[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE SECURITIES AND EXCHANGE COMMISSION'S
$500 MILLION FLEECING OF AMERICA
=======================================================================
(112-37)
HEARING
BEFORE THE
SUBCOMMITTEE ON
ECONOMIC DEVELOPMENT, PUBLIC BUILDINGS, AND EMERGENCY MANAGEMENT
OF THE
COMMITTEE ON
TRANSPORTATION AND INFRASTRUCTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JUNE 16, 2011
__________
Printed for the use of the
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Available online at: http://www.gpo.gov/fdsys/browse/
committee.action?chamber=house&committee=transportation
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COMMITTEE ON TRANSPORTATION AND INFRASTRUCTURE
JOHN L. MICA, Florida, Chairman
DON YOUNG, Alaska NICK J. RAHALL II, West Virginia
THOMAS E. PETRI, Wisconsin PETER A. DeFAZIO, Oregon
HOWARD COBLE, North Carolina JERRY F. COSTELLO, Illinois
JOHN J. DUNCAN, Jr., Tennessee ELEANOR HOLMES NORTON, District of
FRANK A. LoBIONDO, New Jersey Columbia
GARY G. MILLER, California JERROLD NADLER, New York
TIMOTHY V. JOHNSON, Illinois CORRINE BROWN, Florida
SAM GRAVES, Missouri BOB FILNER, California
BILL SHUSTER, Pennsylvania EDDIE BERNICE JOHNSON, Texas
SHELLEY MOORE CAPITO, West Virginia ELIJAH E. CUMMINGS, Maryland
JEAN SCHMIDT, Ohio LEONARD L. BOSWELL, Iowa
CANDICE S. MILLER, Michigan TIM HOLDEN, Pennsylvania
DUNCAN HUNTER, California RICK LARSEN, Washington
ANDY HARRIS, Maryland MICHAEL E. CAPUANO, Massachusetts
ERIC A. ``RICK'' CRAWFORD, Arkansas TIMOTHY H. BISHOP, New York
JAIME HERRERA BEUTLER, Washington MICHAEL H. MICHAUD, Maine
FRANK C. GUINTA, New Hampshire RUSS CARNAHAN, Missouri
RANDY HULTGREN, Illinois GRACE F. NAPOLITANO, California
LOU BARLETTA, Pennsylvania DANIEL LIPINSKI, Illinois
CHIP CRAVAACK, Minnesota MAZIE K. HIRONO, Hawaii
BLAKE FARENTHOLD, Texas JASON ALTMIRE, Pennsylvania
LARRY BUCSHON, Indiana TIMOTHY J. WALZ, Minnesota
BILLY LONG, Missouri HEATH SHULER, North Carolina
BOB GIBBS, Ohio STEVE COHEN, Tennessee
PATRICK MEEHAN, Pennsylvania LAURA RICHARDSON, California
RICHARD L. HANNA, New York ALBIO SIRES, New Jersey
JEFFREY M. LANDRY, Louisiana DONNA F. EDWARDS, Maryland
STEVE SOUTHERLAND II, Florida
JEFF DENHAM, California
JAMES LANKFORD, Oklahoma
REID J. RIBBLE, Wisconsin
CHARLES J. ``CHUCK'' FLEISCHMANN,
Tennessee
7_____
Subcommittee on Economic Development, Public Buildings, and Emergency
Management
JEFF DENHAM, California, Chairman
TIMOTHY V. JOHNSON, Illinois ELEANOR HOLMES NORTON, District of
ERIC A. ``RICK'' CRAWFORD, Columbia
Arkansas, HEATH SHULER, North Carolina
Vice Chair MICHAEL H. MICHAUD, Maine
RANDY HULTGREN, Illinois RUSS CARNAHAN, Missouri
LOU BARLETTA, Pennsylvania TIMOTHY J. WALZ, Minnesota
BOB GIBBS, Ohio DONNA F. EDWARDS, Maryland
PATRICK MEEHAN, Pennsylvania BOB FILNER, California
RICHARD L. HANNA, New York NICK J. RAHALL II, West Virginia
JOHN L. MICA, Florida (Ex Officio) (Ex Officio)
VACANCY
(ii)
CONTENTS
Page
Summary of Subject Matter........................................ iv
TESTIMONY
Clancy, Elaine, Director of Leasing, National Capital Region,
U.S. General Services Administration........................... 6
Heslop, Jeffery, Chief Operating Officer and Acting Executive
Director, U.S. Securities and Exchange Commission, accompanied
by Mark D. Cahn, General Counsel, U.S. Securities and Exchange
Commission..................................................... 6
Kotz, Hon. H. David, Inspector General, U.S. Securities and
Exchange Commission............................................ 6
PREPARED STATEMENTS SUBMITTED BY MEMBERS OF CONGRESS
Norton, Hon. Eleanor Holmes, of the District of Columbia......... 33
PREPARED STATEMENTS SUBMITTED BY WITNESSES
Clancy, Elaine................................................... 35
Heslop, Jeffery.................................................. 40
Kotz, Hon. H. David.............................................. 49
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THE SECURITIES AND EXCHANGE
COMMISSION'S $500 MILLION
FLEECING OF AMERICA
----------
THURSDAY, JUNE 16, 2011
House of Representatives,
Subcommittee on Economic Development, Public
Buildings, and Emergency Management,
Committee on Transportation and Infrastructure,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:10 a.m. in
room 2167, Rayburn House Office Building, Hon. Jeff Denham
(chairman of the subcommittee) presiding.
Mr. Denham. The subcommittee will come to order. First, let
me welcome our witnesses and thank them for testifying today.
After reading the inspector general's report, it is hard to
comprehend how easily the SEC can just commit to spending $500
million of the American people's money in just a few days. It
is as though the SEC did not get the memo that Congress and the
administration have both been talking about cutting the waste
in our Federal buildings. But it seems the SEC thought it was
business as usual, and operated with a Congress-is-throwing-
money-at-us mentality, in total disregard that it is not their
money, but the American people's money.
Our subcommittee has been working to cut waste in Federal
buildings. Billions of taxpayer dollars are wasted in underused
property, the overbuilding of Federal facilities, and in our
over-reliance on costly leases to meet long-term space needs.
Unfortunately, examples of waste abound in our management of
Federal real property. But the SEC's massive half-a-billion-
dollar lease for space it did not need goes far beyond
mismanagement. There must be accountability and consequences
for this type of cavalier spending of taxpayer money.
As outlined in the inspector general's report issued last
month on July 28, 2010, the Securities and Exchange Commission
signed a letter contract to lease space at Constitution Center
in Washington, DC. The agreement was more than 900,000 square
feet of space, with an option to lease an additional 500,000
square feet.
Let's put this in perspective. This is a total of 1.4
million square feet of space for an agency that has just over
3,000 personnel working in the national capital region. The 1.4
million would be on top of the 1.3 million square feet the SEC
leases for its headquarters at station--near Union Station.
Just to give you an example, 3,000 employees, by GSA's
standards, we would have enough room between these 2 facilities
for 12,000 employees. That is by GSA standards.
Constitution Center is the former location of the DOT
headquarters, and was completely renovated and upgraded by the
owner. And we will start the slides now.
[Slide.]
Mr. Denham. This first slide is the interior courtyard of
the building. Next slide.
[Slide.]
Mr. Denham. Here is an image of one of the lobby areas
overlooking the courtyard. Next slide.
[Slide.]
Mr. Denham. This slide is taken from one of the top floors
facing northwest, towards the Capitol building. Next slide.
[Slide.]
Mr. Denham. Another view looking north.
[Slide.]
Mr. Denham. And finally, a view looking southwest towards
the water and the airport.
[Slide.]
Mr. Denham. This last view is from the quadrant of the
remaining 300,000 square feet of space SEC insisted the
building owner reserve for them.
The total cost of this lease is over $550 million over 10
years. The findings of the inspector general are breathtaking.
The SEC bound the taxpayer to more than a half-a-billion
dollars based on the back-of-the-envelope calculations that
were inflated, and just simply wrong.
There was no formal written approval process. In fact, the
final decision was made orally, after only a 10-minute meeting
with the chairman of the SEC. There was no OMB approval and no
ional approval. And, on top of that, SEC proceeded with a sole
source contract negotiated over the course of just days.
The justification for this, as required by law, was
completed after the fact, and three of the four signatures were
signed before the document was even completed. One of the
signatures was back-dated. And then the date was later altered,
giving the impression that justification for the sole source
procurement was completed more than a month before it actually
was.
And there is a serious question as to whether the
Antideficiency Act was violated. It appears someone at the SEC
saw Constitution Center and decided that's where they wanted
the SEC to move, and then everything else had to fit: the
staffing figures, space needs, and justification.
But today, in addition to the investigation, what led to
this lease agreement, we are also examining whether the SEC
should keep its independent leasing authority. And we know that
this is not the first time SEC has mismanaged its leasing
authority. Next slide.
[Slide.]
Mr. Denham. Here we have a slide showing a timeline of just
some of the instances of mismanagement by the SEC, and the cost
to the taxpayer. What this shows is a number of troubling
trends.
The SEC has a history of sole-source leases that even GSA,
in its management of over 180 million square feet of leased
space, rarely uses. SEC has a history of bad leasing decisions
that cost the taxpayer millions: double rent payments in New
York, unbudgeted cost in SEC's headquarters, and holdover fees
in San Francisco.
In addition to these, we know the SEC is now paying nearly
$20 more per square foot for its more recent Station Place
headquarters lease than comparable Federal leases near it. And
SEC has paid $200,000 a year of taxpayer dollars for off-duty
officers to provide security at a Virginia facility already
secured by the Federal agency in the building, the Commerce
Department.
It is bad decision after bad decision, and it is the
taxpayer that loses. The SEC must realize that it is real money
they have spent, and that it is accountable to the American
people who expect all of us to be good stewards of Federal
resources.
At some point the waste has to end. There are very serious
issues raised in the IG report. And the more our subcommittee
investigates, more questions are raised.
I would like to state for the record that we formally
requested the presence of certain current and former employees
of the SEC, including associate executive director Sharon
Sheehan, and former executive director Diego Ruiz. And they
either refused to testify, or failed to respond to our request.
I will be listening closely to the responses of the
witnesses today. And based on the responses we get, I will be
talking further with Ranking Member Norton, the IG, and the
GAO, to determine the appropriate next steps in our
investigation.
I would now like to recognize Ranking Member Norton from
the District of Columbia for 5 minutes to make any opening
statements she may have.
Ms. Norton. Thank you. Thank you very much, Mr. Chairman.
