Street often argues that higher capital means higher 
costs for borrowers, and BIS has estimated that for each 1 
percent of increased capital, banks will have to raise rates by 
15 basis points (0.15 percent). Do you believe that banks could 
adapt to new capital requirements in ways that do not pass 
costs on to customers and borrowers, for example, by cutting 
outsized salaries and bonuses?

A.9. One of the very clear lessons of the recent financial 
crisis is that banks did not have enough capital or enough high 
quality capital. Increasing the amount and quality of capital 
does have a cost and the BIS estimate does provide a reasonable 
benchmark. Although the cost of capital is an element of 
pricing of credit, pricing also should reflect risk inherent in 
credit exposures. The financial crisis revealed that banks 
offered credit products at artificially low prices. As these 
prices are adjusted to more appropriately reflect risk, the 
cost of some credit products will increase and others may 
decrease.
    Although there is not a direct correlation between 
compensation and cost of credit, the compensation issues are 
being addressed as mandated by section 956 of the Dodd-Frank 
Act.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                      FROM SHEILA C. BAIR

Q.1. Section 1022(b) of the Dodd-Frank bill requires that in 
rulemaking, the Consumer Financial Protection Bureau shall 
consider ``the impact of proposed rules on covered persons, as 
described in section 1026, and the impact on consumers in rural 
areas.''
    What specific guidance and resources will the FDIC and the 
Federal Reserve provide to the Bureau to ensure that it can 
adequately understand the impact of proposed rules on community 
banks with assets of less than $10 billion?

A.1. As the primary supervisor of community banks and their 
Federal deposit insurer, the FDIC is particularly sensitive to 
the regulatory environment in which community banks operate. 
With regard to the many consumer financial protection laws for 
which the FDIC has examination and enforcement authority, but 
not rule-writing authority, the FDIC has long made it a 
practice to convey detailed information or concerns to the 
agencies with rulemaking authority. The examples include, but 
are not limited to, the Truth in Lending Act, the Electronic 
Fund Transfer Act, the Real Estate Settlement Procedures Act, 
and Section 5 of the Federal Trade Commission Act relating to 
Unfair and Deceptive Acts or Practices.
    Under the Dodd-Frank Act, the FDIC will not have primary 
rulemaking authority for consumer financial protection laws; 
however, the FDIC will retain consumer protection examination 
and enforcement authority for institutions with assets of $10 
billion or less. The Dodd-Frank Act will likely strengthen the 
consultative process in consumer financial protection 
rulemaking since the Act mandates prior consultation by the 
Bureau with the FDIC in many provisions (such as sections 
1022(b), 1031(e), and 1015, as well as in various specific 
sections of consumer laws). It will be critically important for 
the FDIC to communicate to the Bureau regarding how proposed 
rules could impact the FDIC's supervisory program and the 
affected FDIC supervised institutions. The information will be 
based on a variety of sources, including extensive research, 
supervisory experience, and outreach efforts. As a result, it 
will be a priority for the FDIC to provide input on proposed 
rules to the Consumer Financial Protection Bureau so that the 
Bureau has the benefit of the FDIC's long experience in 
supervising community banks.

Q.2. What infrastructure will the Fed and FDIC develop to 
ensure the coordination and sharing of information with the 
Bureau in cases in which the rule writing and examination and 
enforcement authority is split among agencies?

A.2. Under the Dodd-Frank Act, an infrastructure will be in 
place to ensure coordination and information sharing at the 
agency principal and staff levels, as well as through the 
interagency process.
    First, the Director of the Consumer Financial Protection 
Bureau will be a member of the FDIC's Board. In this role, 
there will be opportunities to communicate on rule writing, 
examinations, and enforcement authority at the highest levels 
between the two agencies.
    Second, following enactment of the Dodd-Frank Act, the FDIC 
approved the establishment of a new division--the Division of 
Depositor and Consumer Protection. One of the key reasons for 
creating this division was to ensure that the FDIC has a strong 
infrastructure in place to conduct ongoing dialogue with the 
new Consumer Financial Protection Bureau at the staff level in 
order to provide the FDIC's perspective as the supervisor of 
community banks.
    Finally, the Consumer Compliance Task Force of the Federal 
Financial Institutions Examination Council (FFIEC) has long 
coordinated the development of examination procedures, and rule 
writing when appropriate, among the Federal banking regulators. 
As a result, the Federal banking agencies already have standard 
operating procedures in place for when we need to jointly 
develop examination procedures or regulations. In the future, 
the Director of the Bureau will also be a member of the FFIEC. 
We expect that although the Bureau will have sole rulemaking 
authority for many consumer protection regulations, all of the 
agencies that examine for and enforce these laws will continue 
to jointly develop examination procedures through our existing 
collaborative process, which will include the Bureau.

Q.3. The Dodd-Frank bill included provisions requiring the FDIC 
to change its insurance assessment based from domestic deposits 
to total assets less tangible equity. What is the FDIC's 
timeframe for implementing this change, including the 
publishing of the proposed rule, comment period and 
implementation date of the new assessment base for financial 
institutions?

A.3. As a result of the Dodd-Frank Act, an insured depository 
institution's (IDI's) assessment base will be calculated using 
average consolidated total assets less average tangible equity 
(with the possible exception of banker's banks and custodial 
banks, which the Dodd-Frank Act allows the FDIC to treat 
differently). This change constitutes a substantial revision to 
the deposit assessment system, which, by statute, can only be 
made after notice and opportunity for comment. Accordingly, on 
November 9, 2010, the FDIC's Board of Directors adopted a 
notice for proposed rulemaking with request for comment on 
changes to the assessment base and their anticipated effect. 
The proposed rulemaking has a 45 day comment period and 
proposes to make the changes effective April 1, 2011.

Q.4. Can you provide me an update on your agencies progress in 
implementing the property appraisal requirements of Title XIV 
of Dodd-Frank? What process will you use to develop and 
implement these requirements?

A.4. Title XIV contains several provisions pertaining to 
appraisals for transactions secured by a consumer's principal 
dwelling. Several provisions require joint rules to be 
promulgated, which includes drafting the joint proposed rules, 
soliciting public comments, and finalizing those rules. 
Therefore, the FDIC is working closely with the Federal Reserve 
Board, the Office of the Comptroller of the Currency, the 
National Credit Union Administration, the U.S. Department of 
Housing and Urban Development, and the Federal Housing Finance 
Agency to address these provisions and rulemakings, as 
appropriate. In addition, once the Consumer Financial 
Protection Bureau becomes operational, this agency also will 
participate in interagency efforts relating to the 
implementation of many of these provisions.
    In September 2010, the FDIC, along with the other agencies, 
established interagency working groups which are meeting to 
study and discuss key implementation issues. These groups now 
are identifying specific appraisal-related issues relative to 
transactions secured by a consumer's principal dwelling that 
will need to be addressed by proposed rules or interpretive 
guidance.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
                      FROM SHEILA C. BAIR

Q.1. In February 2008, the FDIC began a two-year pilot project 
to review affordable and responsible small-dollar loan programs 
in financial institutions. Title XII of the Dodd Frank Act 
calls for the establishment of a small dollar loan program 
within the Department of Treasury's Community Development 
Financial Institutions Fund. What has the FDIC learned from its 
pilot program that would be helpful for Treasury to consider as 
it implements its own small dollar loan program?

A.1. The FDIC's Small-Dollar Loan pilot was a two-year case 
study designed to illustrate the feasibility of banks offering 
small-dollar loans as an alternative to high-cost credit 
products, like payday loans or fee-based overdraft programs. 
The pilot ran from February 2008 to February 2010, and 
concluded with 28 participating banks ranging in asset size 
from $28 million to $10 billion. Cumulatively, during the 
pilot, banks made more than 34,400 loans with a principal 
balance of about $40.2 million. While delinquencies for loans 
made under the pilot were much higher than for personal 
unsecured loans in general, the loans had similar default rates 
to the general population. This fact--that loans made under the 
pilot are no more likely to default than other similar loans--
is an important takeaway from the pilot that might be helpful 
to the Treasury as it implements its program.
    Regarding other important lessons learned, a key point was 
that, as an overall program, most of the bankers did not view 
the small-dollar loans as a stand-alone profit generator. 
Rather, they indicated that long-term relationship building was 
the primary goal for their small dollar loan program. The 
bankers are seeking to generate long-term profits by using the 
small dollar product to build or retain multiproduct 
relationships.
    In terms of actual product elements, bankers indicated that 
loan terms longer than just a few pay periods were critical for 
loan performance in that they gave consumers more time to 
recover from financial emergencies. While some banks 
experimented with shorter loan terms, in all but one rather 
specialized case, 90 days emerged as the bare minimum with 
averages hovering much longer, at 9 months or more. 
Streamlined, but solid underwriting, also was considered 
important for mitigating defaults.
    The pilot also found that in general, small-dollar loan 
programs that emphasized savings linked to credit and delivery 
of financial education tended to have lower default rates than 
those that did not. Given the limited sample size and 
differences in program features, it is difficult to determine 
whether and the extent to which linked savings or formal 
financial education directly affected performance, however, 
there were some indications that these could be factors. 
Another interesting finding in this area was the difference of 
opinion among pilot bankers about mandating linked savings and 
financial education. Some bankers believed that these items had 
to be hardwired into the small-dollar lending process to break 
the cycle of high-cost lending. Others believed that adding 
features for a loan complicates the small-dollar loan product 
and drives stressed consumers into the ease of the payday 
process.
    The best practices and lessons learned from the pilot 
resulted in the following model template of product design and 
delivery elements for small-dollar loans that might be of use 
to the Treasury. The template is simple and it is replicable in 
that it requires no particular technology or infrastructure 
investment. It also could help banks adhere to existing 
regulatory guidance that requires banks to monitor excessive 
overdraft use and offer available alternatives to qualified 
consumers.



       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                      FROM SHEILA C. BAIR

Q.1. Regulatory Structure for Volcker Rule. As you know, the 
objectives of the Merkley-Levin Volcker Rule are two-fold: (1) 
to address the specific risks to our financial stability caused 
by proprietary trades gone bad, and (2) to take on the 
conflicts of interests in proprietary trading.
    Ensuring effective oversight will be challenging, because 
the issues are complicated. As you could see from the exchange 
at the hearing between Senator Reed and Chairman Bernanke, with 
interjections by Chairman Shapiro and Mr. Walsh, I and others 
are beginning to come of the view that there will have to be 
oversight at two levels. First, there will need to be real-time 
(or as close as practicable) monitoring and enforcement at the 
individual trade-by-trade level, which looks to whether any 
given transaction is proprietary trading. This will be 
necessary to ensure that the permitted activities are not 
abused. Second, there will need to be macro-level reviews of 
policies and procedures, and overall portfolio holdings. This 
will be necessary to ensure that proprietary positions and 
conflicts of interest are not cropping up despite the 
restrictions. In addition to monitoring and enforcing the 
proprietary trading and conflicts of interest restrictions, 
regulators are also tasked with setting appropriate capital 
charges, both for permitted activities, and, in the instances 
of nonbank financial companies supervised by the Board, capital 
charges for all covered activities.
    Your agencies appear to have somewhat different strengths 
in these areas, with perhaps the SEC and CFTC having greater 
experience policing the securities and derivatives markets for 
trading violations, and the banking regulators having greater 
experience evaluating the safety and soundness of firms and 
setting appropriate capital charges and levels.
    Share with me your view about the strengths you believe 
your agency brings to the oversight and enforcement of the 
Merkley-Levin Volcker Rule? Are you committed to working with 
your fellow regulators to best use your agency's strengths in 
the effort to keep our financial system safe?

A.1. As you indicated, the FDIC has significant experience in 
evaluating the safety and soundness of financial firms and 
specific investments, as well as setting appropriate regulatory 
capital requirements. We are prepared to work closely with our 
fellow regulators and use the skills and abilities of the FDIC 
to keep the financial system safe. We view the implementation 
of a strong Volcker Rule as a vital tool in this effort.

Q.2. Data Collection. The Dodd-Frank Act requires a significant 
amount of new data collection and storage, particularly in the 
derivatives arena. The SEC and CFTC have made a priority of new 
data collection in a number of areas. Collection and the 
ability to automate reviews of the data will be critical to 
enforcing a wide range of mandates under Dodd-Frank, including 
derivatives position limits, the Volcker Rule provisions, and 
other parts of the bill. At a minimum, your staffs will need to 
know who's making trades, the prices, how long firms hold onto 
their positions, and whether and how their positions are 
hedged.
    Where is your agency in terms of thinking through the 
relevant data you will need to collect?

A.2. Although the CFTC and SEC are responsible for establishing 
data collection requirements, the FDIC staff has developed a 
list of the relevant data fields and is in the process of 
communicating these data needs directly to these agencies. As 
you indicate in your question, these revolve around the volume 
of positions and the purpose of the trade (hedge, speculate, 
make a market). As deposit insurer, the FDIC needs to be able 
to identify potential risks that are building within the 
financial system as a result of derivatives concentrations. 
Moreover, the FDIC has a specific mission regarding the 
disposition of over-the-counter (OTC) derivatives in the event 
of the failure of an insured depository or systemically 
significant market participant. In an earlier rulemaking, the 
FDIC developed data maintenance and reporting standards for the 
OTC derivatives in troubled banks; we refer to this as the 
``QFC Rule.'' Because the FDIC must make a decision on the 
disposition of the qualifying financial contracts (QFCs) one 
day after the appointment of the FDIC as receiver of the failed 
bank, an orderly resolution demands that a full understanding 
of the positions and the purpose of the trades be known in 
advance.

Q.3. Are there any major challenges you see in being able to 
collect and analyze that data in real-time, so as to ensure 
compliance with these various restrictions?

A.3. It is not clear that all of the analysis would need to be 
done in real time. Certainly, real time analysis would be 
needed to assure markets are functioning in an orderly manner 
and that violation of SEC or CFTC rules are not occurring. In 
general, the positions that banking organizations put on their 
books are not reversed during the course of one day. Moreover, 
data integrity is very important; therefore, using data that 
have been confirmed by both parties, or so-called ``paired 
trades,'' should be the cornerstone of data accuracy for data 
being housed in the data repositories. For accuracy and as it 
pertains to the ultimate use, position reporting may not need 
to be in real time.
    In terms of challenges, the greatest challenge likely may 
be obtaining accurate prices of positions in the repositories. 
Unlike the exchange-traded markets, where prices are generally 
set through a transparent market, the OTC contract values are 
usually marked-to-model rather than marked-to-market. 
Particularly for the FDIC's receivership responsibilities, 
knowledge of the market value of the contracts aggregated by 
exposure to a given counterparty (and the family of affiliates) 
and the value of collateral (and the jurisdiction in which it 
is being held) is critical.

Q.4. How do you see the newly created Office of Financial 
Research playing into this process?

A.4. The Office of Financial Research (OFR) will be very 
important for the analysis of the data and fostering data 
reporting infrastructure standardization. The OFR may be able 
to provide assistance to regulators by developing data 
standards. Recent public discussions by senior Treasury 
officials have emphasized the need to create standardized 
identifiers for counterparties, trade types, etc., to be able 
to analyze meaningfully the volume of information that will be 
housed in multiple repositories. For example, the trade 
repositories likely will be based on asset classes, such as 
interest rates, foreign exchange, equities, etc. Without 
standardized identifiers, the ability to aggregate positions 
across trade repositories for a given banking organization will 
be limited.

Q.5. Cross-border Resolution. I know FDIC and to some extent 
others have been working very diligently to implement the new 
resolution authority for our Nation's large complex financial 
institutions--which owes so much to my colleagues on this 
Committee from Virginia and Tennessee.
    But one of the areas I want to keep an eye on--and on which 
I offered an amendment during financial reform to provide 
additional oversight of--is how to make that resolution work 
for large firms operating across multiple national borders.
    Where are we in terms of making the Dodd-Frank resolution 
authority work for large, systemically significant financial 
firms operating across borders? How cooperative have our 
international partners been in this effort?

A.5. We have received good cooperation from international 
supervisors regarding the development of resolution plans for 
cross-border firms. In January and in July of this year, 
multiple day meetings were held with international supervisors 
related to crisis management planning, specifically including 
resolution challenges facing the FDIC. Staff-level meetings 
have been ongoing with the United Kingdom, in furtherance of 
and pursuant to a Memorandum of Understanding (MOU) with the 
Bank of England specifically related to resolutions and crisis 
management. The FDIC continues work with other international 
regulators as well to develop resolution and crisis management 
MOUs.
    Various challenges to cross-border implementation of 
resolutions have been identified and continue to exist. These 
relate to different insolvency regimes in national 
jurisdictions, which cause legal impediments to effectuating a 
cross-border resolution (e.g., differences in creditor rights, 
contractual termination rights, impediments to transferring 
assets and liabilities, data protection and disclosure rules), 
as well as operational challenges (e.g., continued access to 
payment and settlement systems, functioning of operations cross 
time zones around the world). These concerns are being 
discussed bilaterally, as well as at the multilateral level, 
with organizations such as the FSB, the International Monetary 
Fund and the Basel Committee.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                      FROM SHEILA C. BAIR

Q.1. Chairman Bair, I cannot tell you how many times I have 
heard community banks complain about how their regulators will 
not allow them to make good, solid, small-business loans. 
Congress responded to the lending crisis by creating another 
TARP-like structure for small business lending, which I believe 
was a terrible idea. To what extent is the FDIC guilty of 
smothering even solid loans, and is the Fed or other regulators 
to blame?

