[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
  FINANCIAL MANAGEMENT, WORK FORCE, AND OPERATIONS AT THE SEC: WHO'S 
                    WATCHING WALL STREET'S WATCHDOG

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

                             JOINT HEARING

                               before the

                SUBCOMMITTEE ON TARP, FINANCIAL SERVICES
              AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

                                and the

                SUBCOMMITTEE ON GOVERNMENT ORGANIZATION,
                  EFFICIENCY AND FINANCIAL MANAGEMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 10, 2011

                               __________

                           Serial No. 112-11

                               __________

Printed for the use of the Committee on Oversight and Government Reform



[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]



         Available via the World Wide Web: http://www.fdsys.gov
                      http://www.house.gov/reform


                              __________



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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

  Subcommittee on TARP, Financial Services and Bailouts of Public and 
                            Private Programs

              PATRICK T. McHENRY, North Carolina, Chairman
FRANK C. GUINTA, New Hampshire,      MIKE QUIGLEY, Illinois, Ranking 
    Vice Chairman                        Minority Member
ANN MARIE BUERKLE, New York          CAROLYN B. MALONEY, New York
JUSTIN AMASH, Michigan               PETER WELCH, Vermont
PATRICK MEEHAN, Pennsylvania         JOHN A. YARMUTH, Kentucky
JOE WALSH, Illinois                  JACKIE SPEIER, California
TREY GOWDY, South Carolina           JIM COOPER, Tennessee
DENNIS A. ROSS, Florida
   Subcommittee on Government Organization, Efficiency and Financial 
                               Management

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
CONNIE MACK, Florida, Vice Chairman  EDOLPHUS TOWNS, New York, Ranking 
JAMES LANKFORD, Oklahoma                 Minority Member
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona               GERALD E. CONNOLLY, Virginia
FRANK C. GUINTA, New Hampshire       ELEANOR HOLMES NORTON, District of 
BLAKE FARENTHOLD, Texas                  Columbia
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 10, 2011...................................     1
Statement of:
    Schapiro, Mary, chairman, U.S. Securities and Exchange 
      Commission, accompanied by Jeffrey Risinger, Director, 
      Office of Human Resources, U.S. Securities and Exchange 
      Commission; Jonathan Katz, former Secretary, Securities and 
      Exchange Commission; Stephen J. Crimmins, K&L Gates, LLP; 
      and Helen Chaitman, esq., Becker & Poliakoff, LLP..........    11
        Chaitman, Helen..........................................    59
        Crimmins, Stephen J......................................    51
        Katz, Jonathan...........................................    28
        Risinger, Jeffrey........................................    28
        Schapiro, Mary...........................................    11
Letters, statements, etc., submitted for the record by:
    Chaitman, Helen, esq., Becker & Poliakoff, LLP, prepared 
      statement of...............................................    61
    Crimmins, Stephen J., K&L Gates, LLP, prepared statement of..    53
    Katz, Jonathan, former Secretary, Securities and Exchange 
      Commission, prepared statement of..........................    31
    Quigley, Hon. Mike, a Representative in Congress from the 
      State of Illinois, prepared statement of...................     6
    Schapiro, Mary, chairman, U.S. Securities and Exchange 
      Commission, prepared statement of..........................    14