And thank you for calling today's hearing. I certainly want to
welcome today's witnesses to the hearing on the inspector
general's May 16, 2011, report on the SEC leasing deal for the
Constitution Center building located here in southeast
Washington.
The shocking findings by the IG on a leasing agreement for
more than half-a-billion dollars painted an outrageous picture
of an agency that was incompetent to engage in real estate
transactions, and consequently developed a culture that allowed
bureaucrats to make major unsupported financial commitments on
behalf of the agency using outright deceit, and possibly fraud.
The IG findings are so serious that they point towards
possible criminal violations by Federal employees in the course
of official activities, leading to the execution of the leasing
agreement. According to the IG, several SEC employees worked in
concert to repeatedly subvert the direction provided by the SEC
chairwoman on the placement of new employees, made false
representations, and doctored documents to justify a sole-
source leasing agreement.
SEC employees relied on the self-delusion that Congress
would appropriate all the authorized funds under Dodd-Frank,
the new regulatory reform legislation, although the notion that
SEC would obtain an appropriation for a full authorization for
new employees was historically inconsistent with SEC's budget,
and flies in the face of the simple fact and widespread
knowledge that authorization of funding never has ensured full
appropriation of those funds.
More importantly, the notion that all the new employees
would be housed at the SEC headquarters was found to be
completely unsupported, and at odds with the express direction
by the SEC chair to the staff that most of the growth should be
concentrated in regional offices.
The abuse did not end there. Contrary to the General
Services Administration standard of 230 square feet per person
in an office, the SEC Office of Administrative Services, or
OAS, provided an estimated need for 400 square feet per person,
nearly double the GSA standard. This overly generous standard
was later inflated by a factor of 49 percent for auxiliary
staff, even though the 400 square feet per person actually was
meant to accommodate the auxiliary staff.
The IG concluded that this inflation by the SEC OAS
``employed a series of unfounded egregiously flawed and
irresponsible projections to derive the purported need to lease
900,000 square feet.''
Even if the SEC had received all the authorized funds
provided by Dodd-Frank, the SEC would have needed, at most, an
additional 300,000 square feet, only a third of the 900,000 the
Agency eventually leased. Why, then, did the SEC lease 900,000
square feet? The answer provided by the IG is that a few SEC
OAS officials had what he called grandiose plans to lease the
upscale Constitution Center. Having set the target square
footage, they worked backwards, using a ``deeply flawed and
unsound analysis'' to justify the lease, according to the IG.
To compound the damage, the $556 million lease agreement
was conducted as the Government never does, as a sole-source
contract that was completed in over 3 days, just over 3 days.
Only after the contract was signed was a justification and
approval for other than full and open competition prepared.
And, according to the IG, it was inadequate, not properly
reviewed, and back-dated, and prepared well past the deadline--
regulatory deadline for such contracts.
The IG also has raised the serious question that this
leasing agreement may have violated the Antideficiency Act,
which prohibits officers or employees of the Government from
committing the Government to a payment of money before an
appropriation is made, authorized by law.
Astonishingly, this transaction represents a pattern, since
the SEC was granted leasing authority in 1990. The Agency has
made repeated missteps from the build-to-suit lease for the SEC
headquarters behind Union Station that led to $48 million in
construction overages, and the mishandling of lease
transactions in San Francisco and New York, forming a leasing
division only 19 years after receiving leasing authority.
The SEC was granted its own leasing authority, with the
expectation that the authority would be ``exercised vigorously
by the Commission to achieve cost savings and to increase the
Commission's productivity and efficiency.'' Sadly, the opposite
has been the case, and calls into serious question the grant of
leasing authority to the SEC or to any Federal agency.
This subcommittee has an obligation to taxpayers to
understand the steps that led to the Constitution Center lease,
to take corrective measures to ensure the SEC can no longer
engage in leasing activities, and to ensure that appropriate
action regarding the employees involved is taken.
Notably, several employees implicated in this leasing
transaction have refused the invitation of this subcommittee to
testify. And at least one of the principal players named in the
IG report still has oversight of the SEC leasing program.
The SEC leadership is on notice that if there is
retaliation against the employees that provided testimony to
the SEC IG, we will respond immediately. I appreciate the
testimony that has been prepared. I look forward to hearing
from today's witnesses.
Mr. Chairman, I have served on this subcommittee for 20
years. I have seen mishaps by agencies of various kinds, some
of them deliberate. I doubt that I or any other Member of
Congress has ever seen an abuse approaching this, that was as
determinedly done by the employees involved. I have, therefore,
drafted a bill to revoke SEC's leasing authority. I recognize
that the BRAC bill which you and I are working on now will, in
fact, revoke the authority of agencies outside of the GSA to
engage in such leasing, agencies that may have expertise in the
mission assigned to them by Congress, but certainly not in a
very complicated different area of enterprise, and that is real
estate areas.
I believe that taxpayers would not be content if we said,
``Don't worry, we will get to this when the BRAC bill is
done.'' That takes two Houses, it takes going to the floor. I
believe an immediate response by this committee is necessary,
particularly since it has always been doubtful that agencies
outside the GSA should have such authority.
So, I will be asking you, Mr. Chairman, to look at the bill
I have drafted, and hope that you will cosponsor that bill with
me. And perhaps we can get that bill to the floor before this
calendar year is over.
Mr. Denham. Thank you. I look forward to that. This abuse
is not going to be tolerated, and we will look forward to
seeing that, and working with you on the issue.
Today we are going to ask the witnesses to provide
testimony under oath. I would ask each of the witnesses to
please stand and raise their right hand to be sworn in under
oath.
Do you swear that the testimony you are about to provide to
the subcommittee is the truth, the whole truth, and nothing but
the truth, so help you, God?
Witnesses. I do.
Mr. Denham. You may be seated. Our first and only panel
will be the Honorable David Kotz, inspector general, U.S.
Securities and Exchange Commission; Mr. Jeff Heslop, chief
operating officer and executive director, U.S. Securities and
Exchange Commission--and Mr. Heslop is accompanied by Mr. Mark
Cahn, SEC general counsel; and Ms. Elaine Clancy, director of
leasing, national capital region, U.S. General Services
Administration.
I ask unanimous consent that our witnesses' full statements
be included in the record.
[No response.]
Mr. Denham. Without objection, so ordered. Since your
testimony has been made part of the record, the subcommittee
would request that you limit your oral testimony to 5 minutes.
Mr. Kotz, you may proceed.
TESTIMONY OF THE HONORABLE H. DAVID KOTZ, INSPECTOR GENERAL,
U.S. SECURITIES AND EXCHANGE COMMISSION; JEFFERY HESLOP, CHIEF
OPERATING OFFICER AND ACTING EXECUTIVE DIRECTOR, U.S.
SECURITIES AND EXCHANGE COMMISSION; MARK D. CAHN, GENERAL
COUNSEL, U.S. SECURITIES AND EXCHANGE COMMISSION; AND ELAINE
CLANCY, DIRECTOR OF LEASING, NATIONAL CAPITAL REGION, U.S.
GENERAL SERVICES ADMINISTRATION
Mr. Kotz. Thank you. Thank you for the opportunity to
testify before this subcommittee. I appreciate the interest of
the chairman, the ranking member, and the other members of the
subcommittee in the SEC and the Office of Inspector General.
On November 16, 2010, we opened an investigation as a
result of receiving numerous written complaints concerning the
SEC's decisions and actions related to the leasing of office
space at Constitution Center.
As part of our investigative efforts, we obtained and
searched over 1.5 million emails, for a total of 27 current and
former SEC employees for various time periods pertinent to the
investigation. We carefully reviewed and analyzed thousands of
pages of documents, and interviewed or took the testimony of 29
witnesses with knowledge of facts or circumstances surrounding
the SEC's activities.
On May 16, 2011, we issued a comprehensive report of our
investigation containing over 90 pages of analysis, and over
150 exhibits. Our investigation concluded that the
circumstances surrounding the SEC's entering into a lease for
900,000 square feet of space at the Constitution Center
facility in July 2010 represented another in a long history of
missteps and misguided leasing decisions made by the SEC since
it was granted independent leasing authority by Congress in
1990.
We found that, based on estimates of increased funding,
primarily to meet the requirements of Dodd-Frank, between June
and July of 2010 the SEC's Office of Administrative Services,
OAS, conducted a deeply flawed and unsound analysis to justify
the need for the SEC to lease 900,000 square feet of space at
the Constitution Center facility. We found that OAS grossly
over-estimated the amount of space needed for the SEC's
projected expansion by more than 300 percent, and used these
groundless and unsupportable figures to justify the SEC
committing to an expenditure of over $556 million over 10
years.
We found that OAS used the standard of 400 square feet per
person to calculate how much space would be needed for the
additional positions it believed it was gaining. The 400-
square-foot standard was described by one of the people working
on the lease as a back-of-the-envelope calculation.
The standard was an all-inclusive number that included
common space and amenities, an additional 10 percent for
contractors, 10 percent for interns and temporary staff, and 5
percent for future growth. Notwithstanding this all-inclusive
number, when OAS later did its calculations to justify the
Constitution Center lease, it added even more unnecessary space
by double-counting for contractors, interns, and temporary
staff. We also found that each one of these estimates was
wildly inflated, and unsupported by the data OAS was using.
After the SEC committed itself to the 10-year lease term at
a cost of over $556 million, it entered into a justification
and approval for other than full and open competition, which is
required by the Federal Acquisition Regulation, FAR, when an
agency decides not to allow for full and open competition on a
procurement or lease. The FAR permits other than full and open
competition when the agency's need is of such an unusual and
compelling urgency that the Government would be seriously
injured unless the agency is permitted to limit the number of
sources from which it solicits bids.
The IG investigation found that the justification and
approval to lease space at Constitution Center without
competition was inadequate, not properly reviewed, and back-
dated. The OAS analyst who signed the justification and
approval as the SEC's competition advocate acknowledged in
testimony that the SEC would not, in fact, be seriously injured
if it lost the opportunity to rent this space. She admitted
that she took no substantive steps to verify that the
information in the justification and approval was accurate, and
that when she signed the document she was not aware that the
funding had not been appropriated, and she did not have an
understanding of when the projected personnel were expected to
be hired.
The FAR also requires that the justification and approval
be publicly posted within 30 days after contract award. As the
letter contract for Constitution Center was signed on July
28th, the deadline for publication of the justification of
approval was August 27. On September 3rd, the SEC publicly
posted the justification and approval, which was signed by 4
individuals as dated August 2nd.