A.1. The FDIC is profoundly concerned about the availability of 
small business credit. Clearly, the recession and real estate 
crisis have caused banks to curtail loan originations as they 
seek to preserve capital and workout an increasing level of 
nonperforming assets. In addition, rapid collateral value 
depreciation is influencing banks' small business lending and 
loan restructuring decisions as loan-to-value ratios, in 
certain instances, have deteriorated beyond lenders' internal 
underwriting standards. We have attempted to address these 
issues and have taken actions internally to ensure our 
supervisory practices encourage, rather than hinder, the 
availability of small business credit. As you know, small 
businesses are a key driver of growth in our economy and likely 
will be the first enterprises to create jobs and spur an 
expansion.
    In response to the great public concern over small business 
credit availability, the regulators issued the Interagency 
Statement on Meeting the Credit Needs of Creditworthy Small 
Business Borrowers on February 5, 2010, to encourage prudent 
small business lending and emphasize that examiners will apply 
a balanced approach in evaluating loans. The guidance states 
that examiners will not discourage prudent small business 
lending or criticize loans solely due to a decline in 
collateral value. This guidance was issued subsequent to the 
October 30, 2009, Policy Statement on Prudent Commercial Real 
Estate Workouts that encourages banks to restructure loans for 
commercial real estate mortgage customers experiencing 
difficulties making payments. This Statement applies 
appropriate and long-standing supervisory principles in a 
manner that recognizes pragmatic actions by lenders and 
borrowers are necessary to weather this difficult economic 
period. The FDIC believes these Statements have helped banks 
become more comfortable extending and restructuring soundly 
underwritten small business loans.
    The FDIC has not changed its expectations for prudent small 
business lending. We provide banks with considerable 
flexibility in dealing with customer relationships and managing 
loan portfolios, and will continue to advocate for an expansion 
of prudent small business lending at the institutions we 
supervise.

Q.2. What is the total number of bank failures over the past 3 
years, and have the failures of smaller institutions 
contributed to the growing trend of financial concentration in 
large banks?

A.2. Since the beginning of 2008 there have been 311 insured 
depository institution failures (as of November 15, 2010). 
There were 25 in 2008, 140 in 2009 and 146 as of November 15.
    The failure of small insured depository institutions has 
not contributed to significant financial concentrations among 
large banks. Of the 311 failures over the past 3 years, 302 
have been small institutions, defined as those with total 
assets of less than $10 billion. These smaller institutions 
amount to only 3.9 percent of the more than 7,800 insured 
depository institutions in existence today. The top 50 insured 
depository institutions hold 72 percent of total banking 
assets. But the top 50 institutions accounted for the 
acquisition of only 29 of the small failed institutions since 
2008, or less than 10 percent of the total number. The trend 
toward increased financial concentration over the past several 
years has been driven mainly by the acquisition by the largest 
financial companies of other large companies, in many cases 
involving the acquisition of a troubled financial company 
without FDIC assistance.

Q.3. Is there anything in the Dodd-Frank law that will prevent 
the concentration of big banks, or will the fact that ``too-
big-to-fail'' institutions will get both special Fed regulation 
and access to a new FDIC resolution process (with unlimited 
ability to get loans from the Treasury) actually encourage 
investors to leave smaller institutions and flock to the ones 
that are too big to fail?

A.3. Section 622 of the Dodd-Frank Act specifically restricts 
mergers of large financial firms that would result in their 
total liabilities exceeding 10 percent of the industry's total 
liabilities. The Council is required to complete a study on the 
concentration limit by late January 2011. There is currently in 
place a similar restriction on bank mergers based on domestic 
deposit concentrations.
    The Dodd-Frank Title II orderly liquidation authority 
allowing the FDIC to resolve large nonbank financial firms is 
specifically designed to impose losses on the stockholders and 
bond holders of Systemically Important Nonbank Financial 
Companies or Bank Holding Companies with no cost to the 
American taxpayer. These new authorities will level the playing 
field by putting large financial firm investors at risk.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                      FROM SHEILA C. BAIR

Q.1. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
market to limit disruption. In light of the FDIC's unilateral 
decision to add an across the board risk retention requirement 
in the safe harbor rule, which the OCC opposed, how do you plan 
to coordinate and reconcile disagreements in the joint 
rulemaking?

A.1. The FDIC undertook to revise its original safe harbor rule 
(initially adopted in 2000) in light of accounting changes that 
came into effect for reporting periods after November 15, 2009. 
Nothing in this revised safe harbor rule (the Rule) is 
inconsistent with the Dodd-Frank Act. The provisions of the 
Dodd-Frank Act substantively address only the risk retention 
requirements and, pending further regulatory action, require 5 
percent risk retention. This 5 percent level matches the level 
in the Rule (unless certain underwriting standards are met). 
Nonetheless, in order to assure consistency between the Rule as 
issued and any future interagency regulations that may be 
inconsistent, the Rule provides that automatically, upon the 
effective date of final regulations required by Section 941(b) 
of the Dodd-Frank Act, such final regulations shall exclusively 
govern the risk retention requirement under the Rule. Thus, 
there will not be disagreement to coordinate and reconcile 
because of this safe harbor rule.

Q.2. Market participants highlight uncertainty related to 
changing regulations, new accounting standards, and other 
mandates as an obstacle to a resurgence of these markets. What 
steps are your agencies currently taking to minimize these 
complications? What should be done collectively by regulators 
to limit this uncertainty as you look toward the joint 
rulemaking?

A.2. We believe that this safe harbor rule strikes a fair 
balance between protecting the FDIC's Deposit Insurance Fund 
and allowing participants to adjust to a safer, more 
transparent securitization market.
    The FDIC advocates a reestablishment of the securitization 
market, but in a way that is characterized by strong disclosure 
requirements for investors, good loan quality, accurate 
documentation, better oversight of servicers, and incentives to 
assure that assets are managed in a way that maximizes value 
for investors as a whole. The FDIC has taken and is in the 
process of taking other steps to minimize market uncertainty.
    In response to industry concerns, the FDIC did not delay, 
but took a measured evaluation of its original safe harbor 
rule. This evaluation has been in process for nearly a year, 
and we believe that the industry should have no problem 
adjusting. Even though the final regulations were adopted on 
September 30, 2010, application of the rule will not be 
effective until 2011, with the prior safe harbor rule extended 
through the end of the calendar year. All securitizations 
originated prior to January 1, 2011, will be grand fathered 
under the previous safe harbor rule.
    While it is axiomatic that different regulatory agencies 
have different regulatory jurisdiction, and in exercising their 
different responsibilities, the agencies may have to adopt 
rules addressing the same issues within their regulatory 
mandate, the FDIC has made a conscious effort to harmonize its 
rules with other agencies, except where differences are 
appropriate to accomplish different regulatory missions. As 
noted in the response to the previous question, the FDIC, 
balancing requests from the industry for expedited revisions to 
the safe harbor rule with the pending financial reform 
legislation, issued its rule with a risk retention level that 
will automatically apply the risk retention levels established 
by the interagency regulations.
                                ------                                


RESPONSES TO WRITTEN QUESTIONS OF SENATOR HUTCHISON FROM SHEILA 
                            C. BAIR

Q.1. Since the passage of the Dodd-Frank Act, I have heard from 
a number of my small banks that are tremendously concerned 
about the onslaught of new regulations on the horizon, 
particularly because they are already drowning in a sea of 
regulatory burden. In fact, over the past few months, the vast 
majority of community banks in Texas State that they are much 
more concerned with future compliance exams than they are about 
safety and soundness exams. The reason for their concern lies 
simply in ``missing something;'' that is, not properly adhering 
to any of the new and unfamiliar regulations.
    In addition to the amount of compliance that community 
banks will soon face, I am also hearing concern about the sheer 
cost, particularly for the smallest community banks with $250 
million in assets or less. These banks will increasingly have 
more and more difficulty absorbing the additional costs to 
comply with the ever-expanding Government intervention into 
their business. These community banks will be forced to attract 
and pay for necessary staff, consultants, and lawyers as the 
regulations and new requirements keep piling on, something one 
of my bankers in Texas has described as ``death by a thousand 
cuts.'' Many of these small community banks have indicated that 
they are simply waiting for the value of their banks to rise as 
the economy improves, so that they can sell their banks in the 
near future. In my assessment, this will leave a number of 
small communities without their local community bank, the 
primary driver of their local economy.
    While it has been acknowledged over and over again 
throughout the debate on financial regulatory reform that 
community banks neither contributed to nor profited from the 
excesses that led to the financial crisis, community bankers in 
Texas, and across our country, feel that they're paying a very 
dear price.
    What observations do you have? Is there a regulatory model 
that might allow these local institutions to operate in an 
environment where they can take deposits in from their 
communities, then lend out to local families and small 
businesses to foster economic growth and job creation in their 
respective communities, and do so without the economic and 
mental anguish of immense regulation that will only continue to 
increase as a result of the Dodd-Frank Act?

A.1. Congress has mandated a number of financial regulations to 
protect consumers and the FDIC recognizes that banks expend 
significant resources to comply with these laws. The FDIC is a 
strong advocate for consumer protection and we take our 
responsibility for ensuring compliance very seriously.
    We agree with your constituents that this is an extremely 
challenging time for banks, and we applaud their efforts to 
maintain strong compliance programs while remediating credit 
quality and earnings issues associated with the economic 
downturn. Compliance with consumer protection laws requires 
considerable time and resources on the part of financial 
institutions, particularly during a period of stressed business 
conditions. Recent legislation should help level the playing 
field with nonbanks as they now will be required to meet the 
same standards as banking institutions, especially in the 
mortgage finance arena. However, it is clear that consumers 
have come to expect, and depend greatly on, insured depository 
institutions to design and offer fair and equitable financial 
services products. We believe the public's significant trust in 
banks has been fostered by banking institutions' diligence in 
maintaining effective consumer protection programs.
    We understand your constituents' concerns and hope banks 
can continue to meet the public's expectations for delivering 
responsible consumer financial products. At the same time, the 
FDIC will strive to maintain a streamlined examination process 
to help ensure bankers can focus on their core banking business 
and serve consumers on Main Street.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                     FROM MARY L. SCHAPIRO

Q.1. Chairman Schapiro, a number of recent SEC initiatives have 
been approved by a split Commission.
    Given the importance of implementing the Dodd-Frank 
legislation in a balanced manner, what steps are you taking to 
propose and adopt rules that have the support of all five 
Commissioners?

A.1. Since I have become Chairman, over 91 percent of the 
Commission's rulemaking actions have been approved by a 
unanimous vote. The Commission works hard to reach consensus on 
every matter, and I have rescheduled matters when additional 
time and further discussion may help us arrive at a decision 
that can be supported by all.
    This is not to say, however, that unanimity is the only 
acceptable outcome. Sometimes, reasonable people--acting based 
on their own informed judgment--must ultimately agree to 
disagree. As our experience indicates, this happens relatively 
infrequently at the Commission. When it does occur, the matters 
are typically among the most controversial also from a public 
perspective. This is to be expected, as our Commission 
structure and public comment process is designed so that 
strongly held differences of opinion by external constituents 
are important factors that are considered by all Commissioners.

Q.2. Chairman Schapiro, the Dodd-Frank Act requires the SEC to 
adopt countless rules, establish new offices, and conduct a 
number of studies. A 10-page implementation schedule recently 
posted on the SEC's Web site gives an idea of what an 
undertaking this will be. These Dodd-Frank responsibilities 
must be balanced with the SEC's routine enforcement and 
oversight responsibilities. Needless to say, some more 
discretionary rulemaking by the SEC will have to be moved to 
the back burner in order to comply with the aggressive Dodd-
Frank implementation schedule and address the serious problems 
with enforcement and compliance brought to light by the Madoff 
and Stanford cases.
    How do you reconcile your decision to move forward with 
proxy access, a completely discretionary grant of authority in 
the Dodd-Frank legislation, with the need to move forward with 
the legislation's many other time-sensitive mandates?
    What additional discretionary items do you intend to take 
up in the next year?

A.2. The Commission most recently proposed its ``proxy access'' 
rules on June 10, 2009, over a full year before the enactment 
of the Dodd-Frank Act. The comment period on these proposals 
was extended once, and ultimately closed in mid-January, 2010. 
Between that date and mid-July, 2010, the staff analyzed 
comments; developed a term sheet for adoption; considered 
Commission responses to that term sheet; and drafted an 
adopting release and regulatory text. Consistent with our 
internal processes, a fully developed adoption package was 
provided to Commissioners well before the Dodd-Frank Act was 
passed by Congress and signed into law by the President on July 
21, 2010. Between that date and the Commission's adoption on 
August 25, 2010, the remaining staff work involved responding 
to Commissioners' questions, redrafting to address 
Commissioners' concerns, and revising the draft release to 
account for the statutory language on the topic included in the 
Dodd-Frank Act. Finalizing this regulatory action did not 
divert any resources that are or were necessary for 
implementing Dodd-Frank. The timing was driven by a hope that 
new rules could be in place for most, if not all, of the 2011 
proxy season.
    As you note, Commission and staff resources are focused on 
meeting the obligations that Congress has created for us 
through Dodd-Frank as well as previous legislative actions. We 
believe, however, that certain ``discretionary'' rulemakings 
must continue to go forward--despite strained resources--to 
fulfill our overarching mandate of protecting investors, 
maintaining fair and orderly markets, and facilitating capital 
formation. At this time, while it is difficult to predict 
precisely which rulemaking efforts will go forward, non-Dodd-
Frank issues I expect to bring before the Commission for 
consideration during the next year include: a variety of market 
structure rulemakings, consolidated audit trail, large trader 
reporting, broker-dealer financial responsibility, short-term 
borrowing disclosure, Regulation M, point of sale disclosure, 
proxy solicitation enhancements, target date funds, and 12b-1 
fees. In addition, following review of the comments on our 
recent concept release on proxy ``plumbing'' issues, I expect 
to bring some related proposals before the Commission during 
the next year.

Q.3. Chairman Schapiro, Section 939G of the Dodd-Frank Act, 
which eliminated the expert liability exemption for credit 
rating agencies, shut down the already weakened securitization 
markets for a brief period upon enactment. A temporary fix by 
the SEC averted the problem, but a long-term solution still is 
needed. More generally, other regulatory changes in the 
securitization space could have unintended consequences, 
particularly if differences among asset classes are not taken 
into account.
    What is the SEC doing to develop and implement a permanent 
solution to the credit rating agency issue?
    What is the SEC doing to ensure that the securitization 
rules it adopts avoid creating further unintended consequences 
in any affected asset class?

A.3. With respect to the first question, Commission staff 
currently is discussing this issue with market participants and 
the credit rating agencies. In light of the significant 
revisions to the regulatory landscape currently being 
implemented for asset-backed securities and rating agencies, 
the staff is working on a solution that takes account of the 
new regulatory regime.
    With respect to the second question, on April 7, 2010, the 
Commission published for public comment proposals to amend 
Regulation AB to enhance the disclosure investors receive when 
they purchase asset-backed securities. In addition, last month 
we issued two further proposals concerning asset-backed 
securities to implement Sections 932, 943, and 945 of the Dodd-
Frank Act. Each of these proposals is subject to public 
comment, a critical step in the Commission's rulemaking 
process. We currently are working with our fellow regulators to 
propose risk retention requirements for asset-backed securities 
as required by Dodd-Frank, which also will be subject to notice 
and comment. As always, we will carefully consider all input we 
receive, including unintended consequences, as we formulate 
final rules. In addition, while we will make every effort to 
foresee and address unintended consequences in adopting final 
rules, whether in implementing Dodd-Frank or otherwise, the 
Commission and its staff stand ready to act quickly to address 
any unintended consequences that may arise.

Q.4. Chairman Schapiro, last year you announced the creation of 
a new Division of Risk, Strategy, and Financial Innovation, 
which combined the Office of Economic Analysis and the Office 
of Risk Assessment, and you said ``By combining economic, 
financial, and legal analysis in a single group, this new unit 
will foster a fresh approach to exchanging ideas and upgrading 
agency expertise.''
    This summer, both the Chief Economist and Deputy Chief 
Economist, along with some other economists, left the 
Commission. The former Chief Economist was quoted in a recent 
news article as saying that one of the reasons he left the SEC 
was because he felt the chief economist's role was diminished 
in importance under your chairmanship. In fact, prior to your 
chairmanship, the Chief Economist had reported directly to the 
Chairman. But, you insisted that the Chief Economist now report 
to the head of the Division of Risk, Strategy and Financial 
Innovation.
    Why have you diminished the role of economic analysis at 
the Commission?