  FINANCIAL MANAGEMENT, WORK FORCE, AND OPERATIONS AT THE SEC: WHO'S 
                    WATCHING WALL STREET'S WATCHDOG

                              ----------                              


                        THURSDAY, MARCH 10, 2011

        House of Representatives, Subcommittee on TARP, 
            Financial Services and Bailouts of Public and 
            Private Programs, joint with the Subcommittee 
            on Government Organization, Efficiency and 
            Financial Management, Committee on Oversight 
            and Government Reform,
                                                    Washington, DC.
    The subcommittees met, pursuant to notice, at 1:30 p.m. in 
room 2157, Rayburn House Office Building, Hon. Patrick T. 
McHenry (chairman of the Subcommittee on TARP, Financial 
Services and Bailouts of Public and Private Programs) 
presiding.
    Present from the Subcommittee on TARP, Financial Services 
and Bailouts of Public and Private Programs: Representatives 
McHenry, Guinta, Buerkle, Amash, Meehan, Walsh, Gowdy, Ross, 
Quigley, Maloney, Welch, Yarmuth, and Speier.
    Present from the Subcommittee on Government Organization, 
Efficiency and Financial Management: Representatives Platts, 
Mack, Lankford, Amash, Gosar, Guinta, Farenthold, Towns, 
Cooper, Connolly, and Norton.
    Also present: Representatives Issa and Cummings.
    Staff present: Molly Boyl, parliamentarian; Larry Brady, 
staff director; Sharon Casey, senior assistant clerk; Katelyn 
E. Christ, research assistant; Benjamin Cole, policy advisor 
and investigative analyst; Drew Colliatie, staff assistant; 
Tyler Grimm, Ryan M. Hambleton, and Tabetha C. Mueller, 
professional staff members; Peter G. Haller, senior counsel; 
Frederick Hill, director of communications and senior policy 
advisor; Christopher Hixon, deputy chief counsel, oversight; 
Hudson Hollister, counsel; Justin LoFranco, press assistant; 
Mark Marin, senior professional staff member; Tegan Noelle 
Millspaw, research analyst; Laura L. Rush, deputy chief clerk; 
Ronald Allen, minority staff assistant; Carla Hultberg, 
minority chief clerk; Scott Lindsay, minority counsel; Jason 
Powell and Steven Rangel, minority senior counsels; and Dave 
Rapallo, minority staff director.
    Mr. McHenry. The committee will now come to order.
    I will start today's hearing by reading the Oversight and 
Government Reform Committee's Mission Statement.
    We exist to secure two fundamental principles. First, 
Americans have the right to know that the money Washington 
takes from them is well spent. Second, Americans deserve an 
efficient, effective government that works for them.
    Our duty on the Oversight and Government Reform Committee 
is to protect these rights. Our solemn responsibility is to 
hold government accountable to taxpayers because taxpayers have 
a right to know what they get from their government.
    We will work tirelessly in partnership with citizen 
watchdogs to deliver the facts to the American people and bring 
them genuine reform to the Federal bureaucracy. This is the 
mission of the Oversight and Government Reform Committee.
    Today, we are here for a joint hearing between the 
Oversight and Government Reform Subcommittee on TARP, Financial 
Services and Bailouts of Public and Private Programs and the 
Subcommittee on Government Organization, Efficiency and 
Financial Management on ``SEC: Who's Watching Wall Street's 
Watchdog.''
    When we called this hearing originally, we were concerned 
about capital formation and accountability at the SEC. A number 
of management practices had come to light at that point that we 
thought it would be important to discuss, but a lot has changed 
just in the last 2 weeks in terms of disclosures of what is 
happening at the SEC and larger issues of concern with 
management that strike the agency's credibility. So there will 
be a lot of questions to that regard in today's hearing.
    I welcome the panel. I thank you for being here and with 
that, I yield to the chairman of the full committee, my 
customary 5 minutes as subcommittee Chair, for his opening 
statement.
    Chairman Issa. I thank the chairman and I thank him for his 
generosity with the opening statement.
    I, too, thought this hearing would be about slightly 
different matters, but in recent days, the committee has become 
aware of what could be the greatest challenge to the SEC's 
credibility since Bernie Madoff managed to dup so many 
Americans, steal so much money with his ponzi scheme, and 
escape the proper scrutiny of the SEC for so long.
    As we have learned, in 2009, the former general counsel, 