Our investigation found, however, that the justification
and approval was not finalized until September 2nd, and that
substantial revisions were being made up to that date. We found
that three of the four signatories executed the signature page
on August 2nd, before a draft even remotely close to the final
version existed. We found that the SEC's competition advocate
executed the signature page on August 31st, initially back-
dated her signature to August 27th, and then subsequently
whited out the ``7'' to make it appear that she signed the
document on August 2nd.
The actions of the signatory to the justification and
approval gave the public the false impression that the document
was finalized a few days after the letter contract was signed,
and that there was only a minor delay in its publication.
Based on these findings, we issued a report recommending
that a thorough and comprehensive review and assessment of all
matters currently under OAS's purview be conducted, and that
the SEC determine the appropriate disciplinary and/or
performance-based actions to be taken for the matters discussed
in the investigation.
Thank you, and I am happy to answer any questions.
Mr. Denham. Thank you, Mr. Kotz.
Mr. Heslop, you may proceed.
Mr. Heslop. My name is Jeff Heslop, chief operating officer
and acting executive director of the U.S. Securities and
Exchange Commission. I appreciate the opportunity to testify on
behalf of the Commission with respect to the Agency's lease of
office space at Constitution Center, and to share with you
information on the actions the SEC is taking in response to the
IG report.
The IG report on the leasing of Constitution Center
revealed a number of flaws in the SEC's leasing process.
Although the SEC has not paid any rent, and is no longer
obligated for the majority of the space, it is clear that this
leasing decision lacked the rigor and attention to detail
demanded for decisions of this magnitude. As such, we are
committed to implementing whatever changes are needed to
improve the process, starting with the retention of outside
experts to conduct an assessment, a comprehensive assessment,
of our entire leasing organization.
On July 28th of 2010, the SEC entered into an agreement to
lease approximately 900,000 rentable square feet of office
space at Constitution Center to house new staff necessitated by
the Dodd-Frank Act and to address the facilities needs created
by expiring leases in Alexandria, Virginia, at our back office
operations center. The SEC's agreement contained a 10-year
term, and envisioned space being delivered to the SEC in
phases.
In the fall of 2010, when it became apparent that the SEC
would be limited by the continuing resolution and would not be
receiving further funding for fiscal year 2011 to hire
additional staff for the new responsibilities it received under
regulatory reform, and in light of significant uncertainty
regarding the Agency's budget for fiscal year 2012, the
Agency's leasing branch worked with the Constitution Center
landlord to identify two non-appropriated financial regulatory
agencies--the Office of the Comptroller of Currency and the
Federal Housing Finance Agency--that were able to take the
majority of the space allocated to the SEC, a total of
approximately 558,000 square feet. The SEC's releases that
enabled the landlord to lease space to other Federal tenants
were conditioned upon the SEC being released from all
obligations for the space.
With respect to the remaining space, the SEC earlier this
year determined that the uncertainty of the Agency's budget for
fiscal year 2012 and beyond counsels against retaining it. To
this end, SEC staff is currently working with the General
Services Administration to identify other Federal Government
agencies to fill the remaining space.
The inspector general has identified a number of flaws with
the leasing process. My charge from the commissioner--from the
chairman is to address the issues identified in the IG report,
and improve that process.
The SEC is actively at work, implementing the inspector
general's recommendations, and taking steps to strengthen our
real property leasing program. For example, the authority
previously exercised by the executive director has been
transferred to me, as the chief operating officer. All future
property leasing decisions must be approved by me, as the COO,
before any leases are signed.
Second, as I mentioned, we're conducting a comprehensive,
independent assessment of our leasing operations with outside
experts.
Third, all future leasing obligations will require
consultation with an executive senior-level facilities
management committee before they can be incurred or recommended
for approval. This cross-organizational committee will provide
oversight and guidance to the SEC leasing process, and will
serve as a forum for the executive-level discussion of the
Agency's leasing decisions.
Fourth, we're in the process of developing a more clearly
defined leasing policy and associated process.
And, fifth, we have initiated efforts to acquire technology
that will permit us to automate, and will provide more
efficient space planning, move management, and asset
management. Such systems, available on an off-the-shelf basis,
and commonly used in private industry as a best practice,
should provide managers with significantly more timely and
accurate analysis and planning to deliver these efficient space
utilization at our office locations.
In addition, the IG report recommends that the Agency
consider whether disciplinary action should be taken against
current staff members. The SEC has begun this review, in
accordance with Federal personnel law. At present, the Office
of Human Resources and the Office of General Counsel are
analyzing the investigative record, and will recommend
appropriate disciplinary action to me. I would then decide any
appropriate disciplinary action that should be taken.
In conclusion, the SEC is actively at work on a number of
fronts to strengthen the Agency's real property leasing
program. Although the SEC has paid no rent on the space, and
has worked with the landlord to identify substitute tenants,
the OIG report identified flaws in the leasing process in need
of correction. We are endeavoring to take all necessary and
appropriate steps, including implementing new controls and
procedures to ensure that we address the significant issues
identified in the IG's report.
I would be happy to answer any questions at this time.
Mr. Denham. Thank you, Mr. Heslop.
Ms. Clancy, you may proceed.
Ms. Clancy. Good morning, Chairman Denham, Ranking Member
Norton, and members of the committee. I appreciate the
opportunity to be here today, and be invited to discuss the
GSA's approach to acquiring lease space for Federal agencies.
The GSA searches for effective ways to provide space for
Federal agencies, to help them achieve their missions while
protecting the public's interest. In order to accomplish these
goals, the GSA implements a deliberate and comprehensive
process that ensures adequate competition, and considers other
public interest. We manage an inventory of over 370 million
square feet of space, approximately half of which is leased
space.
The GSA effectively manages our leased space, which
currently has a vacancy rate of less than 1 percent. Leases
under the current prospectus threshold represent approximately
98 percent of all of our leases. Prospectus-level leases
represent 2 percent of our leases transacted, and 33 percent of
the annual GSA rent pays--that the GSA pays to lessors.
The requirements development evaluation process of these
leases is more extensive, due to the size and the cost. These
large leases require review and clearance by GSA's central
office and OMB prior to submission to Congress. OMB ensures
that proposed leases comply with lease scoring rules, and
ensures that the proposed action is consistent with personnel
and resource estimated in the President's budget.
Once the GSA has worked with an agency to carefully define
their requirements, and assess that their needs are based on
accurate projections and available funds, GSA's lease
acquisitions process runs through a carefully sequenced set of
steps to ensure adequate competition and a fair rental rate for
taxpayers.
One of GSA's fundamental strategies is to promote
competition by attempting to maximize the number of potential
qualified offerors for a lease solicitation. By improving
communication with the commercial real estate sector, GSA's
presence in the market is strengthened, and a sense of
partnership with leasing industry practitioners emerges,
resulting in increased competition for GSA leases.
GSA follows a sequenced and efficient leasing acquisition
process, which includes market advertising, surveying
assessments, evaluation, negotiations, and contract execution,
which are outlined in detail in my written statement. GSA
constantly looks for ways to streamline, standardize, and
simplify our leasing process, to minimize the cost associated
with acquiring a lease.
We also constantly assess our performance against other
rental rates in the market. GSA is committed to adapting its
internal processes to mirror leasing in the private sector, and
to fully utilize the market leverage that results from the
Federal Government being a reliable and desirable tenant.
In regards to the SEC--the lease procured by the SEC at
Constitution Center in Washington, DC, the SEC has recently
reached out to the GSA to request our assistance in filling the
remaining vacant space. The GSA is gathering additional details
pertaining to this contract, and the conditions under which the
SEC procured the lease. To the extent that we can reasonably
assist in protecting the public's interest and meeting the
space needs of other agencies, we will consider doing so.
In conclusion, the GSA's approach to leasing Federal space
allows agencies to achieve their mission effectively, and
protect the public's interest in ensuring that space is
acquired at a fair rate, while being flexible to ensure that
the highest levels of controls are placed on the largest
potential leasing actions.
In addition, we aim to constantly improve our processes, to
attract further competition from the private sector, and to
minimize cost to the taxpayers.
Thank you for inviting me to appear before you today, and I
appreciate the opportunity to discuss the GSA's leasing
practices and expertise. I welcome your questions.
Mr. Denham. Thank you, Ms. Clancy. We will now start our
first round of questioning. We expect that there will be
several rounds today, because I don't think there is any
shortage of questions that need to be answered here.
First, Mr. Heslop, can you state for the record your
position and responsibilities at the SEC?
Mr. Heslop. I am the chief operating officer and acting
executive director of the SEC. My responsibilities include
oversight of our IT operation, our human resources operation,
the Office of Administrative Services, FOIA, and records
management, and Office of Financial Management.
Mr. Denham. Leasing authority under one of those?
Mr. Heslop. Yes, the Office of Administrative Services.
Mr. Denham. And does the SEC intend to issue a formal
response to the IG report issued in May?
Mr. Heslop. We are taking appropriate action against the
IG's report that was issued. We are, as I stated, having a
comprehensive independent outside assessment done of the OAS
organization, and looking at every recommendation in the IG's
report, and taking appropriate action against them.
Mr. Denham. So are you going to be issuing a formal
response to the IG report?
Mr. Heslop. At this time there is no intent to issue a
formal response.
Mr. Denham. Why? Why wouldn't you respond to them formally?
Mr. Heslop. There is no requirement to respond to them
formally.
Mr. Cahn. If I could, Chairman Denham, if I could?
Mr. Denham. Sure, Mr. Cahn.
Mr. Cahn. Mark Cahn, I am the general counsel at the SEC.
Typically, when the inspector general issues investigative
reports such as this, the agency reviews the report and
responds, as Mr. Heslop describes, to take responsive action--
--
Mr. Denham. Will you pull your microphone closer, please?
Mr. Cahn. Oh, I'm sorry--to take responsive action in
response to the report. It is not the practice of the Agency,
in response to investigative reports such as these, to issue
any sort of formal response. That is as distinguished from
audits that the inspector general prepares, in which the
practice is to have a management response to the audit. But I
suppose the inspector general could speak more directly to
that.
Mr. Denham. What is customary, Mr. Kotz?
Mr. Kotz. Yes, I mean we don't generally have a formal
response to our investigative reports. What we do expect is
that the recommendations in our report be implemented, that a
process be put in place, and that our disciplinary action
recommendations be implemented, as well.
So, I mean, I am not sure we need a formal response. What
we need them to do is fix the problems in the Office of
Administrative Services, and discipline the people who we found
to have violated the rules.
Mr. Denham. I will look at it from a business perspective.
When a Government agency comes down on a business, they are not
only expected to have the recommendations implemented, but to
have a quick, rapid response on the timeline on when you are
going to get these things done.