A.4. The importance of economic analysis to the SEC and its 
work is undiminished. Neither the creation of the new Division 
of Risk, Strategy, and Financial Innovation (RiskFin), nor our 
current need for a new Chief Economist should be viewed as 
reflecting any diminishment of the role of economic analysis at 
the SEC. On the contrary, as is clear in the portion of my 
statement quoted above, it was--and remains--my intention to 
strengthen the already significant role of economic analysis at 
the Commission by integrating it with other analytic 
disciplines and techniques into a single organization serving 
the entire Commission. In light of the SEC's broad 
responsibilities, I continue to believe that such a 
comprehensive, synergistic analytic capability makes far better 
sense than permitting economic analysis to remain isolated from 
other, complementary analytic disciplines that are useful in 
understanding emerging market conditions, trading practices, 
and their implications. Even so, the full benefits of combining 
these formerly separate or novel analytic functions cannot be 
realized overnight.
    Vigorous and expert economic analysis under strong 
leadership is essential to support the Commission's work. As 
noted above, RiskFin was designed to combine and build upon our 
existing analytic capabilities. Nevertheless, as part of our 
ongoing search for the Chief Economist, I have made it explicit 
that, ``the Chief Economist will report directly to me and, on 
economic matters, play the lead role in representing the 
Division of Risk, Strategy, and Financial Innovation before the 
Commission.'' I have made the Chief Economist's primary role 
equally clear: ``I will look to the Chief Economist to assist 
me, my fellow Commissioners, and senior Commission staff in 
identifying and evaluating the economic implications of 
potential policy options.''

Q.5. Chairman Schapiro, four SEC rulemakings in the past 5 
years have been successfully challenged in court because of the 
Commission's failure to provide a sound economic justification 
for some of its arguments.
    In light of these defeats, why do you insist on favoring 
unmeasurable, behavioral concepts like ``investor confidence'' 
as justifications for rulemakings over rigorous economic 
analysis based on sound theoretical arguments and solid 
empirical evidence?

A.5. Economic analysis is a critical component of the 
Commission's rulemaking process. It provides the Commission 
with a valuable framework to assist in the development of 
policies that best serve investors and the broader capital 
markets. For example, the Commission relies on principles of 
economic reasoning to understand and assess the likely 
responses of market participants to various regulatory 
alternatives. Similarly, the Commission relies on available 
empirical data and economic analysis to understand a potential 
rule's economic costs and benefits, as well as its likely 
effect on competition, efficiency, and capital formation.
    Recognizing the importance of robust economic analysis in 
the rulemaking process, I established the Division of Risk, 
Strategy, and Financial Innovation in September 2009. A 
principal purpose of this new division is to elevate the role 
of economic analysis in the Commission's policymaking process 
and to strengthen the quality of the economic analysis 
underlying new Commission rules. As the Commission undertakes 
rulemaking in response to the Dodd-Frank Act and in other 
areas, this new division will continue to provide the 
Commission with sound economic analysis to inform our policy 
choices. The end result, I believe, will be Commission rules 
that rest on solid economic analyses that further our statutory 
mission.

Q.6. Chairman Schapiro and Chairman Gensler, the Dodd-Frank Act 
placed great emphasis on moving over-the-counter derivatives 
into clearinghouses for the purpose of reducing risk in the 
financial system. While this is a laudable goal, if not 
properly constructed, clearinghouses could be the too-big-to-
fail entities at the center of the next crisis. The last thing 
the American people want to do is pay for another bailout.
    What is each of you doing to ensure that the rules take 
seriously the potentially disastrous consequences of a misstep 
in the operation or oversight of clearinghouses?

A.6. The Commission has extensive experience with centralized 
clearance and settlement systems for securities. Since the 1975 
amendments to the Exchange Act, the Commission has had direct 
regulatory authority over the clearinghouses and securities 
depository that serve as the infrastructure of the U.S. 
securities markets. To date, the Commission's authority over 
clearance and settlement in the security-based swap market has 
been much more limited. As a result of the Dodd-Frank Act, the 
Commission now has substantially greater authority to regulate 
this area.
    In the coming months, I anticipate the Commission will use 
this new authority to consider rules designed to strengthen the 
risk management and governance practices of clearing agencies. 
The Commission staff also will continue its efforts to 
coordinate supervisory and oversight responsibilities in this 
area with the staff from the CFTC and the Federal Reserve, 
including under the payment, clearing, and settlement 
provisions of Title VIII of the Dodd-Frank Act. Both the 
Commission's rulemaking and its ongoing oversight of clearing 
agencies will continue to focus on the critical role that 
clearing agencies play in our financial system and the 
regulatory principles for those agencies set forth in the 
Exchange Act.

Q.7. Chairman Schapiro and Chairman Gensler, at a time when our 
economy is in terrible shape, we need to be particularly 
attentive to the unintended consequences of regulatory actions. 
Main Street businesses, large and small, have told us how 
imposing clearing and margin requirements on them will affect 
their ability to expand and hire. An effective, broad end user 
exemption is essential and completely consistent with the goals 
of transparency and mitigation of risk to the financial system.
    Are you committed to crafting a broad end user exemption 
that allows our job creators to avoid costly clearing, margin, 
exchange trading, and other obligations under the Act?

A.7. As you note, with respect to clearing, an effective end-
user exception is consistent with the policy goals of the Dodd-
Frank Act. An end-user clearing exception that is appropriately 
implemented can facilitate the activities of end users. In the 
coming months, the Commission plans to propose rules relating 
to the end-user clearing exception, and will consider seriously 
the comments of all interested parties in order to help ensure 
appropriate implementation. With respect to margin, the 
Commission has not yet proposed rules under the Dodd-Frank Act 
provisions relating to margin requirements for noncleared 
security-based swaps transacted by security-based swap dealers 
and major security-based swap participants for which there is 
not a prudential regulator. I am sensitive to the concerns that 
have been expressed about the potential impact of these 
requirements--and other provisions of the Dodd-Frank Act--on 
end users. Accordingly, I expect that the Commission will 
carefully consider both the scope of its authority in this area 
and the potential effects of margin requirements on the markets 
and market participants, including the nature and extent to 
which such requirements could impact the business of end users. 
Public feedback through the notice and comment process--
including input from end users--also will fully inform any 
final rule that the Commission may adopt.

Q.8. Chairman Schapiro and Chairman Gensler, Dodd-Frank 
mandates that both of your agencies adopt an unprecedented 
number of rules in a very short period of time. And, as you 
know, each of your agencies has a ``statutory obligation to do 
what it can to apprise itself--and hence the public and the 
Congress--of the economic consequences of a proposed regulation 
before it decides whether to adopt the measure.''
    However, a recent news article pointed out that both the 
SEC and the CFTC have been without Chief Economists for months.
    Chairman Schapiro and Chairman Gensler, why have your Chief 
Economist positions gone unfilled for so long?
    How can you expect to adequately consider the economic 
consequences of all of your proposed rules with unfilled Chief 
Economist positions?

A.8. The SEC's need for sound economic analysis ranges across 
all three of its rule-writing divisions and includes the 
considerable litigation support our economists provide to the 
Division of Enforcement. Finding the strongest possible Chief 
Economist for the SEC is therefore a matter of considerable 
importance not only to me but to the SEC as a whole. We are 
conducting a broad search for the SEC's next Chief Economist 
and I actively have participated in that effort. I believe the 
additional effort we have taken to identify a range of strong 
candidates to meet our requirements is well worth the time 
inevitably entailed.
    While we hope to recruit a Chief Economist soon, our 
economist staff in Risk Fin continues to analyze the economic 
implications of each proposed rule. The Chief Economist will 
provide strong and experienced leadership to this team of 25 
PhD financial economists who routinely analyze the potential 
economic consequences of proposed regulatory actions and 
provide analytic support for SEC enforcement actions. They are 
also engaged in the more prospective and creative process of 
helping to identify the most appropriate regulatory approaches 
for new or evolving markets and products. Those activities 
continue unabated as we conduct a vigorous search for the SEC's 
next Chief Economist. We continue to hire experts in financial 
engineering and other analytic disciplines that complement our 
economists' analytic efforts. We are now in the midst of our 
annual effort to recruit new staff economists to the SEC. 
Attrition and replacement hiring within our staff of PhD-level 
financial economists is normal and can even assist in ensuring 
that our economist staff retains its familiarity with the 
latest analytic techniques and leading currents of thought in 
their fields.
    Leading our team of professional financial economists, 
particularly during the present, exceptionally active period of 
rule writing, will require exceptional leadership and practical 
skills. In seeking candidates to serve as the SEC's next Chief 
Economist, I have, therefore, stressed that, ``The Chief 
Economist will . . . play a special leadership role in guiding 
our staff economists and ensuring a uniformly high standard of 
analysis.'' I personally have sought the assistance of a wide 
variety of leaders outside the SEC, including each of the SEC's 
former Chief Economists, as we build the strongest possible 
list of candidates to fill this position.

Q.9. Chairman Schapiro and Chairman Gensler, the derivatives 
title of the Dodd-Frank Act establishes new entities called 
``swap execution facilities'' and ``security-based swap 
execution facilities,'' commonly referred to as ``SEFs,'' as 
alternatives to exchanges. Ideally, multiple SEFs will compete 
to give market participants several different choices for 
trading particular types of swaps.
    Given the SEC's experience in overseeing securities markets 
in which participants have the choice of several different 
trading venues, what is each of you doing to ensure that the 
CFTC has the benefit of the SEC's expertise in this area?

A.9. Members of SEC and CFTC staff have collaborated 
extensively and regularly exchanged information while working 
to create a framework for the regulation of the swap and 
security-based swap markets under the Dodd-Frank Act. In 
particular, the two teams working on SEFs have sought to make 
sure that each agency has the benefit of the other's expertise 
in regulating the financial markets.
    Based on joint meetings with market participants and a 
joint roundtable on SEFs held by SEC and CFTC staff, I believe 
it is possible that multiple SEFs will trade the same swaps or 
security-based swaps. Trading on multiple markets is a hallmark 
of our equity and options markets, and competition among those 
markets helps investors and market professionals obtain the 
best price. We have shared with CFTC staff our experience in 
regulating multiple trading venues under the authority of the 
Exchange Act and the national market system.

Q.10. Chairman Schapiro and Chairman Gensler, Title VIII 
authorizes your agency to prescribe regulations for financial 
institutions engaged in designated activities for which each is 
the Supervisory Agency or the appropriate financial regulator 
governing the conduct of the designated activities.
    What plans do you have for exercising this authority?

A.10. Commission staff has been working closely with the staffs 
from the Federal Reserve and the CFTC to develop a coordinated 
strategy for rulemaking and supervisory activities under Title 
VIII of the Dodd-Frank Act for financial market utilities 
designated as systemically important. In the coming months, I 
anticipate that the Commission will propose rules relating to 
standards for clearing agencies within its jurisdiction, 
including rules to implement the new ``notice of material 
change'' provisions applicable to designated financial market 
utilities under Title VIII.

Q.11. The Financial Stability Oversight Council is an important 
feature of Dodd-Frank. During the conference, my amendment was 
adopted to clarify the role of the Council and the Federal 
Reserve. My amendment gave the Council responsibility for 
financial stability regulation. Up to that point, the 
legislation had colocated this responsibility at the Fed and 
the Council. The Congressional intent is clear that you, as 
members of the Council, are responsible for all policy matters 
related to financial stability. After the Council acts, 
implementation of your policy determinations will fall to the 
individual Federal financial regulators, including, of course, 
the Fed.
    With this in mind, I would like each of you to comment on 
your preparations to serve on the Council:
    Have you directed your staff to examine and study all of 
the issues that will come before you?
    Are you prepared to participate on the Council, not as a 
rubber stamp for the Chairman of the Council, but as a fully 
informed individual participant?

A.11. Yes. The Council and the staff of each agency (including 
the SEC) have formed a number of interagency working teams to 
establish the structure of the Council itself and address its 
substantive responsibilities. This includes teams establishing 
a process for designating systemically important nonbank 
financial companies and financial market utilities for 
heightened supervision and identifying potential risks and gaps 
in oversight and regulation.
    The Council already has sought public comment regarding the 
Volcker Rule study (http://www.treas.gov/FSOC/docs/2010-
25320_PI.pdf) and the proposed rulemaking for designating 
nonbank financial companies as systemically important (http://
www.treas.gov/FSOC/docs/2010-25321_PI.pdf).
    I appreciate that the Council was designed to bring 
together multiple independent perspectives to these and other 
issues that involve potential risks to the stability of our 
financial system. Indeed, I believe that this model is one of 
the Council's core strengths.

Q.12. Secretary Geithner has argued that there is a strong case 
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published 
a paper that proposes Government guarantees of a wide range of 
asset backed securities, including those backed by mortgages, 
credit cards, autos, student loans, commercial real estate, and 
covered bonds. While some may believe that the Government will 
charge fair prices for Government guarantees, the history of 
Government run insurance programs suggests that things will not 
go well.
    Does anyone on the panel support extending or increasing 
Government insurance against losses on asset backed securities 
which, it seems to me, socializes risk, puts taxpayers on the 
hook for losses, and protects Wall Street against losses?

A.12. The mission of the SEC is to protect investors, maintain 
fair, orderly, and efficient markets, and facilitate capital 
formation. In fulfilling this mission, the SEC's role 
traditionally has been to regulate the disclosure that public 
companies provide to their investors and to enforce the Federal 
securities laws, except where another role is specifically 
mandated or authorized by Congress,. Accordingly, I do not 
believe that this is a topic on which it would be appropriate 
for me to take a position.

Q.13. Please provide the Committee with an implementation 
schedule that includes:
    (a) a list of the rules and studies that your agency is 
responsible for promulgating or conducting under Dodd-Frank and 
the date by which you intend to complete each rule or study; 
and
    (b) a list of the reorganizational tasks your agency will 
undertake to fulfill the mandates of Dodd-Frank and the date by 
which you intend to complete each task.

A.13. Attached is a list containing the approximate dates of 
the rulemakings, studies and other actions the Commission will 
be undertaking pursuant to the Dodd-Frank Act in the 1 year 
period following its becoming law. The information contained in 
the list also can be found on our Web site at http://
www.sec.gov/spotlight/dodd-frank/dfactivity-upcoming.shtml#11-
10. This Web page is updated regularly. Currently, we have not 
yet set target dates beyond the 1-year time frame for other 
rulemaking actions and studies, but will make that information 
available on our Web site when those time frames have been 
developed. The Commission is on schedule to complete all of the 
required rulemakings, studies and other actions by the dates 
set forth in Dodd-Frank.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                     FROM MARY L. SCHAPIRO

Q.1. As I've made clear before, I think the largest financial 
firms in this country are just too large, and that their 
massive size threatens our economic security and puts us at 
risk in future crises.
    I think the rise of proprietary trading was one of the key 
drivers behind the massive growth in our largest financial 
institutions. Firms were taking on ever increasing prop trading 
positions, often with highly unstable short term financing, and 
when things froze up, the house of cards collapsed. The Volcker 
Rule looks to stop this risk.
    I know that my colleagues, Senator Merkley and Senator 
Levin, drafted section 619 of the Dodd-Frank Act to ensure 
broad coverage of the prohibition on proprietary trading by 
banks, and meaningful restrictions on the largest nonbank 
financial firms. Nevertheless, one of the concerns I have is 
that firms may try to evade the restrictions. Particularly, I'm 
concerned that if the regulators set a definition of ``trading 
account'' that is too narrow, it might not capture all of the 
risks of proprietary trading. These evasions could only happen 
if the regulators ignore the clear direction of the law to stop 
proprietary trading.
    Are you prepared to take a broad view on the definition of 
``trading account'' and examine and prevent proprietary 
trading, wherever it occurs?
    In short, are you prepared to use the full power of the 
Merkley-Levin provisions to cut the size and riskiness of our 
banks so they get back to the business of lending to families 
and businesses?