Mr. Becker, came to the SEC and informed the chairman that he 
had a potential conflict of interest. We hope to learn exactly 
how that was expressed, but in fact, he had received, along 
with his siblings, $2 million that came from the liquidation of 
a Bernie Madoff fund in 2005. That would be serious enough that 
anyone would normally consider that he should be recused from 
any activity related to the Madoff after action.
    Notwithstanding that, Mr. Becker, feeling that this was, as 
we have understood it, a de minimis amount relative to his 
estate, in fact, not only continued to be involved, but was 
instrumental in having the SEC inserted into the process of 
trying to change how the determination of how much money would 
be considered to be eligible to be retained by those who got 
their money out before the collapse versus how much would be 
clawed back for the greater good of all those involved and 
victimized by the ponzi scheme.
    Had Mr. Becker's suggestions been taken, in fact, Mr. 
Becker's mother's estate of $2 million would have benefited 
well all those who were there to the end and lost so much would 
have been victimized.
    The problem we are going to be probing in this hearing, in 
addition to others, is can we trust an SEC where the process 
allows an individual to inform the chairwoman, to inform the 
ethics individual who actually reports to the general counsel, 
and get effectively a clean bill of health not to disclose and 
not to recuse and even to be involved in an action that had it 
been accepted, as our understanding is, by the trustees, would 
have led to a distortion of process in favor of Mr. Becker's 
family.
    We take Mr. Becker at his word that, in fact, he intended 
no wrong. We are willing to take factually in 25 minutes, the 
ethics individual at SEC made a determination there was no 
problem and stuck by it. We are willing to hear the Chairwoman 
here today.
    What we are not willing to do, as the committee that deals 
in waste, fraud and abuse, and as a committee of Congress, all 
of us being concerned a great deal about the confidence in what 
the SEC represents in its oversight, its fairness and its 
competence, we are not willing to accept that this can ever 
happen again.
    Mr. Chairman, I am not going to presume any facts not yet 
in evidence. So far, we only have a limited amount of reports, 
a clawback procedure against Mr. Becker and Mr. Becker's own 
interview here with some of our investigators. Today, we have 
an opportunity to listen to the Chairwoman, to realize that she 
inherited an organization that had no flaws, but her 
independent agency has, in fact, been the subject of the 
President's attention, her attention.
    We have not yet high confidence but high hope that the SEC 
will live up to its mandate, not just of having a complex web 
of rules that tell public companies that if their own child 
works for a company, they cannot be outside or independent 
officers or directors of the company, or, for example, what a 
conflict is to the people who oversee, who can be on the 
compensation committee, who cannot. It is a complex business 
but it relies on a belief that the rules are necessary, they 
are implemented in a sensible way, uniformly and that they are 
for a purpose.
    I believe as we look further into the Becker matter, we are 
going to find the SEC failed to have the highest level of fear 
so that public confidence could be maintained. I can find no 
way out of this. I hope today we at least understand how this 
mistake came to happen.
    Mr. Chairman, once again, thank you for holding this 
important hearing and I yield back.
    Mr. McHenry. Thank you, Mr. Chairman. Thank you for your 
statement. With that, I recognize the distinguished Member from 
Illinois, the chairman of the Subcommittee on TARP, Financial 
Services and Bailouts of Public and Private Programs, Mr. 
Quigley, for 5 minutes.
    I am sorry, I just promoted you to chairman--ranking 
member, Mr. Quigley.
    Mr. Quigley. Thank you so much, Mr. Chairman. I soon will 
be joined by Chairman Platts, as well.
    I thank our witnesses for their time today and their 
contributions.
    As we all know, in December 2008, Bernard Madoff was 
arrested for running the largest ponzi scheme in American 
history. Losses from Madoff's fraud have been estimated at $18 
billion, devastating the savings of many Americans.
    We all know the SEC missed Madoff despite being tipped off 
on several occasions. Although no regulatory agency should be 
expected to be perfect, a failure of this magnitude is clearly 