So, I would expect to see some type of response, you know.
I want to know. Is it going to take you a year to fix this? Ten
years? I want to know what the response is to the American
taxpayers. So I am looking for how long--what you are going to
do to correct the action, how long it is going to take. And I
would think a simple response to the IG's report would at least
be a good starting point.
Mr. Heslop, one of the critical steps in space planning and
determining how much new space is needed is developing a
program of requirements. Was there a program of requirements
developed prior to July 28, 2010?
Mr. Heslop. To my knowledge, I don't know. I have recently
inherited this function. Again, my role is to try to fix the
process, a very flawed process that led us to this situation.
We are in the process of doing it, taking a number of steps
that I outlined in my testimony. So I can't address the
question about the history.
Mr. Denham. And how long has it been since you have assumed
these new--this new role?
Mr. Heslop. Approximately 7 weeks.
Mr. Denham. Mr. Cahn, same question.
Mr. Cahn. I am not--I don't know whether a program of
requirements was prepared. The inspector general reviewed the
documentation in connection with this particular leasing
activity. So he may be aware of whether that sort of
documentation was prepared. I just don't know.
Mr. Denham. You guys were both aware you were going to
testify in front of Congress today, correct?
Mr. Cahn. Yes, sir.
Mr. Denham. This seems like a pretty basic question. I mean
this is standard procedure, is it not?
Mr. Cahn. I assume it is. I just don't--I was not involved
in the transaction. I assumed the position of general counsel
in March of this year. That is not to say that the general
counsel position would have been involved in that level of
detail of documentation of a leasing decision; I just don't
know what documentation was prepared by the Office of
Administrative Services, but we will be happy to look into that
inquiry and get back to you.
Mr. Denham. Chief operating officer, is this not part of
standard operating procedure?
Mr. Heslop. Again, I am new to the position, I am reviewing
the current process, and trying to improve and fix that
process, going forward. So I can't speak to past operating
practices, other than to tell you, as you have seen, they were
deeply flawed, and we are doing our best to turn them around.
Mr. Denham. Ms. Clancy, the GSA's--when GSA goes out and
does a lease--program of requirements?
Ms. Clancy. Yes. For a lease of this size, we would work
with an agency initially to develop that program of
requirements, specifically looking at their existing space use,
the use of their existing space, how we might house that agency
efficiently, given the current Presidential directives, and
then directives from OMB to reduce their space requirements,
overall.
And as we were developing that requirement, we would then--
we have a number of checks and balances that we use, because we
work with those agencies at the NCR level. Then it goes, again,
as I said before, to our central office, and then to OMB. Once
it reaches OMB, it is not just the GSA's examiners who are
looking at the space requirements, but it is also the agency's
examiners who would be looking at those requirements in
conjunction with ours, to confirm that those requirements are,
in fact, what the agency actually needs.
Mr. Denham. Standard operating procedure. GSA goes out for
a very large-size lease, you put together a program of
requirements. You know what you are going out there to lease,
for how many employees, how big of a space you need, what
location you need. I mean there has got to be a program of
requirements that you are looking at before you go out and
secure space, do you not?
Ms. Clancy. That is correct. And it is a fairly extensive
process that we use.
Mr. Denham. Mr. Kotz, just a quick follow-up. Standard
operating procedure between different agencies, program of
requirements?
Mr. Kotz. Yes, I do believe it is a standard operating
procedure, and I don't believe it was done in this case.
Mr. Denham. Thank you. And more of a statement than a
question, because I am out of time and will come back to this.
But you have been the chief operating officer prior to assuming
the new duties, have you not?
Mr. Heslop. That is correct, for about half of the duties I
outlined when you asked me the original question. I did not
have oversight of the Office of Administrative Services, which
is where this leasing branch resides.
Mr. Denham. But as chief operating officer--I am a new guy
here, but I can understanding a program of requirements in--
both from a business perspective, as well as from GSA and the
IG. You've been COO--I mean that seems pretty basic, that you
would at least know that a program of requirements is something
that every agency, every business, would be going out to get
some specific requirements on.
Ranking Member Norton?
Ms. Norton. Thank you, Mr. Chairman. The chairman asked
about your response to the IG report. I can understand that it
is an interesting response, very much along protocol lines,
even though the actions of the Agency have tended to ignore
rules, as well as protocol.
So, let me take his question even further. Have you taken--
Mr. Heslop and Mr. Cahn, have you taken any action of the kind
recommended by the IG, such as disciplining employees, such as
issuing--getting--asking for a formal opinion from the GAO
about whether there has been a violation of the Antideficiency
Act?
Mr. Cahn. I can start, Congresswoman Norton. As to the last
matter, the--with regard to the Antideficiency Act, yes, we
have. We have recently sent over a formal request for an
opinion from the comptroller general on the question of whether
the manner in which we obligate funds in connection with our
multiyear leases is consistent with the Antideficiency Act. So
that letter has gone over.
And I know that Mr. Heslop can speak to the other
recommendations in the inspector general's report.
Ms. Norton. Thank you, Mr. Cahn. That is minimally
necessary, to know whether there has been--of course, Mr.--the
IG indicated that there may have been, he is not an expert on
that. You need to know that. The appropriators will need to
know that very, very much, especially in light of your new
responsibilities.
And I must say it grieves me that this Agency has had to
deal with a real estate problem outside of its mission, and now
faces an aura of abuse, right at the time when we are expecting
the Agency to zero in on what it is Dodd-Frank asked you to do.
Talking about a distraction, they are distractions. And they
are distractions that an agency cannot afford.
What about the other recommendations, Mr. Heslop?
Mr. Heslop. With regard to disciplinary action, we are
aggressively managing it. Federal personnel law affords the
named individuals due process, and we are letting that process
play itself out.
Ms. Norton. So what processes have been instituted, as to
these employees?
Mr. Heslop. Again, our general counsel and our Office of
Human Resources are reviewing the investigative record. Upon
completion of that review, they will provide me with
recommendations for disciplinary action. I am the deciding
official. I will take--I will make those decisions at that
time----
Ms. Norton. So, Mr. Cahn, you have not--the Agency has
taken no action against the employees who were involved in this
matter.
Mr. Cahn. The Agency has commenced the review, the
disciplinary process review, which----
Ms. Norton. When will that review be over?
Mr. Cahn. I can't predict precisely when that will be over.
I imagine it can be completed quickly. The process that is
required under the Federal personnel laws requires some degree
of time lapse----
Ms. Norton. Mr. Cahn, you are going to have your head
handed to you by the appropriators, given the great amount of
process that is involved here, when there was very little
process----
Mr. Cahn. We recognize----
Ms. Norton [continuing]. Very little process involved, with
respect to these transactions.
I am the first to want due process. But the notion that no
process has even begun, even though the IG had to take--has
issued a report, is very troubling.
Let me ask you about an employee that--whose name runs
repeatedly through the IG report. The name is Sharon Sheehan.
She is named as one of the principal players in signing the
Constitution Center deal. Is Sharon Sheehan still on staff?
Mr. Heslop. Yes, Sharon Sheehan is still on staff.
Ms. Norton. Does her--do her responsibilities--does she
have responsibilities in the SEC's OAS office?
Mr. Heslop. Yes, she does. She is the director of the OAS
office.
Ms. Norton. Why is she still the director of the office?
Mr. Heslop. Again, we are following Federal personnel law,
and letting that process play out. Once that process has played
out----
Ms. Norton. Say that again.
Mr. Heslop. We are following Federal personnel law, and
letting that process play out.
Ms. Norton. Is she still doing oversight of the leasing
program?
Mr. Heslop. She is in that capacity. I have retained all--
--
Ms. Norton. Mr. Cahn----
Mr. Heslop [continuing]. Oversight of the leasing program.
Ms. Norton [continuing]. Don't you think, as an attorney,
officer of the court, that you should advise Mr. Heslop that he
has, under Federal law and regulations, no obligation to retain
a person in the position where abuses have been charged by the
IG? You now are taking it on the Agency, when you maintain her
in that position.
What--we are moving people out of positions all the time. I
insist upon it, as a matter of due process, that they not be
deprived, ultimately, of what they are entitled to. At the same
time, the Government requires the Agency to take action to make
certain that someone charged with abuse is not sitting there,
doing exactly what she was doing when the charges were laid. So
you will have to explain to me, as counsel, how this individual
cited repeatedly in the IG report is left doing precisely what
she was doing before.
And I understand the chairman just said that we asked her
that she be made available to come here, and the Agency refused
to make her available. So you then have to respond for her,
sir, because you, the Agency, have the ability to move this
person or not. Why have you chosen not to do so?
Mr. Cahn. Congresswoman Norton, my understanding is that
this particular employee is under heightened supervision right
now, under the direction of Mr. Heslop.
Ms. Norton. Why have you chosen not to remove her?
Obviously, she has to be under some kind of supervision. But
she is a supervisory employee, herself. Why are you spending
the time and energy of Agency officials supervising a
supervisor? Why do you not remove her? What is the reason for
not removing her from the position of supervising leasing
activities at the SEC? I need an answer to that question.
Mr. Heslop. Yes, ma'am. As mentioned in the IG report, the
recommendation was to conduct a comprehensive assessment of the
report, and post that review, look at disciplinary action. It
is very clearly stated.
Ms. Norton. All right. Let me--I want to make sure I am not
violating law and regulations here. Let me ask the IG.
Is there anything that, in your judgement, requires the
Agency to keep this employee doing what she was doing at the
time your report was issued? Must they do that? Must they do a
review before they even move her to another position, paying
her in the same salary? Are they required to leave her at the
helm, doing exactly what you criticized her for doing?
Mr. Kotz. Yes, I don't believe they are. Before they go
forward with a disciplinary process, you can move an employee
into another office, as long as they are getting the same
salary, has the same equivalence. That person could be moved to
another office, so they are not involved in those duties. There
are also other methods that could be used under personnel law,
to my understanding.
The disciplinary process, if one were to terminate Ms.
Sheehan, which we are recommending in our report, that action
be taken up to and including dismissal, that would take more
time, and there would have to be a proposal and a decision made
on that.
Ms. Norton. Mr. Chairman, I know my time is up.
You have heard the opinion of the IG. Are you willing to
consider removing this employee from presiding over or being
involved in leasing activities at the SEC? Yes or no?
Mr. Heslop. Yes, ma'am. As I mentioned, I am the deciding
official on the disciplinary action, and that is one of----
Ms. Norton. Before disciplinary action is taken, Mr.
Heslop, are you willing to remove her tomorrow to another
position so she is not sitting there, in oversight of leasing
activities still going on at the SEC? Yes or no?