A.1. With respect to the first question, Commission staff is 
working closely with the staff of the bank regulators to study 
the definition of a ``trading account'' under Section 620 of 
the Dodd-Frank Act. \1\ Commission staff is considering how the 
definition should be applied in the broker-dealer context to 
best meet the goals established by Section 619 of the Dodd-
Frank Act. I am mindful--as is the Commission staff--that the 
results of the study currently being conducted by the Financial 
Stability Oversight Council (FSOC) under Section 619 also will 
help inform our approach to this important issue.
---------------------------------------------------------------------------
     \1\ While Section 619 establishes a broad definition of ``trading 
account,'' the term historically has been used principally in a banking 
context because banks generally maintain separate investment accounts 
and trading books (as opposed to broker-dealers, who have no such 
separation).
---------------------------------------------------------------------------
     With respect to the second question, I must defer to our 
colleagues at the banking regulators, who are better-placed to 
address the size and riskiness of banks serving the vital 
function of lending to families and businesses. More broadly, 
however, there are parts of the Merkley-Levin provisions where 
our expertise can help further the goals of those provisions. 
For example, with respect to ``proprietary trading'' and 
``market making,'' Commission staff currently is sharing its 
expertise to inform the FSOC study, and I anticipate that this 
expertise will help reduce the risk that either activity is 
employed by firms to undercut the goals of Section 619 of the 
Dodd-Frank Act.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                     FROM MARY L. SCHAPIRO

Q.1. Regulatory Structure for Volcker Rule. As you know, the 
objectives of the Merkley-Levin Volcker Rule are two-fold: (1) 
to address the specific risks to our financial stability caused 
by proprietary trades gone bad, and (2) to take on the 
conflicts of interests in proprietary trading.
    Ensuring effective oversight will be challenging, because 
the issues are complicated. As you could see from the exchange 
at the hearing between Senator Reed and Chairman Bernanke, with 
interjections by Chairman Shapiro and Mr. Walsh, I and others 
are beginning to come of the view that there will have to be 
oversight at two levels. First, there will need to be real-time 
(or as close as practicable) monitoring and enforcement at the 
individual trade-by-trade level, which looks to whether any 
given transaction is proprietary trading. This will be 
necessary to ensure that the permitted activities are not 
abused. Second, there will need to be macro-level reviews of 
policies and procedures, and overall portfolio holdings. This 
will be necessary to ensure that proprietary positions and 
conflicts of interest are not cropping up despite the 
restrictions. In addition to monitoring and enforcing the 
proprietary trading and conflicts of interest restrictions, 
regulators are also tasked with setting appropriate capital 
charges, both for permitted activities, and, in the instances 
of nonbank financial companies supervised by the Board, capital 
charges for all covered activities.
    Your agencies appear to have somewhat different strengths 
in these areas, with perhaps the SEC and CFTC having greater 
experience policing the securities and derivatives markets for 
trading violations, and the banking regulators having greater 
experience evaluating the safety and soundness of firms and 
setting appropriate capital charges and levels.
    Share with me your view about the strengths you believe 
your agency brings to the oversight and enforcement of the 
Merkley-Levin Volcker Rule? Are you committed to working with 
your fellow regulators to best use your agency's strengths in 
the effort to keep our financial system safe?

A.1. We are committed to working with our fellow regulators to 
develop a coordinated implementation of the Merkley-Levin 
Volcker Rule (Volcker Rule) that builds on each agency's 
relative strengths in regulating financial firms.
    Among the strengths the Commission brings to the 
implementation of the Volcker Rule is our regulatory experience 
with securities trading activities, as well as with the 
concepts of ``proprietary trading,'' ``market making,'' and 
``hedging.'' For instance, the Commission staff has experience 
with activity that we consider to be bona fide market making in 
the equities markets. I look forward to the Commission and its 
staff using this experience as we consider--together with our 
fellow regulators--how ``market making'' should be viewed for 
purposes of the Volcker Rule. Another example is the 
Commission's experience in examining and sanctioning firms with 
respect to conflicts of interests--experience that will help 
inform our understanding and ability to address some of the 
misconduct the Volcker Rule seeks to prevent.
    With respect to real-time collection of trade-by-trade 
data, given that a key goal of the Volcker Rule is addressing a 
firm's risk exposure, it may be necessary to focus on the 
nature and scope of a firm's principal trading and positions in 
the context of the type of market activity in which it is 
engaged. Collecting and analyzing trade-by-trade data on a 
real-time basis would require substantial new resources given 
both the volume of data that would need to be monitored and the 
current lack of regulatory infrastructure for collecting and 
surveilling such data on a real-time basis across all relevant 
asset classes and firms.
Q.2. Data Collection. The Dodd-Frank Act requires a significant 
amount of new data collection and storage, particularly in the 
derivatives arena. The SEC and CFTC have made a priority of new 
data collection in a number of areas. Collection and the 
ability to automate reviews of the data will be critical to 
enforcing a wide range of mandates under Dodd-Frank, including 
derivatives position limits, the Volcker Rule provisions, and 
other parts of the bill. At a minimum, your staffs will need to 
know who's making trades, the prices, how long firms hold onto 
their positions, and whether and how their positions are 
hedged.
    Where is your agency in terms of thinking through the 
relevant data you will need to collect?
    Are there any major challenges you see in being able to 
collect and analyze that data in real-time, so as to ensure 
compliance with these various restrictions?
    How do you see the newly created Office of Financial 
Research playing into this process?

A.2. The Dodd-Frank Act not only creates new requirements for 
data collection and analysis of security-based swaps by the 
SEC, but also underscores similar needs for markets we have 
long regulated. Today, the SEC collects data after the fact 
through a series of manual requests that can take days or even 
weeks to fulfill. This is not acceptable. I therefore have 
sought to have the Commission take a holistic approach--
addressing issues with our current data requirements while at 
the same time designing programs for our new requirements that 
take into consideration what we have learned from past efforts.
    These requirements start with data collection and 
reporting. For the equities markets, challenges around data 
collection have led the Commission to propose new rules for 
large trader reporting and a consolidated audit trail. Both of 
these initiatives seek to address shortcomings in the agency's 
ability to collect and monitor data in an efficient and 
scalable manner. For derivatives, the Commission staff is in 
the midst of developing new rules and reporting requirements 
that are designed to facilitate data collection. The staff is 
considering a range of options and issues in the derivatives 
space, including the utility of standardized formats and data 
elements and the need for robust and automated Commission 
access to the data. In addition, the Commission staff is 
considering standardized counterparty names so that derivative 
ownership can be tracked.
    A framework in which data is regularly collected on a daily 
basis and available to the SEC and other regulators would 
provide the Commission an opportunity for the timely analysis 
of specific issues as well as a framework for continuous, long-
term study of the markets. In order to ensure any type of 
general or specific analysis accurately reflects the order and 
sequence of trading events, new systems we procure should be 
capable of receiving time stamps, and the Commission has 
proposed requiring data to be tagged with time stamps. 
Implementation of such initiatives would be a tremendous step 
forward.
    Ensuring standardization of reporting is necessary, but not 
sufficient, to ensure a robust data analysis program. The 
Commission also needs to create an infrastructure for the 
scalable collection and timely analysis of such data. Again, we 
have started with existing requirements for the equities 
markets and are currently engaged in a Request for Information 
process with vendors who have proven track records in providing 
the types of specialized databases and analytical solutions 
required by the Commission. To help support and staff these 
initiatives with appropriate levels of expertise, the Division 
of Trading and Markets and the Division of Risk, Strategy, and 
Financial Innovation have been working, within the limitations 
of current budget constraints, to identify industry experts 
with the abilities, knowledge, and desire to help the 
Commission meet the new requirements under the Dodd-Frank Act.
    In addition to internal programs, the Commission staff has 
been working with the CFTC staff whenever data standards are to 
be shared across similar products regulated by both agencies. 
The Commission staff also has been working with the newly 
created Office of Financial Research on their preliminary 
initiatives. In particular, OFR can be an excellent conduit for 
disseminating common data standards that can be used across all 
regulators and market participants. In this fashion, data can 
be sourced in a more efficient manner that benefits not only 
regulators of specific firms and markets, but also the OFR 
itself as it seeks to aggregate summary information from across 
the marketplace. I believe OFR will provide an excellent 
complement to the type of work underway at the Commission today 
and look forward to continuing our active participation as they 
expand their efforts.
    With respect to ``real-time'' data collection and analysis, 
the collection of information on a regular, intraday basis 
would pose significant technical hurdles in markets where data 
is not generated in real-time. In addition, even if real-time 
collection of data may be feasible, it will require substantial 
new resources to achieve real-time analysis of the entire 
volume of the data that the Commission will seek to collect. 
Moreover, because much of the analysis likely to be performed 
will require careful reconstruction of events that also 
requires time, such analysis may best be accomplished in the 
context of end-of-day, or even longer, processing.

Q.3. Cross-border Resolution. I know FDIC and to some extent 
others have been working very diligently to implement the new 
resolution authority for our Nation's large complex financial 
institutions--which owes so much to my colleagues on this 
Committee from Virginia and Tennessee.
    But one of the areas I want to keep an eye on--and on which 
I offered an amendment during financial reform to provide 
additional oversight of--is how to make that resolution work 
for large firms operating across multiple national borders.
    Where are we in terms of making the Dodd-Frank resolution 
authority work for large, systemically significant financial 
firms operating across borders? How cooperative have our 
international partners been in this effort?

A.3. The challenge of resolving a large complex financial 
institution is compounded by different regulatory regimes that 
may apply to the same entity, or to affiliated entities, that 
operate across borders. The Commission and its staff 
participates in productive multilateral discussions among 
regulators in order to better understand the business practices 
and organizational aspects of global financial firms and how 
those practices and organizations can make resolution of 
international entities more challenging. The Commission plans 
to continue to work closely with the FDIC and other regulators 
to identify and address issues of mutual concern that arise in 
the context of the resolution of the Nation's large complex 
financial institutions.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                     FROM MARY L. SCHAPIRO

Q.1. Chairman Schapiro, this summer the New York Times reported 
on yet another AIG outrage. As part of the deal the New York 
Fed put together that paid off AIG's counterparties at par, AIG 
also waived its right to sue Goldman Sachs and other 
counterparties, even for fraud. It is interesting that you sued 
Goldman Sachs for fraud, but the New York Fed's deal did not 
allow AIG to sue Goldman Sachs or anyone else for fraud. If AIG 
had been able to sue, that could have helped recover 
shareholder value and made the massive bailout smaller. In your 
opinion, was it a mistake to force AIG to give up its right to 
sue, and do you plan to investigate this?

A.1. I understand your question to involve the actions of the 
Federal Reserve Bank of New York in November 2008 to 
restructure certain AIG credit-default swap contracts. I am not 
familiar with the considerations that factored into the 
decision-making process. As a result, I am not able to offer an 
opinion on particular components of the final agreements.
    You also asked whether the Commission intends to 
investigate any issues related to these events. Although I am 
unable to comment on the existence or nonexistence of specific 
law-enforcement investigations, I can assure you that the 
Commission's Enforcement Division continues to examine the 
events surrounding the financial crisis and, where violations 
of the securities laws are uncovered, the Commission will 
vigorously pursue culpable entities and individuals.

Q.2. As you know, this Committee held an oversight hearing last 
week on the SEC's mishandling of the Stanford Ponzi scheme, 
which defrauded investors out of $5 billion. I asked the SEC 
Inspector General and witnesses from the SEC whether anyone had 
been fired over the Enforcement Division's disturbing actions, 
or more accurately, deliberate inaction in spite of examiners 
begging them over several years to do something. None of the 
witnesses were aware of any firing. And worse, after the 
hearing I was informed by the Stanford Victims Coalition that 
exactly the wrong people were rewarded and punished. I was told 
that many of the very people in the Enforcement Division who 
were guilty of malfeasance were actually promoted. And further, 
the one person from the Examinations Division who identified 
the problem and doggedly tried to get employees of the 
Enforcement Division to do their job has actually been demoted, 
possibly out of retaliation for blowing the whistle. Is this 
true, and if so, why does the SEC reward employees who are 
guilty of malfeasance and punish employees who do the right 
thing?

A.2. With respect to discipline of staff who worked on the 
Stanford matter, we have carefully reviewed the Inspector 
General's report and are in the final stages of determining 
what, if any, personnel actions are appropriate. Although the 
Inspector General's report generally is critical of the 
performance of Enforcement staff, it does not recommend 
discipline for any particular employee. The Inspector General's 
report also did not find that the failure to investigate 
Stanford more aggressively was related to any improper 
professional, social, or financial relationship on the part of 
any current or former Commission employee. Moreover, the 
conduct that the Inspector General investigated occurred over 5 
years ago, some of it extending back well over a decade. Many 
of the Enforcement employees identified in the report no longer 
work at the Commission, including the most senior people who 
had final decision-making authority, such as the former 
District Administrator and two former Associate District 
Directors for Enforcement in the Fort Worth Office.
    The Commission has not promoted or demoted any member of 
its Enforcement or Examination staff as a result of work 
performed on the Stanford matter during the time period 
reviewed by the Inspector General. Employees with varying 
degrees of involvement in the Stanford matter have been 
promoted in both programs, however, based on their 
contributions to the Commission's overall efforts.
    You also inquire about a Fort Worth office employee who was 
allegedly demoted in retaliation for whistleblowing. The 
employee at issue currently is assigned to a position chairing 
our Southwest Regional Oil and Gas Task Force, which includes 
State and Federal regulators. The employee was not demoted and 
did not receive a decrease in pay or grade. The employee 
received a letter of reprimand based on conduct unrelated to 
Stanford that occurred prior to public criticism of the agency 
for its handling of the Stanford matter.

Q.3. Chairman Schapiro, I also learned at the Stanford Ponzi 
scheme hearing that the SEC Inspector General, who is supposed 
to be an independent watchdog, is not so independent after all. 
Apparently, the SEC can take as much time as it wants reviewing 
an IG report before it becomes public, redact whatever it wants 
from the report and call it ``proprietary,'' and control the 
release date of the report. The SEC's release of the Inspector 
General's Stanford report looked suspicious because it was done 
on a day with other distracting SEC news. It is stunning that 
the SEC has so much control over the Inspector General. By 
contrast, I am told that the Treasury Department has only seven 
days to review reports of the Treasury Inspector General for 
Tax Administration (TIGTA). Treasury can recommend redactions 
for taxpayer confidentiality or other narrow reasons, but TIGTA 
makes the call about whether the information will be redacted 
and when the report is released. Why does the SEC not allow its 
Inspector General to be truly independent, and how many IG 
reports is the SEC currently sitting on?

A.3. The Commission's Inspector General has full independence 
in determining what matters to investigate, in conducting those 
investigations, in drawing its conclusions and in preparing its 
reports. The process described below does not impact that 
independence in any way.
    As you may be aware, under the Inspector General Act, an 
Inspector General's reports are provided to the Commission. The 
Commission determines what redactions are needed prior to the 
dissemination of those reports. The Commission strives to make 
only limited redactions to the reports and seeks to perform its 
review function as expeditiously as is practicable. Examples of 
the types of information typically redacted from recent reports 
include:

    information the disclosure of which may harm 
        ongoing law enforcement investigations or proceedings; 
        and

    names and personal identifying information 
        (generally of persons not employed by the Commission 
        who played peripheral roles in the events under 
        investigation and of lower-level Commission employees) 
        to protect personal privacy (in instances where names 
        are redacted, we overlay replacement text which 
        generally describes the job/role of that individual so 
        that the substance of the report is unaltered).

    In certain instances, the Commission may disclose 
information even though it falls into a category listed above 
due to the public's interest in the information at issue. Prior 
to the Commission's approval of the release of a report, 
Commission staff solicits the input and feedback of the 
Inspector General's Office on the proposed redactions.
    With regard to the timing of the Commission's release of 
the Inspector General's report in the Stanford investigation, 
the Inspector General found in a separate report that the act 
of redacting portions of the Stanford report ``appeared to 
proceed independently of the timing of the SEC's . . . action'' 
against Goldman Sachs & Co. and that it ``did not find any 
concrete and tangible evidence'' that the filing of the 
Commission's action against Goldman Sachs was ``delayed to 
coincide with the issuance of the OIG Stanford Report.''
    There are two Inspector General reports that the Commission 
or its staff currently is reviewing. We will be making those 
available as soon as possible.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM MARY L. SCHAPIRO

Q.1. Congress clearly intended, as Chairman Dodd and Chairman 
Lincoln set forth in a letter that: ``The legislation does not 
authorize the regulators to impose margin on end-users, those 
exempt entities that use swaps to hedge or mitigate commercial 
risk . . . Again Congress clearly stated in this bill that the 
margin and capital requirements are not to be imposed on end-
users.''
    Do you agree with the Congressional intent of the Dodd-
Lincoln letter?
    In setting capital requirements under Title VII, do you 
agree that increases in capital requirements will be linked to 
the risk associated with the swap, and not as a punitive 
mechanism to drive volume to central clearinghouses or 
exchanges?
    Please describe any and all cost-benefit analysis, 
particularly with regard to end-users, that you will undertake 
prior to issuing rules.

A.1. The Commission has not yet proposed rules under the Dodd-
Frank Act provisions relating to margin requirements for 
noncleared security-based swaps transacted by security-based 
swap dealers and major security-based swap participants for 
which there is not a prudential regulator. I am sensitive to 
the concerns that have been expressed about the potential 
impact of these requirements--and other provisions of the Dodd-
Frank Act--on end users. Accordingly, I expect that the 
Commission will carefully consider both the scope of its 
authority in this area and the potential effects of margin 
requirements on the markets and market participants, including 
the nature and extent to which such requirements could impact 
the business of end users. Public feedback through the notice 
and comment process--including input from end users--will also 
fully inform any final rule that the Commission may adopt.
    The Commission also has not yet proposed rules establishing 
capital requirements for security-based swap dealers and major 
security-based swap participants. In establishing such capital 
requirements, the Dodd-Frank Act directs the Commission to 
consider whether they will help ensure the safety and soundness 
of the entity and whether the standards are appropriate for the 
risks associated with uncleared security-based swaps. These 
principles established by the statute--as well as input through 
the notice and comment process--will guide our consideration of 
capital requirements in this area.
    The Commission conducts a cost-benefit analysis of proposed 
rules pursuant to specific statutory requirements, including 
those set forth in the Paperwork Reduction Act and the Small 
Business Regulatory Enforcement Fairness Act of 1996. 
Accordingly, any proposed rulemaking impacting end users and 
other market participants will include an analysis of any costs 
and benefits that may accrue to such end users and will be 
subject to public comment prior to any final action that may be 
taken.

Q.2. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
market to limit disruption. In light of the FDIC's unilateral 
decision to add an across the board risk retention requirement 
in the safe harbor rule, which the OCC opposed, how do you plan 
to coordinate and reconcile disagreements in the joint 
rulemaking?

A.2. Under Section 941 of the Dodd-Frank Act, the Commission 
and the banking and other agencies will jointly write rules 
regarding risk retention, with the Department of Treasury--the 
Chairperson of the Financial Stability Oversight Council--
coordinating all joint rulemaking required under the section. 
Staff from a number of Divisions and offices of the Commission 
have been meeting regularly and frequently with the staff from 
the other agencies and Treasury. Thus, we are working 
diligently with Treasury and the other agencies to jointly 
consider how best to prescribe risk retention rules for the 
various asset classes of asset-backed securities.
    I also would note that the FDIC rule you referenced (12 
C.F.R. 360.6) provides that upon the effective date of final 
regulations required by Section 941(b) of the Dodd-Frank Act, 
such final regulations shall exclusively govern the requirement 
to retain an economic interest in a portion of the credit risk 
of the financial assets under the FDIC rule.

Q.3. Market participants highlight uncertainty related to 
changing regulations, new accounting standards, and other 
mandates as an obstacle to a resurgence of these markets. What 
steps are your agencies currently taking to minimize these 
complications? What should be done collectively by regulators 
to limit this uncertainty as you look toward the joint 
rulemaking?

A.3. Given the breadth of the Dodd-Frank Act's implementation 
requirements, including many necessitating joint rulemakings, 
the SEC has significantly expanded its public outreach and is 
committed to an open and transparent notice and comment 
rulemaking process.
    Specifically, we have enhanced our public consultative 
process by expanding the opportunity for public comment beyond 
what is required by law. To maximize the opportunity for public 
comment and to provide greater transparency, less than a week 
after Dodd-Frank became law, we made available to the public a 
series of e-mail boxes to which interested parties can send 
preliminary comments before the various rules are proposed and 
the official comment periods begin. We also are trying, given 
time constraints, to meet with anyone who seeks to meet with us 
on the various issues raised. In addition, staff is seeking to 
reach out as necessary to solicit views from affected 
stakeholders who do not appear to be fully represented by the 
developing public record on a particular issue. To further our 
public outreach effort, the Commission also is holding public 
roundtables and hearings on selected topics.
    Commission staff also is meeting regularly on both a formal 
and informal basis with other financial regulators, and staff 
working groups frequently consult and coordinate with the 
staffs of the CFTC, Federal Reserve Board and other prudential 
financial regulators, as well as the Department of the 
Treasury, the Department of State, the Commerce Department, and 
the Comptroller General.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                       FROM GARY GENSLER

Q.1. Chairman Gensler, you have been very active in the CFTC's 
implementation of the derivatives title of the Dodd-Frank Act.
    Recognizing that you are only one of five Commissioners at 
the CFTC, what steps are you taking to adopt balanced rules 
that can garner the support of all five Commissioners?

A.1. Throughout the rulemaking development process, Commission 
staff strives to ensure that each Commissioner is apprised of 
issues involved. Staff teams consult with all Commissioners and 
the comments and suggestions of each are often incorporated in 
staff recommendations.

Q.2. Chairman Gensler, the Dodd-Frank Act gives the CFTC new 
registrants such as major swap participants and swap dealers.
    Does the CFTC intend to rely on a self regulatory 
organization to oversee these new entities, as it does for 
futures commission merchants?

A.2. Some tasks assigned to the Commission may be delegated in 
turn to Self Regulatory Organizations (SROs) where permitted, 
appropriate and where the SROs are ready to assume the new 
tasks.

Q.3. How will the CFTC coordinate its oversight of these 
entities with other regulators?

A.3. Coordination with the Securities and Exchange Commission 
and the banking regulators will be required to implement the 
Dodd-Frank Act in an efficient manner and to avoid unnecessary 
duplication on registrants. The Commission is striving to 
coordinate its rulemaking activities with its fellow regulators 
through staff to staff contacts, and it is contemplated that 
these coordination efforts will continue as the agencies move 
past the rule-writing process to administering the Dodd-Frank 
Act.

Q.4. Chairman Gensler, as one law firm's commentary noted, 
``major provisions of the Derivatives Legislation are either 
largely indeterminate or too broadly drafted to be implemented 
literally.''
    Chairman Gensler, how do you reconcile this assessment with 
your conclusion that the ``Dodd-Frank Act is very detailed, 
addressing all of the key policy issues regarding regulation of 
the swaps marketplace''?

A.4. While the Dodd-Frank Act is detailed and comprehensive, it 
directs the financial regulatory agencies to write regulations 
to implement the policies Congress enacted. The rule-writing 
process will involve careful consideration of the insights of 
industry and other members of the public through meetings and 
written comments that may spotlight refinements that should be 
made before regulations are finalized.

Q.5. Should we be concerned that you are not paying sufficient 
attention to the potential unintended consequences of the 
legislation?

A.5. We are actively seeking participation in the rule-writing 
process from industry and other members of the public. As the 
rule-writing process goes forward, I am confident that concerns 
of industry and other members of the public about the 
consequences of rules, unintended or otherwise, will be brought 
to the attention of my fellow commissioners and myself.

Q.6. Chairman Gensler, you have set up 30 rulemaking teams for 
the Dodd-Frank Act. Some of those teams are headed by 
enforcement attorneys.
    Please identify which teams are headed by enforcement 
attorneys and why enforcement attorneys are best suited to 
write the rules in the area assigned to each of those teams.

A.6. Four of the 30 rulemaking teams assigned to draft the 
rules required by the Dodd-Frank Act are led by Division of 
Enforcement Staff. Staff from the Division of Enforcement are 
leading groups drafting rules on manipulation, disruptive 
trading practices, whistleblowers, and business conduct with 
counter parties. The Division has 35 years experience 
investigating and litigating cases of manipulation, attempted 
manipulation, and false price reporting. Each of these areas is 
closely related to the mission of the Division. It should be 
noted that these teams are not limited to Division of 
Enforcement staff, but rather are composed of staff from 
several offices. Ultimately, the teams' recommendations must be 
approved by the Commissioners as proposals, exposed to comments 
from the public, and adopted by the Commissioners as final 
rules before they go into effect.

Q.7. Chairman Schapiro and Chairman Gensler, the Dodd-Frank Act 
placed great emphasis on moving over-the-counter derivatives 
into clearinghouses for the purpose of reducing risk in the 
financial system. While this is a laudable goal, if not 
properly constructed, clearinghouses could be the too-big-to-
fail entities at the center of the next crisis. The last thing 
the American people want to do is pay for another bailout.
    What is each of you doing to ensure that the rules take 
seriously the potentially disastrous consequences of a misstep 
in the operation or oversight of clearinghouses?

A.7. The Commission is in the process of proposing detailed 
rules for derivatives clearing organizations (DCOs). These 
proposals contain standards concerning financial resources, 
margin, and risk management with which DCOs will be required to 
comply. The Commission also conducts daily risk surveillance of 
DCOs, clearing members, and large traders and periodic reviews 
of DCO compliance with the Commodity Exchange Act and 
Commission regulations.

Q.8. Chairman Schapiro and Chairman Gensler, at a time when our 
economy is in terrible shape, we need to be particularly 
attentive to the unintended consequences of regulatory actions. 
Main Street businesses, large and small, have told us how 
imposing clearing and margin requirements on them will affect 
their ability to expand and hire. An effective, broad end user 
exemption is essential and completely consistent with the goals 
of transparency and mitigation of risk to the financial system.
    Are you committed to crafting a broad end user exemption 
that allows our job creators to avoid costly clearing, margin, 
exchange trading, and other obligations under the Act?

A.8. The concerns of end users are being given a great deal of 
attention by the Commissioners and the staff. Their concerns 
will continue to be of great importance throughout the 
rulemaking process. The Dodd-Frank Act was enacted to reduce 
risk, increase transparency, and promote market integrity 
within the financial system. The rulemakings are intended to 
implement those goals, all of which will benefit customers, 
particularly end users, using the market. There is no intention 
to unnecessarily increase burdens on end users seeking to 
reduce their commercial risks.

Q.9. Chairman Schapiro and Chairman Gensler, Dodd-Frank 
mandates that both of your agencies adopt an unprecedented 
number of rules in a very short period of time. And, as you 
know, each of your agencies has a ``statutory obligation to do 
what it can to apprise itself--and hence the public and the 
Congress--of the economic consequences of a proposed regulation 
before it decides whether to adopt the measure.''
    However, a recent news article pointed out that both the 
SEC and the CFTC have been without Chief Economists for months.
    Chairman Schapiro and Chairman Gensler, why have your Chief 
Economist positions gone unfilled for so long?
    How can you expect to adequately consider the economic 
consequences of all of your proposed rules with unfilled Chief 
Economist positions?

A.9. The CFTC recently announced the appointment of Dr. Andrei 
Kirilenko as Chief Economist. Dr. Kirilenko, who received his 
Ph.D. in Economics from the University of Pennsylvania, has 
been with the CFTC since 2008. Prior to joining the agency, he 
worked for 12 years at the IMF working on global capital 
markets issues. During the process of selecting a Chief 
Economist, the Commission's Acting Chief Economist, the other 
economists in the Office of the Chief Economist, and other 
economists on the Commission's staff took an active role in the 
Dodd-Frank rule-writing process.

Q.10 Chairman Schapiro and Chairman Gensler, the derivatives 
title of the Dodd-Frank Act establishes new entities called 
``swap execution facilities'' and ``security-based swap 
execution facilities,'' commonly referred to as ``SEFs,'' as 
alternatives to exchanges. Ideally, multiple SEFs will compete 
to give market participants several different choices for 
trading particular types of swaps.
    Given the SEC's experience in overseeing securities markets 
in which participants have the choice of several different 
trading venues, what is each of you doing to ensure that the 
CFTC has the benefit of the SEC's expertise in this area?

A.10. I have encouraged the CFTC staff to consult with and 
coordinate their rule-writing efforts with the SEC staff 
whenever appropriate in the implementation of the Dodd-Frank 
Act including the drafting of rules to govern SEFs. As part of 
ongoing communications, contacts between the two staffs have 
included more than 100 meetings.

Q.11. Chairman Schapiro and Chairman Gensler, Title VIII 
authorizes your agency to prescribe regulations for financial 
institutions engaged in designated activities for which each is 
the Supervisory Agency or the appropriate financial regulator 
governing the conduct of the designated activities.
    What plans do you have for exercising this authority?

A.11. The Commission issued a proposed rule that was published 
in the Federal Register of October 14, 2010, addressing the 
financial resources of derivatives clearing organizations 
(DCOs) that might be designated as systemically important under 
Title VIII.

Q.12. The Financial Stability Oversight Council is an important 
feature of Dodd-Frank. During the conference, my amendment was 
adopted to clarify the role of the Council and the Federal 
Reserve. My amendment gave the Council responsibility for 
financial stability regulation. Up to that point, the 
legislation had colocated this responsibility at the Fed and 
the Council. The Congressional intent is clear that you, as 
members of the Council, are responsible for all policy matters 
related to financial stability. After the Council acts, 
implementation of your policy determinations will fall to the 
individual Federal financial regulators, including, of course, 
the Fed.
    With this in mind, I would like each of you to comment on 
your preparations to serve on the Council:
    Have you directed your staff to examine and study all of 
the issues that will come before you?

A.12. Yes.

Q.13.Are you prepared to participate on the Council, not as a 
rubber stamp for the Chairman of the Council, but as a fully 
informed individual participant?

A.13. Yes.

Q.14. Secretary Geithner has argued that there is a strong case 
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published 
a paper that proposes Government guarantees of a wide range of 
asset backed securities, including those backed by mortgages, 
credit cards, autos, student loans, commercial real estate, and 
covered bonds. While some may believe that the Government will 
charge fair prices for Government guarantees, the history of 
Government run insurance programs suggests that things will not 
go well.
    Does anyone on the panel support extending or increasing 
Government insurance against losses on asset backed securities 
which, it seems to me, socializes risk, puts taxpayers on the 
hook for losses, and protects Wall Street against losses?

A.14. The Commission does not have a position on this issue.

Q.15. Please provide the Committee with an implementation 
schedule that includes:
    A list of the rules and studies that your agency is 
responsible for promulgating or conducting under Dodd-Frank and 
the date by which you intend to complete each rule or study; 
and . . .

A.15. We identified 30 areas where rules will be necessary and 
assigned teams of staff to work on rulemakings for each of 
these areas.
    Following each team on the list are found the date of the 
Commission meeting to consider the Advanced Notice of Proposed 
Rulemaking (ANPR) or Notice of Proposed Rulemaking (NPR), the 
Final Rule (FR) or the anticipated date of those meetings that 
have been scheduled.

        I. Registration (NPR 11/10/10)

        II. Definitions, such as Swap Dealer, Major Swap 
        Participant, Security-Based Swap Dealer, and Major 
        Security-Based Swap Participant, to be Written Jointly 
        with SEC (NPR 12/1/10)

        III. Business Conduct Standards with Counterparties 
        (NPR 12/9/10)

        IV. Internal Business Conduct Standards (NPR 11/10/10), 
        (NPR 12/16/10), (NPR 1/13/11)

        V. Capital & Margin for Nonbanks (NPR 1/20/11)

        VI. Segregation & Bankruptcy for both Cleared and 
        Uncleared Swaps (uncleared, NPR 11/19/10; cleared, ANPR 
        11/19/10) (NPR wk of 2/21/11)

        Clearing:

        VII. DCO Core Principle Rulemaking, Interpretation & 
        Guidance (NPR 9/30/10), (NPR 12/1/10), (NPR 12/16/10)

        VIII. Process for Review of Swaps for Mandatory 
        Clearing (NPR 10/26/30)

        IX. Governance & Possible Limits on Ownership & Control 
        (NPR 9/30/10), (NPR 12/9/10)

        X. Systemically Important DCO Rules Authorized Under 
        Title VIII (NPR 16/10), (FR 1/19/11)

        XI. End-user Exception (NPR 12/9/10)

        Trading:

        XII. DCM Core Principle Rulemaking, Interpretation & 
        Guidance (NPR 12/1/10)

        XIII. SEF Registration Requirements and Core Principle 
        Rulemaking, Interpretation & Guidance (12/16/10)

        XIV. New Registration Requirements for Foreign Boards 
        of Trade (NPR 11/10/10)

        XV. Rule Certification & Approval Procedures 
        (applicable to DCMs, DCOs, SEFs) (NPR 10/26/10)

        Data:

        XVI. Swap Data Repositories Registration Standards and 
        Core Principle Rulemaking, Interpretation & Guidance 
        (Int. FR 9/30/10), (NPR 11/19/10)

        XVII. Data Record Keeping & Reporting Requirements (NPR 
        11/19/10), XVIII. Real Time Reporting (NPR 11/19/10)

        Particular Products:

        XIX. Agricultural Swaps (ANPR 9/20/10), definitions 
        (NPR 10/19/10), (FR 1/20/11)

        XX. Foreign Currency (Retail Off Exchange) (FR 9/3/10)

        XXI. Joint Rules with SEC, such as ``Swap'' and 
        ``Security-Based Swap'' (NPR week of 2/7/11)

        XXII. Portfolio Margining Procedures (combined with VI 
        above and other rules)

        Enforcement:

        XXIII. Antimanipulation (NPR 10/26/10)

        XXIV. Disruptive Trading Practices (ANPR 10/26/10), 
        (NPR wk of 2/21/11)

        XXV. Whistleblowers (NPR 11/10/10)

        Position Limits:

        XXVI. Position Limits, including Large Trader 
        Reporting, Bona Fide Hedging Definition & Aggregate 
        Limits (large trader reporting NPR 10/19/10), (NPR 12/
        16/10), (NPR 1/13/11)

        Other Titles:

        XXVII. Investment Adviser Reporting (NPR 1/20/11)

        XXVIII. Volcker Rule (not scheduled)

        XXIX. Reliance on Credit Ratings (NPR 10/26/10)

        XXX. Fair Credit Reporting Act and Disclosure of 
        Nonpublic Personal Information (NPR 10/19/10)


    Recently an additional team was created and assigned the 
task of writing conforming rules.
    A comprehensive schedule for the rulemaking process was set 
out with dates for technical conferences on many of the rules, 
dates to circulate drafts of rule proposals to Commissioners, 
dates for meetings to consider Advanced Notices of Proposed 
Rules and Notices of Proposed Rules and comment periods. The 
public, including the regulated industry, other businesses that 
may be affected, interest groups, and others, have been 
encouraged to participate in the process through filing writing 
comments. Schedules for the adoption of final rules have not 
been set because in large part the staff recommendations to the 
Commission and the views of the Commissioners themselves are 
expected to be significantly affected by the public comments.