Mr. Heslop. I will take it under consideration.
Ms. Norton. Thank you, Mr. Chairman.
Mr. Denham. Amazing. We ought to take some other things
under consideration.
Mr. Heslop, your testimony suggests that the reason the
space at Constitution Center was not needed is because Congress
did not provide full funding for the new staff that SEC had
anticipated. Putting aside the appropriateness of entering into
a lease before funding is secured, the IG report suggests--and
I would agree--that the SEC's anticipated staffing levels still
would not have justified 900,000 square feet of space, and
certainly not a sole-source procurement.
Are you suggesting that the amount of the space procured by
the SEC was an appropriate amount of space?
Mr. Heslop. No, sir, I am not suggesting that at all.
Mr. Denham. What do you believe an appropriate amount of
space is?
Mr. Heslop. An appropriate amount of space will be
determined once we get the resources for the requirements that
Congress has given us to execute our new responsibilities,
based upon consideration of regional strategy.
By the way, I should mention that we are undergoing a
review of our regional strategy, which may influence our
regional footprint, and how many people we put in those
regions, as well as a determination in the local capital region
of how many employees of the different mixes will require--will
need to be housed.
We intend to land on an industry best practice, Government
best practice square-footage estimate, and use that in our
calculations. We intend to cooperate closely with GSA to obtain
their wise counsel and subject matter expertise. It is
something we haven't done in the past, it is part of our plan.
Mr. Denham. Your plan. So your plan is to develop a program
of requirements?
Mr. Heslop. Our plan--I would expect very surely to develop
a program of requirements.
Mr. Denham. So we should have had a program of requirements
prior to this.
Mr. Heslop. It is quite apparent that we should have, yes.
The previous process was very flawed. And our role is to fix
that process going forward, so this does not happen again. That
is my role.
Mr. Denham. Mr. Kotz, the inflation of the numbers, as
detailed in your report--breathtaking. The increase in numbers
for contractors, interns, temporary workers, coupled with the
400-square-foot per person standard used is disturbing, at
best.
What do you believe the needed space--shot out from under
300,000 square feet, what it originally was, all the way up to
900,000 square feet in just the course of 1 month--was it some
big change in Government that we, you know, go through, some
new operation nationally that would suggest that all of a
sudden we were going to get a huge number of employees, and we
absolutely had to have this space?
Mr. Kotz. No, I think it was that they looked into
Constitution Center and saw how beautiful it was, and what a
nice space it was, and so that's what happened in that interim
period. And they decided only to focus on Constitution Center,
as opposed to all other options. And the Constitution Center
was a larger place, and that needed 900,000 square feet.
Mr. Denham. So, in your report, do you see any
justification to go to a 900,000-square-foot building?
Mr. Kotz. No, no. The numbers were wildly inflated. There
was no basis for it. Even if you assumed, as you indicated,
that the SEC was going to get all the money, there still
wouldn't have been need for 900,000 square feet, no less an
additional 500,000 square feet, as you indicated, which would
be 1.4 million. It was completely fabricated. And we believe it
was simply to be able to acquire beautiful space with fancy
views, like you indicated on that slide show.
Mr. Denham. How about the current 1.3 million space that
they currently occupy? Is that 100 percent utilized?
Mr. Kotz. No. And, in fact, during that time there were
open offices there. There continue to be some open offices. I
think it is mostly utilized, but there still are open offices
in Station Place.
Mr. Denham. So we've got 1.3 million in current space with
availability. Went out to get 300,000 square feet, which
inflated to 900,000 square feet, with an option of 500,000
square feet. Can you give me the timeline of that course of
decisionmaking?
Mr. Kotz. Sure. This is all within the period from June
2010 through July 2010. There was the briefing in June 2010,
where there was discussion about 280,000 to 315,000 square
feet. By July 2010 it turned into 900,000 square feet with the
option for the additional 500. So it was 1 month.
Mr. Denham. Is that normal?
Mr. Kotz. No, no. I mean it----
Mr. Denham. This is half-a-billion dollars. I mean I would
think you would need congressional approval to spend a half-a-
billion dollars, or certainly you would go through other
agencies.
Probably this would rise to the level of the President, to
say, you know, ``I realize you are going to cut a lot of
different programs this year that are very important to the
people of this Nation. We are thinking about going out and
getting enough square footage, and spending a half-a-billion
dollars. Mr. President, what do you think about that?''
I mean the process of going out and getting this type of
leased space, the sign-off?
Mr. Kotz. Yes. I mean the negotiation was done,
essentially, over a weekend. They got the OK to go forward on
Friday. By Wednesday they had signed the deal. The process of
coming up with the numbers was very, very quick. You know, not
scientific, not thorough, you know, no program put forward, you
know, no rational basis put forward, no approvals outside the
SEC.
Mr. Denham. Thank you, Mr. Kotz. My time has expired. Mr.
Walz?
Mr. Walz. Well, thank you, Mr. Chairman and Ranking Member.
This entire situation is troubling on many layers. I guess the
school teacher in me--the one good thing about this whole thing
is is, Mr. Heslop, you have done what I didn't think was
possible. You certainly brought us together in a bipartisan
manner for a common cause. Because the frustration here is
palatable. I associate myself with both my colleagues' remarks.
I often times sometimes laugh about the names of hearings.
This one is serious, and I think it was appropriately named,
and that is very frustrating to me, one, as a watchdog of the
taxpayers' money, but two, as I think everyone in this room
recognizes, is the incredible importance of the SEC, and the
job that it does, and the importance now more than maybe any
time in the last 75 years is on trial today, if you will,
because of a stupid, possibly illegal, decisionmaking.
And I again associate, I think, with the chairman on this
one is I can't imagine a private business just getting to
decide they will get around to this when they decide, ``It is
OK, we will fix this,'' or whatever. That is not going to
happen. They are going to have somebody hammering on them. And
I am incredibly frustrated by that.
And this whole idea of leasing--and I don't like to pile
on, Mr. Heslop, but we, as Members of Congress--I review my
leases through GSA, and I follow those rules. We go out and
look for space in Rochester, Minnesota, in Mankato, look for
the best space, try and get the best dollar for it, negotiate a
good deal, and I look it over to make sure it is legal. That is
my responsibility, in addition to other responsibilities. So
there is a frustration.
But I do think the good news is I am a huge fan of our IG
programs, Mr. Kotz, on--and across the board. I spend a lot of
time in the VA committee, and the inspector general in the VA
returns about 12 to 1 in terms of what we give them for a
budget. For every dollar they return 12 back to the taxpayer.
Do you happen to know, in your Agency, what that number is, or
could we get it?
Mr. Kotz. Our office's budget?
Mr. Walz. No, what you get on what we give to you.
Mr. Kotz. Oh.
Mr. Walz. I am going to come to that----
Mr. Kotz. Oh.
Mr. Walz [continuing]. On what we get, a return on the
dollar in terms of stopping fraud, waste, and abuse, both
internally and in private contractings. In the VA, that is the
number they can come up with.
Mr. Kotz. Yes, I don't know that we have calculated a
specific number. I mean in each one of our semi-annual reports
we identify cost savings. Routinely, those are in the millions.
Mr. Walz. You get to count $500 million on this one. That
will up the odds.
Mr. Kotz. Right, right, yes.
Mr. Walz. But it--but in all seriousness, I will move to
the next question on this.
Yesterday's number from the Financial Services cut the
budget for the SEC by 18.7 percent. You are probably going to
take your share of the cut in that. My concern on this is all
of us want to see good responsibility, I think, at this time in
history. And for the importance of responsibility of enforcing
new enforcement laws to make sure we don't get a melt-down, it
will be tragic to me if we are not able to give you the
resources. Because as those resources go down--how does your
office decide how you look at things, how you go after things?
Because you are limited, I would assume.
Mr. Kotz. Right. Well, you know, we get a lot of
complaints. And where we get complaints--every complaint that
comes in, we look at it in some way or another. We triage the
process to determine how much resources we should put to a
certain complaint. In this case, we got so many complaints
about this leasing decision that it was very clear it would
have to be looked at.
And then, many folks from that office, the Office of
Administrative Services, came to us--many anonymously--with
other concerns about that. So it was very clear that this one
had to be looked at. But, you know, we strive to look at
whatever we can. We do have a small staff, but we are very
efficient, and we do produce a lot of work, because it is
important for the taxpayer that there be a watchdog in place.
Mr. Walz. In this case, would it be fair to say the system
did work? We have an agency, we have the IG, the complaints
came in, they were taken, they were investigated, you brought
it to Congress.
And I will say ``worked,'' because I get a very strong
feeling here, Mr. Heslop, this thing will be resolved. I can be
pretty certain of that. It will be resolved in a satisfactory
manner to the taxpayer and to the system.
But would you think the system worked here, so far, at this
point?
Mr. Kotz. Yes, in that manner, certainly. I mean we
identified the issues, we issued a report. We didn't pull any
punches in that report. The Agency has accepted the report.
Now, the next stage, obviously, is to fix the problem and
to engage in disciplinary action, as appropriate. But I do say,
as of now, the system has worked, yes.
Mr. Walz. Would it be possible--and I don't know if it's
you, yourself, Mr. Kotz, or someone in your office--to see if
you have that data, on return for the dollar, what you are
doing?
I am very concerned, when I make the argument where we do
have to cut--and the chairman is right about that, there is
tough decisions to be made--as I said, I am a long-time fan of
the IG because of what I think it saves and does what it's
supposed to do for the taxpayer.
Could I get that information?
Mr. Kotz. Sure, we would be happy to provide that to you.
Mr. Walz. Thank you for that. I yield back, Mr. Chairman.
Again, thank you for this hearing.
Mr. Denham. Thank you, Mr. Walz. Mr. Heslop, did the SEC
leasing regulations and policies in July of 2010 require
written approval by the chairman or commissioners of the SEC?
Mr. Heslop. Not to my knowledge.
Mr. Denham. Not the chairman or the commissioners? A half-
a-billion dollars, you go out and spend a half-a-billion,
commission and chairman not needed?
Mr. Heslop. To my knowledge, it was a delegated
responsibility.
Mr. Denham. What approval process did they require?
Mr. Cahn. That responsibility, or the delegated
responsibility for approval of leases, resided with the
executive director of the Agency. And I do not know, at the
time, what approval underneath him was required for him to
execute an approval.
Mr. Denham. And what type of expenditures is the executive
director authorized to make?
Mr. Cahn. I don't know the level of his approval. I don't
know whether there is a particular cap. I just know with regard
to leasing decisions, that was delegated from the chairman to
the executive director at the time of this lease.