Q.16. A list of the reorganizational tasks your agency will 
undertake to fulfill the mandates of Dodd-Frank and the date by 
which you intend to complete each task.

A.16. The Commission has discussed potential reorganizations; 
however, given uncertainties of funding, staffing, and other 
issues no final reorganization plans have been adopted.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                       FROM GARY GENSLER

Q.1. Over the last 15 years, the 6 biggest banks grew from 
having assets equal to 17 percent of GDP to 63 percent of GDP. 
The four largest banks control about 48 percent of the total 
assets in the Nation's banking system. And the 5 largest dealer 
banks control 80 percent of the derivatives market and account 
for 96 percent of the exposure to credit derivatives.
    Part of the Volcker Rule, section 622 of the Dodd-Frank 
Act, requires the Financial Stability Oversight Council (FSOC), 
of which your organizations are a member, to study and make 
recommendations concerning the effects of financial sector 
concentration on financial stability, moral hazard, efficiency, 
and competitiveness in the financial system. Subject to these 
recommendations, no company will be permitted to hold more than 
10 percent of the liabilities held by all financial companies, 
with some significant exceptions.
    What are effects does concentration in the financial 
industry have on financial stability, moral hazard, efficiency, 
and competitiveness?
    Given that the six biggest banks alone have about $7.4 
trillion in liabilities, almost 53 percent of GDP, do you think 
this provision will meaningfully restrict the size of financial 
institutions?
    How should this rule be implemented to address financial 
stability, moral hazard, efficiency, and competitiveness?
    Can you identify any potential loopholes in the existing 
provision?
    As I've made clear before, I think the largest financial 
firms in this country are just too large, and that their 
massive size threatens our economic security and puts us at 
risk in future crises.
    I think the rise of proprietary trading was one of the key 
drivers behind the massive growth in our largest financial 
institutions. Firms were taking on ever increasing prop trading 
positions, often with highly unstable short term financing, and 
when things froze up, the house of cards collapsed. The Volcker 
Rule looks to stop this risk.
    I know that my colleagues, Senator Merkley and Senator 
Levin, drafted section 619 of the Dodd-Frank Act to ensure 
broad coverage of the prohibition on proprietary trading by 
banks, and meaningful restrictions on the largest nonbank 
financial firms. Nevertheless, one of the concerns I have is 
that firms may try to evade the restrictions. Particularly, I'm 
concerned that if the regulators set a definition of ``trading 
account'' that is too narrow, it might not capture all of the 
risks of proprietary trading. These evasions could only happen 
if the regulators ignore the clear direction of the law to stop 
proprietary trading.
    Are you prepared to take a broad view on the definition of 
``trading account'' and examine and prevent proprietary 
trading, wherever it occurs?

A.1. Section 619 of the Dodd-Frank Act defines ``trading 
account'' to mean any account used for acquiring or taking 
positions in the securities and instruments described in 
paragraph (4) principally for the purpose of selling in the 
near term (or otherwise with the intent to resell in order to 
profit from short-term price movements), and any such other 
accounts as the appropriate Federal banking agencies, the 
Securities and Exchange Commission, and the Commodity Futures 
Trading Commission may, by rule, determine. The FSOC is 
currently conducting its study that will provide 
recommendations on the Volcker Rule, and whether the definition 
in this section is adequate to enforce the Volcker Rule; 
however, at this time because this study is still underway, I 
believe that it is too early to opine on the definition of 
``trading account.''

Q.2. In short, are you prepared to use the full power of the 
Merkley-Levin provisions to cut the size and riskiness of our 
banks so they get back to the business of lending to families 
and businesses?

A.2. The CFTC is committed to using its resources to ensure 
that applicable CFTC regulated entities will be monitored to 
seek to ensure compliance of the CFTC promulgated rules 
relating to the Volcker Rule.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                       FROM GARY GENSLER

Q.1. Regulatory Structure for Volcker Rule. As you know, the 
objectives of the Merkley-Levin Volcker Rule are two-fold: (1) 
to address the specific risks to our financial stability caused 
by proprietary trades gone bad, and (2) to take on the 
conflicts of interests in proprietary trading.
    Ensuring effective oversight will be challenging, because 
the issues are complicated. As you could see from the exchange 
at the hearing between Senator Reed and Chairman Bernanke, with 
interjections by Chairman Shapiro and Mr. Walsh, I and others 
are beginning to come of the view that there will have to be 
oversight at two levels. First, there will need to be real-time 
(or as close as practicable) monitoring and enforcement at the 
individual trade-by-trade level, which looks to whether any 
given transaction is proprietary trading. This will be 
necessary to ensure that the permitted activities are not 
abused. Second, there will need to be macro-level reviews of 
policies and procedures, and overall portfolio holdings. This 
will be necessary to ensure that proprietary positions and 
conflicts of interest are not cropping up despite the 
restrictions. In addition to monitoring and enforcing the 
proprietary trading and conflicts of interest restrictions, 
regulators are also tasked with setting appropriate capital 
charges, both for permitted activities, and, in the instances 
of nonbank financial companies supervised by the Board, capital 
charges for all covered activities.
    Your agencies appear to have somewhat different strengths 
in these areas, with perhaps the SEC and CFTC having greater 
experience policing the securities and derivatives markets for 
trading violations, and the banking regulators having greater 
experience evaluating the safety and soundness of firms and 
setting appropriate capital charges and levels.
    Share with me your view about the strengths you believe 
your agency brings to the oversight and enforcement of the 
Merkley-Levin Volcker Rule? Are you committed to working with 
your fellow regulators to best use your agency's strengths in 
the effort to keep our financial system safe?

A.1. The CFTC has the ability to collect and analyze trade data 
in regulating and supervising the futures markets. The agency 
also has capabilities for auditing and reviewing 
intermediaries. These tools would be available to the CFTC to 
help enforce all aspects of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act. The CFTC is committed to keeping 
our financial system safe and to working with all other fellow 
financial regulatory agencies toward that objective.

Q.2. Data Collection. The Dodd-Frank Act requires a significant 
amount of new data collection and storage, particularly in the 
derivatives arena. The SEC and CFTC have made a priority of new 
data collection in a number of areas. Collection and the 
ability to automate reviews of the data will be critical to 
enforcing a wide range of mandates under Dodd-Frank, including 
derivatives position limits, the Volcker Rule provisions, and 
other parts of the bill. At a minimum, your staffs will need to 
know who's making trades, the prices, how long firms hold onto 
their positions, and whether and how their positions are 
hedged.
    Where is your agency in terms of thinking through the 
relevant data you will need to collect?
    Are there any major challenges you see in being able to 
collect and analyze that data in real-time, so as to ensure 
compliance with these various restrictions?
    How do you see the newly created Office of Financial 
Research playing into this process?

A.2. On November 19th the Commission held an open meeting to 
consider, among other things, requirements and duties of swap 
data repositories; real time public reporting requirements of 
swap transactions; and record keeping and reporting 
requirements for swaps entities. These proposed rules were 
published in the Federal Register in December 2010.
    The proposed rules specify minimum data fields and/or 
categories that must be reported to the public and to swap data 
repositories. The data reported to swap data repositories will 
allow the staff to identify parties involved in a trade, the 
prices, how long counterparties hold onto their position, among 
other things. The staff identified major categories of relevant 
data that needs to be collected based on the instrument type 
and asset-class underlying.
    The proposal requires real time reporting for swap 
transaction and pricing data to occur as soon as 
technologically practicable for trades other than trades of 
large notional size or block trades.
    The proposal implements the Dodd-Frank Act direction that 
regulators have direct access to information maintained by swap 
data repositories. We are currently in the public comment 
period and will be considering those comments before the 
Commission adopts and final rules in these areas.
    Agency staffs are meeting to coordinate data collection and 
analysis and to efficiently identify market interconnectedness. 
To achieve that, the Commission staff is involved in numerous 
consultations with various Federal Government agencies 
including the Office of Financial Research.

Q.3. Cross-border Resolution. I know FDIC and to some extent 
others have been working very diligently to implement the new 
resolution authority for our Nation's large complex financial 
institutions--which owes so much to my colleagues on this 
Committee from Virginia and Tennessee.
    But one of the areas I want to keep an eye on--and on which 
I offered an amendment during financial reform to provide 
additional oversight of--is how to make that resolution work 
for large firms operating across multiple national borders.
    Where are we in terms of making the Dodd-Frank resolution 
authority work for large, systemically significant financial 
firms operating across borders? How cooperative have our 
international partners been in this effort?

A.3. Our role in responding to the insolvency of firms such as 
holding companies with a Futures Commission Merchant (FCM) 
subsidiary is somewhat limited, such as assisting in the 
transfer of customer funds and positions, advising the 
bankruptcy court with respect to the FCM, and exchanging 
information with foreign regulators concerning our respective 
regulated entities. We do not undertake the operational role 
envisioned under the Dodd-Frank Act for the FDIC.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                       FROM GARY GENSLER

Q.1. Mr. Gensler, I support the concept of regulating 
derivatives because they helped cause the problem. But I do 
understand that some businesses use derivatives to manage 
legitimate business risk. How will dealers be encouraged to not 
pass on additional capital and regulatory costs to businesses 
that are end users, and how will the regulators know whether a 
derivative is being used to manage commercial risk?

A.1. On December 9, 2010, the Commission issued proposed rules 
to implement the end user exception to mandatory clearing that 
was contained in Section 2(h)(7) of the Dodd-Frank Act, which 
were published in the Federal Register of December 23, 2010. 
This provision of the Dodd-Frank Act generally provides that a 
swap otherwise subject to mandatory clearing is subject to an 
elective exception from clearing if one party to the swap is 
not a financial entity, and is using swaps to hedge or mitigate 
commercial risk. A number of commercial end-users were 
concerned that mandatory clearing would require them to deposit 
cash in margin accounts. The Commission rule proposal also 
addresses the need to verify that swaps exempt from clearing 
and margining were entered into to mitigate commercial risk.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                       FROM GARY GENSLER

Q.1. Congress clearly intended, as Chairman Dodd and Chairwoman 
Lincoln set forth in a letter that: ``The legislation does not 
authorize the regulators to impose margin on end-users, those 
exempt entities that use swaps to hedge or mitigate commercial 
risk . . . Again Congress clearly stated in this bill that the 
margin and capital requirements are not to be imposed on end-
users.''
    Do you agree with the Congressional intent of the Dodd-
Lincoln letter?
    In setting capital requirements under Title VII, do you 
agree that increases in capital requirements will be linked to 
the risk associated with the swap, and not as a punitive 
mechanism to drive volume to central clearinghouses or 
exchanges?
    Please describe any and all cost-benefit analysis, 
particularly with regard to end-users, that you will undertake 
prior to issuing rules.

A.1. The Dodd-Frank Act was enacted to reduce risk, increase 
transparency, and promote market integrity within the financial 
system. At the Commission's open meeting on December 1, I 
stated that ``my view is that uncleared swaps entered into 
between financial entities pose more risk to the financial 
system than those where one of the parties is a nonfinancial 
entity.''
    I further stated that ``Interconnectedness among financial 
entities allows one entity's failure to cause uncertainty and 
possible runs on the funding of other financial entities, which 
can spread risk and economic harm throughout the economy. We 
know from the AIG debacle that the interconnectedness of 
financial entities through their swap books raises the risks of 
bailouts. Transactions involving nonfinancial entities, 
however, do not present the same risk to the financial system 
as those solely between financial entities. The risk of a 
crisis spreading throughout the financial system is greater the 
more interconnected financial companies are to each other. I 
think that Congress also recognized the different levels of 
risk posed by transactions between financial entities and those 
that involve nonfinancial entities, as reflected in the 
nonfinancial end-user exception to clearing. Consistent with 
this, I believe that proposed rules on margin requirements 
should focus only on transactions between financial entities 
rather than those transactions that involve nonfinancial end-
users. I would be interested to hear views from the public on 
this issue.''
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                        FROM JOHN WALSH

Q.1. Recent news reports have detailed disturbing information 
about servicers' foreclosure processes. Allegations have ranged 
from forged documents to the signing of eviction notices 
without review.
    What evidence have your agencies found in regards to these 
charges? What actions have been undertaken by your agencies 
both to address this situation and to prevent future abuses?

A.1. To date, six large national bank servicers have publicly 
acknowledged procedural deficiencies in their foreclosure 
processes. The lapses that have been reported represent a 
serious operational breakdown in foreclosure governance and 
controls that national banks should maintain. These lapses are 
unacceptable, and we are taking aggressive actions to hold 
national banks accountable, and to get these problems fixed.
    As soon as the problems at Ally Bank--which is not 
supervised by the OCC--came to light, the OCC directed the 
largest national bank mortgage servicers under our supervision 
to review their operations, to take corrective action to remedy 
identified problems, and to strengthen their foreclosure 
governance to prevent recurrences. At the same time, we 
initiated plans for intensive, on-site examinations of the 
eight largest national bank mortgage servicers. The Federal 
Reserve Board and the Federal Deposit Insurance Corporation 
(FDIC), are participating in these examinations.
    Our examination objectives are to independently test and 
verify the adequacy and integrity of bank self-assessments and 
corrective actions; the adequacy and effectiveness of 
governance over servicer foreclosure processes to ensure 
foreclosures are completed in accordance with applicable legal 
requirements and that affidavits and claims are accurate; and 
to determine whether troubled borrowers were considered for 
loss mitigation alternatives such as loan modifications prior 
to foreclosure. The scope of work to assess governance is 
extensive and includes an assessment of each servicer's 
foreclosure policies and procedures, organizational structure 
and staffing, vendor management, quality control and audit, 
loan documentation including custodial document management, and 
foreclosure work flow processes. We also will test and validate 
the effectiveness of foreclosure governance and adequacy of the 
bank's self-assessment including corrective actions taken and/
or planned.
    Examiners will also be reviewing samples of individual 
borrower foreclosure files from judicial and nonjudicial States 
that include both in-process and completed foreclosures. In 
reviewing these files, examiners will determine whether 
foreclosed borrowers were appropriately considered for 
alternative loss mitigation actions such as a loan 
modification. Examiners will also check for the following:

    A documented audit trail that demonstrates that 
        data and information (e.g., amount of indebtedness and 
        fees) in foreclosure affidavits and claims are accurate 
        and comply with State laws;

    Possession and control over the underlying, 
        critical loan documents such as original note, 
        mortgage, and deed of trust to support legal 
        foreclosure proceedings; and

    Evidence that the affidavit and documents were 
        appropriately reviewed, and that proper signatures were 
        obtained.

    In addition to these loan file reviews, examiners will 
review the nature, volume, and resolution of foreclosure-
related complaints. These will include complaints received by 
the OCC's Customer Assistance Group as well as complaints 
received by the banks.
    Finally, examiners will assess the adequacy of each bank's 
analysis and financial reporting for the potential adverse 
impact on the bank's balance sheet and capital that may arise 
from the increased time and costs needed to correct any 
procedural errors; losses (if any) resulting from inability to 
access collateral; and expected litigation costs. We are 
directing banks to maintain adequate reserves for potential 
losses and other contingencies and to make appropriate 
disclosures, consistent with applicable Securities and Exchange 
Commission disclosure rules.
    As our examination work proceeds, where we find errors or 
deficiencies, we are directing banks to take immediate 
corrective action. We are also responding to the concerns that 
have been raised about the so-called ``dual track'' foreclosure 
process when a borrower is in a trial loan modification. We 
recognize that the so-called ``dual track'' process is 
confusing for many consumers and risks consumers receiving 
mixed or contradictory information. As a result, we have 
directed the large national bank servicers, when they have the 
legal ability to do so, to suspend foreclosure proceedings for 
borrowers who are in a trial modification and are performing 
according to the terms of the modification agreement. This 
directive is modeled on provisions that the Treasury Department 
has adopted for trial modifications made under the HAMP 
program. It is important to note, however, that the terms and 
conditions for non-HAMP modifications, and the ability of 
servicers to suspend foreclosure processes, may be 
significantly affected--and limited--by requirements imposed by 
the GSEs and agreements with private investors.
    Using our authority under the Bank Service Company Act, we 
also are conducting interagency examinations of two major 
nonbank mortgage service providers. In coordination with the 
Federal Reserve Board, FDIC and the Federal Housing Finance 
Administration, the OCC is leading an on-site examination of 
the Morlgage Electronic Registration System (MERS), which 
operates a system that electronically registers and tracks 
mortgage ownership interests and servicing rights and may serve 
as the mortgagee of record as a nominee/agent of the owner of a 
loan (the lender or subsequent investor). A key objective of 
the MERS examination is to assess MERS corporate governance, 
control systems, and accuracy and timeliness of information 
maintained in the MERS system.
    We also are participating in an examination being led by 
the Federal Reserve Board of Lender Processing Services Inc. 
(LPS) which provides third party foreclosure services to banks.
    The OCC is focused on identifying and rectifying problems 
so that the basic function and integrity of the foreclosure 
process is restored; the rights of all homeowners subject to 
the foreclosure process are protected; and the basic 
functioning of the U.S. mortgage market is stabilized. As we 
move forward we will continue to cooperate with the many 
inquiries and investigations that are taking place.

Q.2. What policies and procedures have your agencies put in 
place to ensure compliance with State laws, and when were they 
implemented?

A.2. The OCC's Mortgage Banking Handbook, which provides 
guidance to the industry and examiners on risks associated with 
mortgage banking activities, states that ``a bank that 
originates and/or services mortgages is responsible for 
complying with applicable Fderal and State laws.'' As a general 
matter, we expect national banks to know what laws apply to 
their business activities, whether Federal or State, to have 
policies and procedures for complying with those laws, and to 
have ongoing quality controls and audits that test compliance 
with these procedures.

Q.3. Mr. Walsh, your testimony states that there appears to be 
an inconsistency in the duties assigned to the banking agencies 
and the CFPB with respect to fair lending, and that this 
creates confusion in responsibilities. Could you elaborate?

A.3. Fair lending compliance and reporting requirements are 
contained in provisions of the Fair Housing Act, Equal Credit 
Opportunity Act and the Home Mortgage Disclosure Act. The Dodd-
Frank Act provides the Consumer Financial Protection Bureau 
(CFPB) with exclusive examination and enforcement authority 
over national banks (and other insured depository institutions) 
with assets greater than $10 billion with respect to the Equal 
Credit Opportunity Act and the Home Mortgage Disclosure Act 
(Secs. 1025, 1002(12)(D), 1002(12)(K)). However, the law does 
not transfer to the CFPB the authority to examine insured 
depository institutions with assets over $10 billion for 
compliance with the Fair Housing Act. See, Sec. 1002 (defining 
``enumerated consumer laws''); see, also Sec. 1027(s) 
(preserving current authorities under the Fair Housing Act).
    Continuing the banking agencies' supervision of Fair 
Housing Act compliance for institutions over $10 billion in 
asset size will potentially result in duplication of, or 
overlap with, the CFPB's supervision and in inconsistencies in 
supervisory approach between the banking agencies and the CFPB. 
If Congress did not intend this jurisdictional split, 
amendments to Title X of the Dodd-Frank Act would be needed.

Q.4. Mr. Walsh, your testimony identifies that Dodd-Frank 
requires Federal banking agencies to make capital standards 
countercyclical. How will that be accomplished?

A.4. As you know, the OCC, along with the other U.S. banking 
agencies, are participating in the international efforts to 
revise and improve regulatory capital standards as part of the 
Basel III reform process. Throughout the development of these 
new standards, we have made a concerted effort to reduce the 
cyclicality of capital requirements. The countercyclical 
elements of Basel III operate both at the bankwide level, 
through the introduction of capital buffers and a new 
international leverage ratio, and at the exposure level, 
through the assignment of higher capital requirements to 
certain types of transactions and risks that proved most 
problematic during the crisis.
    Basel III will create countercyclical bank-level capital 
requirements through the introduction of capital conservation 
buffers. These capital conservation buffers essentially raise 
the capital ratios at which banks will operate. If a bank dips 
into the capital conservation buffer range, it faces 
constraints on its capital distributions including constraints 
on dividends and discretionary bonuses. The capital buffers 
will reduce the cyclicality of capital requirements by creating 
incentives for banks to hold high levels of capital during good 
times that can then be drawn down during periods of economic 
stress. This additional capital cushion will also make it 
easier for banks to lend during a downturn without fear of 
broaching minimum capital requirements, which will help to 
reduce the likelihood of a credit crunch.
    Basel III will also introduce an international leverage 
ratio that is intended to limit the build-up of excessive 
leverage and serve as a backstop to the risk-based capital 
requirements. While the United States already employs a 
leverage ratio, the international leverage ratio will also 
incorporate certain off-balance sheet elements, which will 
strengthen the ability of the leverage ratio to serve as a 
governor on excessive leverage.
    At the individual exposure level, Basel III will reduce the 
cyclicality of capital requirements for trading book exposures 
by requiring banks to explicitly incorporate stress periods 
when assigning capital to these positions. In contrast, the 
existing capital requirements only require banks to make use of 
recent experience, which during benign periods led to capital 
requirements that proved to be too low. Similarly, Basel III 
reforms will also require banks to consider stress periods when 
assessing capital for counterparty credit risk. By using 
periods of stress to assign capital requirements for trading 
book positions and counterparty exposures, the amount of 
capital required will be less variable over the business cycle, 
and more capital will be required before a downturn instead of 
once the downturn occurs.
    Basel III will also require more capital for bank exposures 
to certain other financial institutions, particularly large 
banks and highly leveraged firms such as hedge funds. By 
requiring more capital for exposures to other financial 
institutions, each bank under Basel III will be better able to 
withstand a negative shock to another financial institution, 
thereby reducing the likelihood of contagion that was clearly 
evident during the crisis.
    Basel III will also significantly increase capital 
requirements under the Standardized Approach for certain bank 
exposures to asset-backed commercial paper (ABCP) programs. 
During the crisis, some banking organizations decided to 
support their ABCP programs and similar structures such as 
structured investment vehicles. This support required 
additional capital at the most inopportune time. By raising 
capital requirements for these programs, capital will be 
required to be held up front, resulting in a smoothing of 
capital requirements over the cycle.
    The enhancements under Basel III described above represent 
significant progress in limiting the cyclicality of capital 
requirements; however, it is worth noting that there are limits 
with respect to the extent to which capital requirements can be 
made less cyclical. Capital requirements are meant to be 
reflective of risk, and if risk increases for a bank during a 
downturn, one would expect capital requirements to also rise 
during a downturn. Despite this limitation, we believe the 
Basel III changes noted above will reduce the cyclicality of 
regulatory capital standards, and we will continue to work to 
make capital requirements less cyclical and will consider 
cyclicality in every capital rulemaking we undertake, as 
required under Dodd-Frank.
    Lastly, it is also important to note that the Basel 
Committee and the banking agencies are actively engaged in 
efforts to reduce procyclicality through changes in areas other 
than the capital rules, Specifically, the Committee and the 
agencies are advocating changes in domestic and international 
accounting standards that would promote stronger and less 
procyclical provisioning practices, Both the Financial 
Accounting Standards Board (FASB) and the International 
Accounting Standards Board (IASB) have proposed changes to the 
current ``incurred loss model'' of provisioning that would move 
the standards towards an expected loss (EL) approach. The OCC, 
along with the other agencies are providing input to both the 
FASB and IASB in their efforts to finalize an EL approach to 
provisioning to permit earlier-in-the-cycle provisioning that 
captures credit losses more transparently and results in a less 
procyclical regime than the current ``incurred loss'' approach.

Q.5. The Financial Stability Oversight Council is an important 
feature of Dodd-Frank. During the conference, my amendment was 
adopted to clarify the role of the Council and the Federal 
Reserve. My amendment gave the Council responsibility for 
financial stability regulation. Up to that point, the 
legislation had colocated this responsibility at the Fed and 
the Council. The Congressional intent is clear that you, as 
members of the Council, are responsible for all policy matters 
related to financial stability. After the Council acts, 
implementation of your policy determinations will fall to the 
individual Federal financial regulators, including, of course, 
the Fed.
    With this in mind, I would like each of you to comment on 
your preparations to serve on the Council:
    Have you directed your staff to examine and study all of 
the issues that will come before you? Are you to prepared to 
participate on the Council, not as a rubber stamp for the 
Chairman of the Council, but as a fully informed individual 
participant?

A.5. Yes, The OCC is fully committed to the independent 
exercise of its authority and judgment in tile Council's 
deliberations and actions, and there are statutory provisions 
that broadly protect the OCC's independence. These statutory 
independence provisions would cover matters that arise in 
connection with the OCC's membership on the Council.
    Moreover, the OCC has put staffing arrangements in place to 
ensure that the OCC's participation on the Council is informed 
by careful staff review and analysis of the matters the Council 
considers. We have committed staff resources to the support of 
its Council responsibilities that are commensurate with scope 
and importance of the Council's work. For example, the OCC's 
Senior Deputy Comptroller/Chief National Bank Examiner serves 
on the Council's deputies' committee. He is supported by staff 
at the deputy comptroller level, specialists in various areas 
of supervisory policy, and, in the Law Department, by lawyers 
expressly assigned to support Council-related work.

Q.6. Secretary Geithner has argued that there is a strong case 
to be made for continuing Government guarantees of mortgage-
backed securities. Additionally, the Federal Reserve published 
a paper that proposes Government guarantees of a wide range of 
asset-backed securities, including those backed by mortgages, 
credit cards, autos, student loans, commercial real estate, and 
covered bonds. While some may believe that the Government will 
charge fair prices for Government guarantees, the history of 
Government run insurance programs suggests that things will not 
go well.
    Does anyone on the panel support extending or increasing 
Government insurance against losses on asset-backed securities 
which, it seems to me, socializes risk, puts taxpayers on the 
hook for losses, and protects Wall Street against losses?

A.6. We believe that this is a public policy issue that is for 
Congress to decide. Should the Congress determine that such 
guarantees are in the public interest, we would incorporate 
this into our supervision of the assets.

Q.7. Please provide the Committee with an implementation 
schedule that includes: A list of the rules and studies that 
your agency is responsible for promulgating or conducting under 
Dodd-Frank and the date by which you intend to complete each 
rule or study.

A.7. Please see the chart attached as Appendix A [Ed.: See Page 
196], which details the rules and studies the OCC is 
responsible for under Dodd-Frank (either as primary drafter or 
in a consultative capacity) and the target dates for completion 
of each rule or study.

Q.8. Please provide the Committee with an implementation 
schedule that includes: A list of the reorganizational tasks 
your agency will undertake to fulfill the mandates of Dodd-
Frank and the date by which you intend to complete each task.

A.8. The OCC is engaged in a number of tasks to plan for and 
accomplish the integration of the OTS's personnel and its 
supervision of Federal savings associations into the OCC; the 
establishment of our Office of Minority and Women Inclusion; 
and the transfer of certain OCC functions and personnel to the 
CFPB.
    In addition to the list of items below, section 327(a) of 
the Dodd-Frank Act requires the OCC, the FDIC, the OTS, and the 
Board of Governors of the Federal Reserve System (FRB) to 
submit an Implementation Plan to the Committee on Banking, 
Housing, and Urban Affairs of the Senate, the Committee on 
Financial Services of the House of Representatives, and the 
Inspectors General of the Department of the Treasury, the FDIC, 
and the FRB. The Plan, which must be submitted by January 17, 
2011, will provide additional details with respect to the 
integration of the OTS into the OCC.

OTS/OCC Integration

    The OCC has established a transition team, headed 
        by the Senior Deputy Comptroller/Chief Financial 
        Officer, to coordinate and supervise the implementation 
        of all issues involving the integration of OTS 
        functions and personnel.

    Pursuant to section 314 of the Dodd-Frank Act, we 
        have designated a Deputy Comptroller for Thrift 
        Supervision, who will lead the agency's planning 
        process for integration of OTS examination and 
        supervision functions and staff into the OCC. He will 
        report to the Senior Deputy Comptroller for Midsize/
        Community Bank Supervision.

    Pursuant to the Dodd-Frank Act, the Director of the 
        OTS, the Comptroller of the Currency, and the 
        Chairperson of the FDIC must jointly determine the 
        number of OTS employees needed to perform the functions 
        transferred and identify employees for transfer to the 
        OCC or FDIC. While the final number of OTS employees 
        who will transfer to the OCC has not yet been 
        determined, senior managers from the OCC, OTS, and FDIC 
        are meeting regularly to discuss the process and to 
        identify and address mutual concerns and issues for 
        resolution.

    We also have begun the process of integrating our 
        examination workforce by developing plans to enroll 
        recent OTS hires in OCC national bank examiner training 
        courses. Pursuant to the statute, OTS personnel coming 
        to the OCC will be transferred not later than 90 days 
        after the transfer date.

    The OCC intends to integrate transferred employees 
        into the agency's organizational structure and pay plan 
        as soon as possible and to maintain existing OCC human 
        resources policies.

    The transition team also is reviewing and comparing 
        employee benefits and any related contracts, including 
        those under the OTS's Financial Institutions Retirement 
        Fund (FIRF), which covers some OTS employees, and other 
        supplemental retirement benefits.

    OCC staff is now participating in OTS supervisory 
        review committee presentations for problem banks, and 
        sharing information on other institutions and 
        supervisory strategies. The development of examination 
        plans and supervisory strategies for national banks and 
        Federal thrifts for fiscal year 2012 will be conducted 
        jointly and is scheduled to begin in January 2011.

    The OCC is working closely with the OTS to review 
        the status of leased office space supporting thrift 
        supervision, including the leasing decisions required 
        over the next 2 years. This review includes an 
        assessment of space needs to support thrift supervision 
        staff throughout the country, as well as the continuing 
        space requirements for more than 3,000 current OCC 
        employees.

    We have posted on our internal Web site a number of 
        frequently asked questions and answers regarding the 
        OTS/OCC integration.

Establishment of the OCC's Office of Minority and Women Inclusion

    The OCC has moved promptly to fulfill the 
        requirements of Section 342 of the Dodd-Frank Act. 
        Shortly after passage of the Act, the agency's Human 
        Resources office, in consultation with senior OCC 
        leadership, developed a job description for the 
        position of Director and advertised the position within 
        the OCC in accordance with our policies and principles 
        for merit promotion and internal placement. The process 
        for evaluating eligible candidates is complete and a 
        selection will be announced shortly.

    Once a selection is made, the Director will play an 
        integral role in determining the orgranizational 
        structure and the number of staff needed to 
        successfully carry out his or her responsibilities. We 
        expect to have the office organized and functioning on 
        or before mid-January, 2011.

Transfer of OCC Functions and Personnel to the CFPB

    The OCC is coordinating with the Department of 
        Treasury to identify personnel that could be 
        transferred to the CFPB. This involves identifying 
        those OCC employees who have both the skills needed by 
        the CFPB and are interested in transferring to the 
        CFPB.

    We also have solicited expressions of interest from 
        employees who may be interested in moving to the CFPB. 
        To help keep OCC employees informed, the OCC has posted 
        on our internal Web site a number of frequently asked 
        questions and answers regarding the CFPB. In addition, 
        on November 10, the OCC held an agencywide 
        teleconference to inform OCC employees about 
        developments regarding the CFPB.

    Acting Comptroller Walsh and other senior managers 
        at the OCC recently met with Treasury officials and 
        Professor Warren to discuss issues related to the 
        transfer of OCC personnel. To further the understanding 
        of our current operations, we also have provided 
        extensive materials to Treasury staff, including 
        organizational charts describing our consumer 
        protection functions, details about the national banks 
        with more than $10 billion in assets that the CFPB will 
        assume responsibility to examine, position 
        descriptions, and FTE requirements for supervision.