Mr. Denham. What is the largest expenditure that has been
done in the past?
Mr. Cahn. I don't know the answer to that, but I would be
happy to have that information pulled together and provided to
the committee.
Mr. Denham. Do you have any idea? Ballpark?
Mr. Cahn. (No response.)
Mr. Denham. Is this the largest?
Mr. Cahn. I do not--I just--I do not know, I'm sorry.
Mr. Denham. Have you ever heard of the executive director
spending $1 billion?
[No response.]
Mr. Denham. $1 trillion?
Mr. Cahn. No, no. I do not know how the size--these lease
payments compare to the size, for instance, of the lease
payments in connection with the Station Place headquarters
location, which I believe is a larger footprint.
Obviously, the numbers we are talking about are the
aggregate amount over the lifetime of the lease, as opposed to
an annual expenditure. I do not know, with regard to particular
line items, what is the largest expenditure in an--on an annual
basis that the executive director has authority to approve. But
I would be happy to get that information to you.
Mr. Denham. So are you saying, then, because it is over a
term, that the SEC would look at this on an annual basis, and
spending authority may have been less than the half-a-billion?
Mr. Cahn. No. You were asking about----
Mr. Denham. You are just saying you have no idea.
Mr. Cahn. You asked me what the largest expenditure was,
whether half-a-billion, and it depended, I guess, on how you
measured it, whether you measured it on what the annual impact
was, or over the lifetime of the commitment. And I was just
saying that I didn't know the answer to the question of what
the largest one was that the executive director had approved,
but we would be happy to get that information to you.
Mr. Denham. And approval process that is currently
required?
Mr. Cahn. I believe right now, with regard to leases, that
authority resides with Mr. Heslop.
Mr. Denham. And prior to this?
Mr. Cahn. Prior to the immediate--immediacy, I believe it
resided with the executive director. Those authorities have
been transferred to Mr. Heslop, so he now has the authority--
all leases need to be approved by him.
Mr. Denham. So Mr. Heslop has the authority to commit our
Federal Government to a half-a-billion dollars with no other
authority at all?
Mr. Heslop. Sir, as I stated, we are conducting, in
process, as we speak, an independent----
Mr. Denham. Oh, I understand that there is a process that
you are----
Mr. Heslop [continuing]. Analysis of all of our----
Mr. Denham [continuing]. You are looking at going after----
Mr. Heslop [continuing]. Of our policies----
Mr. Denham [continuing]. But I just want to know right now,
today, do you have the authority to go out and spend a half-a-
billion dollars?
Mr. Heslop. I don't believe that I do, sir. But the policy
that we typically follow is we have an annual budgeting
process. That budgeting process is approved by our financial
management oversight committee.
So, first of all, we are limited within the confines of the
SEC's budget on an annual basis. And then, expenditures from
within that are taken through a governance process of our
financial management oversight committee. And as a rational
man, sir, I would not take a decision of half-a-billion dollars
independently. I would run it through the committee, and run it
through the chairman.
Mr. Denham. And, as COO, you oversaw annual budgeting
processes in the past. So this isn't something--an annual
budget process is not something new you guys have just
implemented in the last few weeks, is it?
Mr. Heslop. No, sir.
Mr. Denham. OK. So you oversaw that as COO prior to this.
Mr. Heslop. I did not last year, sir. I have just assumed
these responsibilities within the last 7 weeks.
Mr. Denham. So the executive director went over the annual
budget process.
Mr. Heslop. The executive director previous to me was on
top of the annual budgeting process, yes.
Mr. Denham. And, as COO, do you not look at the budget?
Mr. Heslop. As COO, I looked at the budget as it related to
those functions underneath my umbrella of responsibility. And
at that time that did not include budget management. It did not
include the Office of Administrative Services.
Mr. Denham. I just want to, for the record--COO does stand
for chief operating officer, correct?
Mr. Heslop. Sir, the Commission had a bifurcated approach
to oversight of the back office functions in the past. It is
a--it was a recommendation recently we had--as you know, Dodd-
Frank requested an independent assessment of the Agency. The
Dodd-Frank study recommended that those functions be
consolidated under one head. It was consolidated under me,
approximately 7 weeks ago.
Mr. Denham. OK. So, under your testimony, prior to your new
duties you were not authorized to look at the annual budget.
Mr. Heslop. I was certainly authorized to look at the
annual budget----
Mr. Denham. You just chose not to.
Mr. Heslop. I looked at it with respect to those functions
that were under my tutelage: Office of Information Technology,
Office of Freedom of Information Act, Privacy, and Records
Management.
Mr. Denham. So was a half-a-billion dollars under last
year's annual budget?
Mr. Heslop. Again, sir, I don't know. I did not look at
that component of it.
Mr. Denham. You missed that piece of it. How big is the
annual budget?
Mr. Heslop. I think we are at approximately $1.1 billion.
Mr. Denham. I would at least, as CEO, expect that you
would--even if you chose not to look at the entire annual
budget, that you at least looked at a top line. Would you not?
Mr. Heslop. I reviewed the budget, sir. Yes, sir.
Mr. Denham. OK. So you said $1.1 billion is the annual
budget?
Mr. Heslop. Approximately, yes.
Mr. Denham. And we went out and spent a half-a-billion
dollars. That did not even take a jump on the radar screen to
say, ``Wait a minute, this is--I must need to look into the
budget further, because this is a big jump in what our annual
budget authorizes.''
Mr. Heslop. Again, sir, I was not privy to any real estate
decisions, this one in particular.
Mr. Denham. I just want to understand. You know, as CEO
your decisionmaking process--obviously, if you have got to at
least look at the top line--maybe you weren't inquisitive
enough to look at the entire budget.
But if you are at least looking at the top line budget
numbers, and your budget went from $1.1 billion to $1.6
billion, that somewhere there must be a big issue there. If you
are looking across the Nation and we are making cuts, the
President has made a decision that we are going to cut
spending, or at least, at the time, freeze spending, and you,
as chief operating officer, saw the top line budget, $1.1
billion increasing to a large amount, did you not think, as
chief operating officer, that maybe you ought to look deeper
into the budget and figure out where the discrepancy is?
Mr. Cahn. If I may?
Mr. Denham. Mr. Cahn, if he doesn't understand the
question, maybe you can answer for him.
Mr. Cahn. Let me try, Chairman Denham. I mean I think that
it is a very important question. I think the issue focuses on
the Antideficiency Act issue, because the question, as I
understand it presented by the Antideficiency Act, the issue is
whether, as an agency with independent leasing authority, and
authority to enter into multiyear leases, whether we are
required, consistent with the Antideficiency Act, to obligate
funds for the entire amount of the contract in the first year
of the contract, or whether, consistent with the Antideficiency
Act, we are permitted to obligate funds only on an annual basis
for what amounts are due.
Certainly agencies, such as GSA, it is clear that they may
obligate their long-term leases on an annual basis. We have
understood since 1990, when we received independent leasing
authority, that we could, consistent with the Antideficiency
Act, obligate those funds on an annual basis, and that is
something that hasn't been questioned by OMB or GAO in the
course of their audits of us.
But, having said that, that is the question that the
inspector general has legitimately raised in connection with
his investigative report. And that is why we have submitted
that question to the comptroller general. Because if,
consistent with our interpretation of the Antideficiency Act,
it is permissible to present in our budget our long-term leases
on an annual basis, I think that answers your question.
Obviously, if the determination comes back----
Mr. Denham. It doesn't answer my question. It doesn't even
scratch the surface. I am out of time right now.
But I am just--I am amazed that chief operating officer and
his legal counsel, you know, whether it is over the course of a
10-year obligation--if you are at $1.1 billion and it jumps to
$1.2 billion, or 1.1 to 1.15, somebody needs to be asking some
questions. And if we don't have the right people in charge to
be able to ask those questions, then we need to make some
changes.
Ms. Norton?
Ms. Norton. Thank you, Mr. Chairman. One of the problems we
are experiencing here you need to really take into account. We
see no energy for reform coming from these witnesses. We
understand what the IG said.
That is befuddling to me. I don't know if you understand
the gift you are giving to those who oppose Dodd-Frank, while
many of us are up here trying to remind people that the way we
got into this hole was, if you will excuse me, some of the
problems that were raised at SEC and the problems that Dodd-
Frank is meant to cure.
So, what--your failure to even want to remove an employee
who has been named as the source of the abuse is like going to
those who oppose Dodd-Frank and said, ``Here is something
further for you.'' It is befuddling to me.
And, Mr. Heslop, your testimony--you are big and bold.
``Although the SEC is no longer pursuing space in Constitution
Center, the Agency continues to believe that significant staff
will be required to carry out the new responsibilities''--good
luck, good luck getting it from this Congress--``assigned to
the Agency under Dodd-Frank. To this end, the SEC will continue
to assess its space needs''--``Congress, we are going to
continue to look at our space needs''--``in the context of its
current budget, and the overall resources available to the
Agency.''
I looked through your testimony. I didn't see anything in
the testimony that says--and I will tell you what, Mr.
Chairman, any resources we get will be devoted to the regional
offices the way the chairwoman said it should, in the first
place. Instead, you refer increasingly in your testimony--I
have pulled it out to new responsibilities, need for space
because you've got new responsibilities, continuing resolution
didn't give you all the money you needed to carry out these
responsibilities.
Nowhere do you indicate that the chair said you were to
carry out those responsibilities in the regional office, so you
probably won't need any more space in the District of Columbia.
Isn't that the case?
Mr. Heslop. Ma'am, as I mentioned earlier, the BCG study
that was done as a result of the Dodd-Frank Reform Act required
us to take a look--basically, do an independent assessment of
the SEC. And as a result of that study, one of the
recommendations was to look at our regional strategy. And that
is exactly what we are doing. That analysis----
Ms. Norton. You don't mention that in your testimony. You
don't mention in your testimony that any resources that you are
lucky enough to get would go certainly not to a Washington,
DC--now, this is my district, I always love to have people
lease in my district, but I do have an oath to be a Member of
Congress first, and responsible to taxpayers--you don't even
say that no more space would be sought in the District of
Columbia. Can you at least say that this morning?
Mr. Heslop. It will be totally dependent, ma'am, on the
level of resourcing that we get to execute the new
responsibilities that we have been given under the Dodd-Frank
Act.
Ms. Norton. All right, Mr.--what you are saying is on the
record and under oath.
Mr. Heslop. Yes, ma'am.
Ms. Norton. And that is going to be repeated back to you
time and time again.