    In addition to assist with the organization of the 
        CFPB, we have detailed employees to the CFPB and 
        provided technical assistance to CFPB organizers 
        relating to bank supervision, consumer compliance and 
        consumer complaint functions, and internal systems and 
        issues such as payroll, procurement, and benefits.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN
                        FROM JOHN WALSH

Q.1. As I've made clear before, I think the largest financial 
firms in this country are just too large, and that their 
massive size threatens our economic security and puts us at 
risk in future crises.
    I think the rise of proprietary trading was one of the key 
drivers behind the massive growth in our largest financial 
institutions. Firms were taking on ever increasing prop trading 
positions, often with highly unstable short term financing, and 
when things froze up, the house of cards collapsed. The Volcker 
Rule looks to stop this risk.
    I know that my colleagues, Senator Merkley and Senator 
Levin, drafted section 619 of the Dodd-Frank Act to ensure 
broad coverage of the prohibition on proprietary trading by 
banks, and meaningful restrictions on the largest nonbank 
financial firms. Nevertheless, one of the concerns I have is 
that firms may try to evade the restrictions. Particularly, I'm 
concerned that if the regulators set a definition of ``trading 
account'' that is too narrow, it might not capture all of the 
risks of proprietary trading. These evasions could only happen 
if the regulators ignore the clear direction of the law to stop 
proprietary trading.
    Are you prepared to take a broad view on the definition of 
``trading account'' and examine and prevent proprietary 
trading, wherever it occurs? In short, are you prepared to use 
the full power of the Merkley-Levin provisions to cut the size 
and riskiness of our banks so they get back to the business of 
lending to families and businesses?

A.1. The OCC is fully committed to ensuring that national banks 
comply with the requirements of section 619, including the 
statute's restrictions on proprietary trading. The statute 
requires, as a first step, that the Financial Stability 
Oversight Council conduct a study and make recommendations 
about implementation of the provision. The statute prescribes 
certain implementation objectives, including protecting banks' 
safety and soundness, protecting taxpayers and consumers, 
enhancing financial stability, limiting the inappropriate 
transfer of Federal subsidies to unregulated entities, reducing 
conflicts of interest between banks and their customers, 
limiting activities that have caused or might reasonably be 
expected to create undue risk or loss at banks, appropriately 
accommodating the business of insurance, and appropriately 
timing the divestiture of illiquid assets that will be affected 
by the restrictions of section 619(a). It further provides that 
the study must be completed not later than 6 months after the 
enactment of the Dodd-Frank Act, that is, in January 2011.
    The Council sought public input for the required study by 
publishing a notice in the Federal Register on October 6, 2010. 
The public comment period closed on November 5, 2010; the 
Council received more than 8,000 comments in total, 
approximately 1,450 of which were unique (that is, 
individualized, rather than form, letters). \1\ An interagency 
staff group currently is developing a draft study for 
consideration and final action by the Council at its next 
meeting, in January 2011. As a member of the Council, the 
Acting Comptroller has been fully engaged in these 
implementation efforts, and OCC are actively participating in 
the interagency group that is conducting the staff work.
---------------------------------------------------------------------------
     \1\ For the Council's Federal Register notice, see, 75 Fed. Reg. 
61758 (Oct. 6, 2010). Comments received may be viewed on 
Regulations.gov at http://www.regulations.gov/search/Regs/
home.html#docketDetail?R=FSOC-2010-0002.
---------------------------------------------------------------------------
    Section 619 directs the OCC, the Federal Reserve Board, and 
the Federal Deposit Insurance Corporation to issue joint 
regulations implementing section 619 for banks after carefully 
considering the findings of the Council's study, and after 
consultation and coordination with the Securities Exchange 
Commission and the Commodity Futures Trading Commission. These 
regulations are due 9 months after the study is completed, that 
is, in October 2011. We will proceed as directed by the 
statute, and will consider the findings in the Council's study 
and the views of the other regulatory agencies in defining 
statutory terms and implementing the important proscriptions in 
the statute on proprietary trading.
    With particular respect to the size of financial firms, 
section 622 of the Dodd-Frank Act imposes a concentration limit 
that prevents a financial company from acquiring, merging or 
consolidating with another company if the resulting company's 
total consolidated liabilities would exceed 10 percent of the 
aggregate consolidated liabilities of all financial companies. 
Congress directed the Council to study the effects of imposing 
this concentration limit, specifically the extent to which the 
concentration limit would affect financial stability, moral 
hazard in the financial system, the efficiency and 
competitiveness of the U.S. financial firms and financial 
markets, and the cost and availability of credit and financial 
services to U.S. households and businesses. In January, 2011, 
the Council must issue recommendations regarding modifications 
to the concentration limit that the Council determines would 
more effectively implement section 622. Following the Council's 
study and recommendations, the Federal Reserve Board will issue 
implementing regulations. The OCC is actively participating in 
the interagency staff group that is drafting the study, which 
we expect the Council also will consider and act on at its 
January, 2011, meeting.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TESTER
                        FROM JOHN WALSH

Q.1. Can you provide me an update on your agencies progress in 
implementing the property appraisal requirements of Title XIV 
of Dodd-Frank? What process will you use to develop and 
implement these requirements?

A.1. Title XIV provides that the appraisal rules are to be 
developed jointly by a group of agencies that includes the OCC, 
the FDIC, the Federal Reserve Board, the National Credit Union 
Administration (NCUA) the Federal Housing Finance 
Administration (FHFA), and the CFPB. Title XIV provides, in 
general, that the regulations it requires must be prescribed in 
final form before the end of the 18-month period beginning on 
the designated CFPB transfer date which will be in July, 2011, 
and take effect 12 months following issuance of the final 
regulations. Since the CFPB does not yet have a director or 
permanent staff, the rulemakings in which it is required to 
participate have not yet commenced. Pending initiation of the 
rulemakings, OCC staff have primarily focused on evaluating the 
changes required by the legislation.
    In addition, the OCC, together with the Federal Reserve 
Board, the FDIC, the OTS, and the NCUA recently issued 
revisions to their joint ``Interagency Appraisal and Evaluation 
Guidelines.'' The revised Guidelines update the agencies' 
supervisory guidance and clarify their expectations for 
institutions' appraisal and evaluation programs to conduct real 
estate lending safety and soundly. The revised Guidelines were 
published in the Federal Register on December 10, 2010.
    Finally, Title XIV required that within 90 days of the 
enactment of the Dodd-Frank Act, the Federal Reserve Board 
issue an interim final rule specifiying acts or practices that 
violate appraisal independence requirements. Pursuant to this 
provision, the Board issued its interim final rule for comment 
on October 18, 2010, with a mandatory compliance date of April 
1, 2011.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR MERKLEY
                        FROM JOHN WALSH

Q.1. Regulatory Structure for Volcker Rule. As you know, the 
objectives of the Merkley-Levin Volcker Rule are two-fold: (1) 
to address the specific risks to our financial stability caused 
by proprietary trades gone bad, and (2) to take on the 
conflicts of interests in proprietary trading.
    Ensuring effective oversight will be challenging, because 
the issues are complicated. As you could see from the exchange 
at the hearing between Senator Reed and Chairman Bernanke, with 
interjections by Chairman Shapiro and Mr. Walsh, I and others 
are beginning to come of the view that there will have to be 
oversight at two levels. First, there will need to be real-time 
(or as close as practicable) monitoring and enforcement at the 
individual trade-by-trade level, which looks to whether any 
given transaction is proprietary trading. This will be 
necessary to ensure that the permitted activities are not 
abused. Second, there will need to be macrolevel reviews of 
policies and procedures, and overall portfolio holdings. This 
will be necessary to ensure that proprietary positions and 
conflicts of interest are not cropping up despite the 
restrictions. In addition to monitoring and enforcing the 
proprietary trading and conflicts of interest restrictions, 
regulators are also tasked with setting appropriate capital 
charges, both for permitted activities, and, in the instances 
of nonbank financial companies supervised by the Board, capital 
charges for all covered activities.
    Your agencies appear to have somewhat different strengths 
in these areas, with perhaps the SEC and CFTC having greater 
experience policing the securities and derivatives markets for 
trading violations, and the banking regulators having greater 
experience evaluating the safety and soundness of firms and 
setting appropriate capital charges and levels.
    Share with me your view about the strengths you believe 
your agency brings to the oversight and enforcement of the 
Merkley-Levin Volcker Rule? Are you committed to working with 
your fellow regulators to best use your agency's strengths in 
the effort to keep our financial system safe?

A.1. The OCC is unequivocally committed to working with our 
fellow regulators to promote the safety of our financial 
system. The strengths we bring to this challenge include, 
first, a comprehensive and detailed knowledge about the 
securities and derivatives activities of the national banks we 
supervise and the risks presented by those activities. The 
OCC's knowledge derives from our examination activity, which is 
conducted through the continuous presence of examiners on-site 
at the largest institutions. (Smaller institutions are examined 
on-site on a 12-18 month schedule, consistent with requirements 
for the frequency of bank examinations established by statute). 
The on-site examination process is complemented by extensive 
off-site monitoring and analyses done not only by examiners but 
also by experienced supervisory staff and economists. Finally, 
the OCC has an extensive array of supervisory tools that it can 
use to remedy problems or weaknesses that we identify. These 
tools include broad administrative enforcement authority to 
impose cease-and-desist remedies and assess civil money 
penalties. But, unlike some other regulators, the OCC is not 
solely reliant on formal administrative or judicial 
proceedings, where remedies may be applied only after lengthy 
proceedings are concluded. The OCC also can use its supervisory 
process to direct bank management to correct deficiencies 
identified in an examination report as ``matters requiring 
attention'' or MRAs--an approach that is especially effective 
because it requires a bank to fix a problem right away.

Q.2. Data Collection. The Dodd-Frank Act requires a significant 
amount of new data collection and storage, particularly in the 
derivatives arena. The SEC and CFTC have made a priority of new 
data collection in a number of areas. Collection and the 
ability to automate reviews of the data will be critical to 
enforcing a wide range of mandates under Dodd-Frank, including 
derivatives position limits, the Volcker Rule provisions, and 
other parts of the bill. At a minimum, your staffs will need to 
know who's making trades, the prices, how long firms hold onto 
their positions, and whether and how their positions are 
hedged.
    Where is your agency in terms of thinking through the 
relevant data you will need to collect?
    Are there any major challenges you see in being able to 
collect and analyze that data in real-time, so as to ensure 
compliance with these various restrictions?
    How do you see the newly created Office of Financial 
Research playing into this process?

A.2. As directed by Congress, the Financial Stability Oversight 
Council is currently conducting a study on how to implement the 
Volcker Rule. As a member agency of the Council, the OCC is 
working closely with the Department of the Treasury and other 
member agencies on the study, and will carefully consider the 
study's findings and recommendations in the Volcker Rule's 
implementing regulations. We will be better positioned to 
ascertain what data might be required once the study and 
implementing regulations are finalized.
    We do not foresee major challenges in acquiring this data. 
The OCC's supervisory authorities, as well as the Dodd-Frank 
Act and other banking statutes, provide tools adequate to 
collect any data needed to monitor compliance with the 
proprietary trading restrictions.
    The Office of Financial Research is still in formation, so 
it is too soon to determine how it will fulfill its duties 
under the Dodd-Frank Act. We expect the Office will support the 
Council and its constituent agencies in carrying out their 
respective responsibilities under the Volcker Rule, including, 
as appropriate, through data collection and related services.

Q.3. Cross-border Resolution. I know FDIC and to some extent 
others have been working very diligently to implement the new 
resolution authority for our Nation's large complex financial 
institutions--which owes so much to my colleagues on this 
Committee from Virginia and Tennessee.
    But one of the areas I want to keep an eye on--and on which 
I offered an amendment during financial reform to provide 
additional oversight of--is how to make that resolution work 
for large firms operating across multiple national borders.
    Where are we in terms of making the Dodd-Frank resolution 
authority work for large, systemically significant financial 
firms operating across borders? How cooperative have our 
international partners been in this effort?

A.3. On an interagency basis with the FRB and FDIC, the OCC has 
been working as a home regulator on recovery and resolution 
planning for large, U.S.-owned, cross-border firms. Significant 
international partners (i.e., host supervisors) have been 
cooperative in seeking answers to difficult resolution issues 
for both U.S. and foreign owned cross-border firms. The U.S. 
agencies have conducted vertical (i.e., firm specific plans) 
and horizontal (i.e., issues across firms) reviews of recovery 
plans prepared by the U.S. firms. The FRB and OCC are preparing 
feedback to the firms on their detailed recovery plans. This is 
an iterative process which will require further work by the 
firms.
    As home supervisors, the OCC, FRB, and FDIC have hosted 
crisis management group (CMG) meetings with significant host 
supervisors of the large, U.S.-owned, cross-border firms. The 
SEC was also invited to participate in these meetings. The CMG 
meetings served to identify resolution issues which are being 
researched by both home and host supervisors (e.g., recognition 
of U.S. bridge bank, licensing processes, etc.). Follow up 
meetings are being planned for early 2011. CMG meetings are in 
addition to the supervisory colleges held for these firms.
    As the host supervisor of foreign-owned U.S. banks/
branches, the OCC has participated in supervisory colleges and 
CMG meetings of foreign firms with significant global 
operations. As with the meetings for the U.S. firms, there are 
many resolution issues that require further research.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CRAPO
                        FROM JOHN WALSH

Q.1. Dodd-Frank requires that risk retention be jointly 
considered by the regulators for each different type of asset 
and includes a specific statutory mandate related to any 
potential reforms of the commercial mortgage-backed securities 
market to limit disruption. In light of the FDIC's unilateral 
decision to add an across the board risk retention requirement 
in the safe harbor rule, which the OCC opposed, how do you plan 
to coordinate and reconcile disagreements in the joint 
rulemaking?

A.1. The OCC believes that it is essential to set policy for 
U.S. securitization markets on a comprehensive, interagency 
basis as mandated by the Dodd-Frank Act. Dodd-Frank assigns 
several different aspects of the credit risk retention rule 
writing that it requires to several different combinations of 
agencies and assigns a coordination role to the Secretary of 
the Treasury as Chairman of the Financial Stability Oversight 
Council. Through an interagency group coordinated by the 
Treasury Department, the respective staffs of the OCC, the 
FDIC, the Federal Reserve Board, the SEC, the FHFA, and HUD are 
currently working cooperatively to draft the various sets of 
risk retention rules mandated under the Dodd-Frank Act. 
Differences among the agencies are negotiated the staff level 
with guidance from agency principals. If necessary, agency 
principals will hold direct discussions to reach closure on any 
unresolved issues.
    This interagency process is unaffected by the OCC's views 
on the proposed or final FDIC safe harbor rule. At both stages 
of the rulemaking process, the OCC took the position that FDIC 
action was premature in light of legislation--the provisions 
ultimately enacted in section 941 of Dodd-Frank--that addressed 
securitizations and risk retention on a comprehensive basis. 
The FDIC final rule acknowledges that the joint agency rules 
promulgated pursuant to Dodd-Frank will ``exclusively govern'' 
the requirement to obtain an economic interest in a portion of 
the credit risk of the financial assets that are subject to its 
rule.

Q.2. Market participants highlight uncertainty related to 
changing regulations, new accounting standards, and other 
mandates as an obstacle to a resurgence of these markets. What 
steps are your agencies currently taking to minimize these 
complications? What should be done collectively by regulators 
to limit this uncertainty as you look toward the joint 
rulemaking?

A.2. We recognize that the uncertainty that has been created by 
the scope and magnitude of regulatory and accounting changes 
facing the financial industry can, by itself, create obstacles 
for bankers, their accountants, auditors, and other market 
participants as they try to make strategic business decisions. 
The OCC's Senior Deputy Comptroller and Chief National Bank 
Examiner, Tim Long, highlighted these issues in his recent 
speech before the AICPA National Conference on Banks and 
Savings Institutions. \1\ As Mr. Long noted in his speech, we 
believe it is important that regulators and accounting 
standard-setters move as quickly as possible to give the 
industry the clarity it needs to move ahead, at a time when a 
strong and competitive financial sector is more important than 
ever to our economy. At the same time, however, we must ensure 
that our decisions are governed by a process that is 
deliberate, transparent, and inclusive. To that end, we believe 
it will be important to provide the industry and other 
interested parties sufficient time to review and comment on 
proposed rules and standards and, to the extent practical, 
allow appropriate transition periods and mechanisms to assess 
the impact of rule changes before they take full effect. The 
phased-in approach for strengthening capital and liquidity 
standards that the Basel Committee has recently announced is 
one example of such an approach.
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     \1\ A copy of Mr. Long's speech is available at: http://
www.occ.gov/news-issuances/speeches/2010/pub-speech-2010-108.pdf.
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    The myriad of rules required under the Dodd-Frank Act will 
also place a premium on interagency coordination and 
communication. As I noted in my written testimony, the Dodd-
Frank Act wisely requires other financial regulatory agencies 
to consult with primary supervisors as those agencies draft 
studies or develop regulations or standards, since there may be 
implications for the safety and soundness of depository 
institutions. To help facilitate this collaboration, we have 
designated OCC experts to advise the other financial regulatory 
agencies about the potential impact on the institutions we 
supervise and their customers.















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