Mr. Heslop. It is----
Ms. Norton. Not only with respect to this issue, but with
respect to your very important mission.
Now, I am--with--and when I say Congress would like to see,
whenever we see a problem, that there is somebody who is gung-
ho on fixing the problem. I don't see anything like that from
anybody, except the IG, who can't fix it, because that's not
his job.
I asked staff to pull up what leases were coming up. And
that is one of the reasons why I think we have to, Mr.
Chairman, do a bill. Because they have got some leases coming
up in the very near term. And let's look at Atlanta, where they
are 383 feet above the standard level of other Government
employees. That is coming up--well, that is already done.
Would you--I want to--perhaps you don't have off the top of
your head. I would like to know whether you--would you get to
the chairman on whether or not you have renewed the Atlanta
lease, which ran out on June 19, 2011, for 114 people for the
same amount of space?
But let's move on. On 2012, January, Chicago. It is rented
at--it is leased at 419 per person. At--and that is coming up
in 2012. In Los Angeles you have got 336 per person. Understand
we are talking about 200 square feet per person, and some law
firms in this town are going down to 175 square feet per
person, because they don't want to spend all their money, what
they have left, on leasing. In Miami, 449 square feet per
person. Your total regional offices are at 492, on the average,
per square--square feet per person.
Now, let me ask this, in case--if you are left with leasing
authority, would you agree today to draw down the utilization
rate to the standard utilization rate of 200 square feet, or
230 square feet, so as to reduce your utilization rate in any
new contracts you would be fortunate enough to make?
Mr. Heslop. Yes, ma'am, we would certainly consider that
figure.
Ms. Norton. Seems to me that you will have some difficulty
doing that if you are leasing--if you are renewing leases. But
that is something that any competent real estate operator would
be doing now, he would be renegotiating every single lease you
have.
I think the chairman asked about are there other buildings
with this kind of lease. I just want to record that you have
made the top 10 of leased space ever in the District of
Columbia.
Could I ask the IG whether you think, in light of your
report, that Congress would be well advised to revoke the
leasing authority of the SEC?
Mr. Kotz. Yes, obviously it is something that requires
serious consideration. I would say this. You know, looking at
the way the leasing practices have been run to date, I would
say there is no question that the leasing authority should be
taken away.
If significant changes are made, if there is a complete
cleaned house at the Office of Administrative Services, if
everything is done differently going forward, then I think
there would be a possibility to allow that to go forward. But
certainly, from what we saw, I don't think that the SEC has
done a capable job of exercising that leasing authority.
I would think that there would have to be a drastic and
significant change in the way----
Ms. Norton. Well, let me--all right. Let's consider this
drastic change.
Mr. Heslop, in the present staff, who has had any
background or experience in real estate transactions of the
kind, for example, that GSA requires in the ordinary course of
doing business? And what has that experience been?
Mr. Heslop. There are a number of current staff that have
actually had GSA experience. We have a lead realty specialist
with 20 years of GSA realty contracting and policy experience,
and has been at the SEC 2 years. We have a lead realty
specialist with nearly 10 years of GSA realty contracting and
policy experience. We have a realty specialist with 11 years of
GSA realty contracting experience, and----
Ms. Norton. Mr. Heslop, the IG--read the IG's report. The
IG said that those with any real estate experience, those are
fairly minor--those with fairly minor roles, even at GSA, were
routinely ignored.
Does Sharon Sheehan have any significant real estate
experience? And she is the woman in charge, and the person the
IG finds was deeply involved in these abuses. Has she any real
estate experience?
Mr. Heslop. I am not aware of what her professional history
and how deep it is----
Ms. Norton. Would you see to it that the chairman receives
her resume?
Mr. Heslop. Sure.
Ms. Norton. Within the next 10 days. Let me ask about the
status of Constitution Center. I have toured Constitution
Center. It is an extraordinary facility. This is a facility
that was apparently built for--as a secure facility,
recognizing that, after 9/11, the Government would be looking
for secure facilities for certain kinds of agencies. Is the SEC
classified as a secure facility?
[No response.]
Ms. Norton. Are you like the Defense Department? Are you
like the Department of Homeland Security?
Mr. Heslop. I am not aware of the classification system
that----
Ms. Norton. What kinds of employees would have or are now
in Constitution Center from the SEC? What are their duties?
Mr. Heslop. I am not aware of any employees in Constitution
Center at the moment, ma'am.
Ms. Norton. All of the employees are out?
Mr. Heslop. Yes, ma'am.
Ms. Norton. What kinds of employees were housed there
before you got GSA to help you try to find others for this
space?
Mr. Cahn. Congresswoman Norton, I don't believe any SEC
employees have been at Constitution Center at any time.
Ms. Norton. So nobody ever made it into Constitution
Center?
Mr. Cahn. That is correct.
Mr. Denham. And I would like to follow up on the same round
of questioning. What was the intent? Is there a specific reason
why this building was picked? Does the SEC have specific
requirements that would require a secure building?
Mr. Heslop. Not to my knowledge. The way the Department of
Defense--you know, a specific type that the Department of
Defense organization might have. Based on my two decades of
experience in the military, I don't believe the SEC has the
kinds of requirements that you might find with several of the
DOD-type activities.
Mr. Denham. Let me switch the line of questioning back
again, Mr. Heslop. Last week you and Mr. Cahn, you met with my
staff, subcommittee staff. When we requested the SEC provide
the subcommittee with an unredacted copy of the IG report,
committee staff was informed ``a formal written request should
be made so that the SEC commissioners could review the request
and approve it.''
What types of administrative decisions do the commissioners
review and approve, and why are leasing actions, especially one
binding the Federal Government to a half-a-billion dollars, not
included among them?
Mr. Cahn. Chairman Denham, as I mentioned, the--well, as
you know, we have produced the unredacted report and exhibits
to the committee in connection----
Mr. Denham. Well, I understand. And my concern is, for a
simple report, before you come before a congressional committee
to testify, you required a written notification to go to the
commissioners, so the commissioners could vote on whether or
not you just were going to provide a simple piece of paper that
should be open to the public.
Now, if you have got to go to the commission to ask for
approval and a vote to give Congress some information, but you
don't have to go to the commission for a half-a-billion
dollars, I would assume there is something wrong with the
approval process there, or your priorities are deeply skewed.
Mr. Cahn. I appreciate that, Chairman. And I think
certainly, going forward, we need to look at whether we need a
process that involves going to the commission, as opposed to
the delegated authority that we have now. The delegation to the
executive director is in accordance with the manner in which
certain administrative functions, as opposed to adjudicative
and other functions, are delegated within the commission.
But I think you obviously raise a very significant point,
and one that we are currently evaluating right now.
Mr. Denham. You are evaluating a lot of things with no
answers.
You know, we had invited Commissioner Shapiro to be here to
testify today. I understand that she is wrapping up her
testimony in Financial Services. Mr. Manley, I would ask you to
go over to Financial Services, and if she wraps up her
testimony, maybe she can come here and provide some answers and
some greater detail.
I know you are new, Mr. Heslop, with some new duties, but
some of these questions are pretty basic questions. If somebody
in my company answered these questions in the manner that you
guys are, there would be a lot of people fired. I mean this is
just amazing, that half-a-billion dollars--you want us to go
back to the commission just in asking for the unredacted copy
of the IG report and take a vote by the commissioners, but the
commission doesn't require you to go to them with a half-a-
billion dollars? And, Mr. Heslop, you oversee the annual
budget, but you don't notice when a large expenditure like this
is being proposed? That's amazing.
Ms. Clancy, in your testimony you provide an overview of
how GSA normally reviews and approves leases. During GSA's
process, does GSA keep track of necessary approvals orally, or
do you get approvals in written documentation?
Ms. Clancy. Our process is fairly extensive, and we
actually have a formal written process that tracks those, both
electronically as well as through a paper process which gets
input later on into our electronic system. So it's two--at two
levels.
Mr. Denham. Mr. Heslop, in your testimony you mentioned
that the SEC has worked with the landlord of Constitution
Center to find other Federal tenants to release ``part of our
obligation under the lease.'' You also indicate the SEC is
working with GSA on filling the remaining space. Can we assume,
then, that the SEC has concluded that the lease obligation is a
valid one?
Mr. Heslop. [No response.]
Mr. Denham. Are you obligated to the lease?
Mr. Heslop. Yes. Yes, it is----
Mr. Denham. Somebody signed it.
Mr. Heslop. It is a valid lease.
Mr. Denham. OK. So, the Federal Government is on the hook
for this long-term lease. Where are we, as far as getting out
of that obligation, or releasing that to others?
Mr. Cahn. Right, we are--we have been working closely and
we are working closely with GSA and other entities, and we are
hopeful that we can do that. And I would defer to the GSA to be
able to respond more to the----
Mr. Denham. You are hopeful? Where are we in the process?
Mr. Cahn. We have been in discussions with them, and we
are----
Mr. Denham. When did you realize this was a problem? Was it
before the IG report came out, or----
Mr. Cahn. We have been in discussions with GSA, I think,
going back to the fall, yes. So we have been----
Mr. Denham. OK. So you have been working on it since the
fall. Where are we?
Mr. Cahn. We are still working with them. I think it is a
matter of them----
Mr. Denham. You are working with them. That is the best
answer you can give us today? How far are you working with
them? Do you have any--are there any proposals out there? Are
there any signed agreements? Do we have anybody under lease
today?
Mr. Cahn. With regard to the remaining space, there isn't
anyone yet that is under obligation to take that remaining
space.
Mr. Denham. So we were able, over a weekend, to approve a
half-a-billion dollars of taxpayers' money without any
authority from the commission, from Congress, from the
President. We were able to, over a weekend, go out and secure
half-a-billion dollars worth of space, and over the course of a
year we have not been able to get out of that lease or find
anybody else who was willing to lease that property.
Mr. Cahn. I think, as Mr. Heslop's testimony mentioned, we
were able to identify two tenants to take the majority of the
space. There is still a balance, you are correct, and----
Mr. Denham. You have identified, or they are under new
contract?
Mr. Cahn. They are under new contract for the--for most of
the space. There is about 340,000 square feet that remains that
we are working with GSA on.
Mr. Denham. And who are those new tenants?
Mr. Cahn. FHFA and OCC.
Mr. Denham. And GSA? Have they already--each of those
agencies already gone out for proposal on new space?
Ms. Clancy. I believe--we were not involved in either one
of those leases for OCC or FHFA. I believe that both of those
agencies have their own leasing authority. And so those leases,
to my understanding, were negotiated directly with the
landlord.
Mr. Denham. The landlord being?
Ms. Clancy. The landlord at the Constitution Center.
Mr. Denham. But had to renegotiate. Now we are subleasing
this space. SEC is subleasing this space to two other
Government agencies that also have their own leasing authority
to help come in and fix the problem.
Mr. Cahn. My understanding is that we released the space,
so they are in direct--they have a direct lease agreement with
the landlord. So we are not subleasing that space to FHFA and
OCC.
Mr. Denham. But SEC----
Mr. Cahn. I can confirm that.
Mr. Denham [continuing]. Is still on the hook for the rest
of the lease.
Mr. Cahn. Yes, sir.
Mr. Denham. Thank you. Mr. Walz?
Mr. Walz. Thank you, Mr. Chairman. Mr. Heslop, I want to
get back at something just a little bit here, trying to
understand this on how something like this happens. It is going
to be--the details are going to come out, as I said, and we
will get it all right.
You come to this job with private sector experience. I want
to go back to where--you were at Capital One, is that correct?
Mr. Heslop. That is correct.
Mr. Walz. And Capital One is the thirteenth largest
financial institution in the United States?
Mr. Heslop. I believe that is correct, sir.
Mr. Walz. OK. And you were there about 12 years?
Mr. Heslop. Yes, sir.
Mr. Walz. So you got a chance to understand their internal
culture and how things work and how they would go about
leasing, expanding, and those decisions?
Mr. Heslop. I was very familiar with the risk management
internal controls component during my tenure at Capital One. I
did have some small degree of leasing interface, as well. It
was not huge.
Mr. Walz. For the critics that are always there--and in
this case it looks like rightfully so--that Government can't
get things right, would Capital One have made a mistake like
this?
Mr. Heslop. I can't speculate as to whether they would have
made one.
Mr. Walz. Would there have been safeguards, culturally,
that would have prevented it from happening, in your opinion?
Mr. Heslop. It is actually an interesting question. I
believe when I first got there, there was not a strong culture
of internal controls and process and rigorous discipline. One
of my roles, while I was there during my tenure, was to
implement, on a global basis, a very strong disciplined
internal control program, which, over time, you know, was
instituted into the culture, and became very successful.
So, I would say the answer to your question would be early
on it could well have happened. Later on, toward the end of my
tenure, I think we had a rigorous control environment in place.
Mr. Walz. And I know that the--and it comes with the nature
of leadership--you are going to take a lot of responsibility
for things, one way or another, and that is the way it should
work, to a certain degree.
My questions are that I often times see inside of
Government agencies is sometimes a career staff there, maybe
working at cross purposes to the person who is put in into the
leadership position. Do you feel there is a problem at SEC, in
terms of management and your ability to be able to dictate, or
at least oversee, if that's a better term?
Mr. Heslop. I would not characterize it as a problem. I
would say that there is an opportunity to change the culture,
as it relates to, you know, a more disciplined approach to
controls, in general. I think that with the IG we have been
making good strides in that direction, and we have evidence of
that in some specific areas over the course of the last year.
We have more to go. The OAS organization is one of those, which
is now under my tutelage, and I very much intend to bring that
organization under control as well, with specific--specifically
focused around the leasing of facility space.
Mr. Walz. Do you share the chairman's frustration on--that
it is not moving faster? I understand there is a relative
amount of time--the one thing I think I see, and I think the
public gets a frustration with--and I think it's a valid
concern--even large bureaucratic--which I think you could argue
Capital One is big enough to have some of that--they seem to be
more nimble at times on being able to do that.
Are we still hampered with not moving at the pace of the
way the world moves now inside our agencies? Because I don't
know how long this takes. I am not--I don't have a best
practices that says how long it should take GSA and everyone to
work on this. My intuitive sense tells me, like the chairman is
saying, it should move a hell of a lot faster.
And I want to know. How do we determine that? Or how do we
make sure that is happening? And that is something where you
and leadership could implement, I would think.
Mr. Heslop. I think I would definitely agree with you, that
I would like to see it move faster. There are a number of
constraints that one faces in an organization like this that
you don't face necessarily on the private sector that impede
progress along a more rapid glide path. We are trying to work,
you know, as effectively and efficiently as possible, tackle
those obstacles, and move the ball down the path.
Mr. Walz. Well, I think that is our charge right now, that
those of us--and, as I said, I am going to be fighting for a
proper amount of funding, making sure it is used right, making
sure the IG has their ability, making sure you have the ability
to oversee what I think was reckless disregard for the public
welfare and the economy that collapsed this economy. But right
now I think the ranking member is right. We have given them--
not only teed it up, we have given them a damn beach ball to
hit over center field that ``These guys are reckless, can't do
anything right, how dare they oversee us in the private
sector?''
So, I am looking for you or someone to stand up, the
director, whoever it is, to stand up and say, ``We are going to
implement these things, we are going to move faster, we are
going to take these IG recommendations from some experts, we
are going to look at them and see if we can implement it,'' and
then come back to us if this is the case.
And I know that there is no one, other than the ranking
member, no one in Congress, that cares more about due process,
but her frustration with employees--we don't--we are not just
going to jack somebody, move them out, and not give them due
process or whatever. But I think if someone has made such a
gross error, there has got to be ability to, if you will, move
her to the corner and sharpen pencils until we figure this out.
That should be able to happen.
Is that true? I mean don't you think--come to us if we are
hampering you with some of those. Come to us and say, ``We need
the ability to have more flexibility to move some of this
stuff.''
So I just--I offer that to you. I want--as I said, you are
going to take your lumps on this. You are experienced, you have
been in the private sector and done this. But I think what the
chairman is looking for, too, is, yes, a fix of this initial
problem. Certainly what I am looking for is what we are going
to do, moving forward.
And this economic difficulties we are having presents
golden opportunities to streamline our operations and make it
work better.
And so, with that, I yield back.
Mr. Denham. Thank you, Mr. Walz. I have just been informed
by Mr. Manley that the commissioner is still testifying, she is
going to be unable to come back after our votes. We have been
called to votes now.
So, I made the determination we are going to be having a
second hearing. There are just too many unanswered questions
here. But in this next hearing I will expect to know who has
been fired during this whole process. If we can all agree that
there has been some wrongdoing done here, which--I would at
least hope that we could agree to that--I would expect to see
who is being held accountable on this.
I also want to know the budget oversight process, because
this seems like a gross abuse of taxpayer dollars.
And I also know that the Agency would not make available
Ms. Sheehan to testify. And before we close the hearing, I have
got a couple of documents that we are going to show. But I will
just inform this panel, as well as the SEC, that this committee
does plan on using its subpoena authority. We will have people
here, and we will demand answers for the taxpayers.
With that, I know that Ms. Norton is on a tough time
schedule, so I would like to recognize her for a brief
statement.
Ms. Norton. I thank you, Mr. Chairman, for your indulgence.
What I regret is that you have infected your important mission
here, and we really don't need that up here. You've got to
separate out these two missions, and you've got to do it very
quickly.
I want to just clarify the IG's statement. He had said,
well, if they had--you know, perhaps they could carry on such
activities if, you know, they changed everything. Let me ask
you whether--two things, whether they could carry it on with
the same person in charge, and whether you think that, in light
of their core mission, they would be better off devoting most
of their time or all of their time to their core mission.
Mr. Kotz. Certainly with respect to the first question, no.
They would need to have new people in charge. I think if the
same people were in place, they wouldn't be able to carry on in
an appropriate way.
In terms of their overall mission, I think that is a very
valid point, that obviously, what the SEC is trying to do is
enforcement, other matters related to the financial system. And
certainly, time spent dealing with these issues is not
productive to their mission.
You know, in terms of how that would come out, that is
really up to Congress to decide.
Ms. Norton. Thank you very much. Those were definitive
enough responses.
Mr. Denham. Thank you, Ms. Norton. Mr. Kotz, your
investigation found that the dates on the signature page of the
justification for sole-source procurement was misleading, to
say the least.
Put the slides up here.
[Slide.]
Mr. Denham. On the screen is a copy of the signature page.
Can you explain what the issues are, and why they are
significant?
Mr. Kotz. Sure. If you can see on the signature page, the
signatures are dated August 2nd. However, the document was not
finalized on August 2nd. It was signed, and then revised
substantially. It was not finalized until September 2nd. And,
in fact, one of the signatures that was written, it was signed
on August 31st, but they wrote in ``August 27th.''
But then, when they saw that the other signatures were
August 2nd, they whited out the 7 so it would appear like it's
August 2nd. And you can see there is a space. You can see there
is a space under that second signature from the bottom, where
it is pretty clear that there was a 7 or another number there,
and that was whited out to make it appear that they were all
signed on the same day.
In fact, the document was not finalized until a month
later.
Mr. Denham. Mr. Heslop, have you seen these documents
before?
Mr. Heslop. I have.
Mr. Denham. Can you at least recognize that there is an
issue here?
Mr. Heslop. Absolutely. We do not condone back-dating of
documents. We are managing the disciplinary action process
aggressively, and we will take appropriate action, upon
completion of the recommendations to me.
Mr. Denham. What type of recommendations are you waiting
for?
Mr. Heslop. I am waiting for the general counsel and the
Office of Human Resources to provide me recommendations as to
appropriate disciplinary action with respect to each of the
individuals named.
[Pause.]
Mr. Denham. You know, I am not somebody who is normally at
a loss for words. But I got to tell you, this is amazing. It is
a complete gross abuse of taxpayer dollars.
Mr. Heslop, I am--quite frankly, I am amazed at your
testimony today. You are the COO of a very large agency with a
very large budget, huge responsibilities. I would assume you
are a pretty bright individual to be able to sit in this spot.
I am--I will look forward to our next hearing, and I will
expect some answers. We will give the SEC plenty of notice, we
will give you plenty of time. But I will expect everybody that
we send an invitation to to not only respond to that invitation
and make sure their schedules are available, but we will
subpoena them. We will bring them in. But we expect
accountability. And the answers that we have received today are
just completely unsatisfactory. We have votes taking place on
the floor right now.
I would like to thank each of our witnesses for their
testimony, or lack thereof. We will be following up with
questions for the record. And I would ask that you provide your
responses in a timely manner.
I ask unanimous consent that the record of today's hearing
remain open until such time as our witnesses have provided
answers to any questions that may be submitted to them in
writing, and unanimous consent that the record remain open for
15 days for additional comments and information submitted by
Members or witnesses to be included in the record of today's
hearing.
[No response.]
Mr. Denham. Without objection, so ordered. If no other
Members have anything to add, this subcommittee stands
adjourned.
[Whereupon, at 11:51 a.m., the subcommittee was adjourned.]