unacceptable.
    How did this happen? Many have blamed the SEC's outdated 
technology, which is woefully behind what the financial firms 
are using; many have blamed the SEC's silo problem which 
prevents coordination among the SEC's many offices. Another 
culprit that has been cited is the SEC's work force which some 
argue includes too many lawyers and not enough industry 
veterans. We have all heard about the SEC employees viewing 
pornography instead of doing their jobs. These are reasonable 
concerns and all merit oversight from these two subcommittees.
    We have also heard about a potential conflict of interest 
from David Becker, formerly senior counsel at the SEC. It is my 
understanding that SEC IG David Katz is investigating this 
matter. I look forward to his report.
    Just a few years removed from Madoff and the worst 
financial crisis since the Great Depression, we need the SEC to 
do its job and do it well. The SEC is Wall Street's policeman. 
It was estimated by the 1934 Security Exchange Act to prevent 
fraud and abuse in the securities market. Creating the SEC was 
essential to restoring investor trust in our country's economic 
system. If our economic system is going to work, says Nobel 
laureate, Joseph Stiglitz, then we have to make sure that what 
people gain when they cheat is offset by a system of penalties.
    Each year, the SEC brings hundreds of enforcement cases 
against firms that have sold fraudulent financial products. In 
2010, for example, the SEC brought 681 enforcement cases 
against 1,800 defendants.
    Just as all of us feel more comfortable in our 
neighborhoods when they are well policed, investors feel more 
comfortable buying financial products when the SEC is doing its 
job and prosecuting white collar crime. The SEC is more 
important today than ever before. Trust in our financial system 
is at its lowest ebb and this lack of trust is impeding our 
economic recovery.
    The financial regulatory reform law passed here was a step 
in the right direction, but it alone is insufficient. Laws have 
to be enforced and the SEC needs to be a strong enforcer.
    Unfortunately, the House-passed budget would reduce SEC 
funding from its current $1.1 billion. For comparison's sake, 
City Bank spent $1.6 billion on marketing alone in 2010. How is 
the SEC expected to police Wall Street when its entire budget 
is less than the marketing budget of one Wall Street Bank?
    In a May 2010 report, the minority staff of the Oversight 
Committee found that the Commission security disclosure 
procedures are technologically backward. Yet, under the House-
passed cuts, the SEC won't be able to continue any improvement 
of its IT systems. If the SEC's budget is reduced to 2008 
levels, as some have proposed, the SEC would have to layoff 600 
workers.
    My point is this. Just a few years after the Madoff 
incident and the worst financial crisis in recent history, 
should we really be talking about taking 600 cops off Wall 
Street? Let us strengthen the SEC, not weaken it. Let us also 
ensure that the SEC undertakes common sense report to avoid 
past mistakes.
    Put another way, after 9/11, despite our intelligence 
failures, we did not cut the intelligence budget, we doubled 
it. It is my understanding that the SEC has already 
reorganized, brought in a COO and designed a new tips referral 
system. These are all commendable steps.
    In the end, our country will be safer from another 
financial crisis if the SEC is well organized and well funded.
    I look forward to hearing from our witnesses who I hope 
will provide some constructive ideas on how to improve the 
SEC's oversight of financial markets.
    Thank you. I yield back.
    [The prepared statement of Hon. Mike Quigley follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. McHenry. I thank the ranking member.
    With prior agreement on our side, Dr. Gosar from Arizona 
will have 5 minutes for an opening statement.
    Mr. Gosar. Thank you, Mr. Chairman.
    Let me preface my comments with the following. I am not a 
financial analyst, I am not an accountant and I am not a 
lawyer, but I do have skin in the game, as do most Americans. 
Most Americans are compelled to invest in the markets through 
their employer-sponsored retirement plans whether they are 
401(k) plans or public or union pension plans. The money 
largely goes to Wall Street.
    The public needs assurances that those who handle our money 
and our retirement futures are playing by the rules and are 
being fair and are honoring their fiduciary responsibilities 
and obligations.
    The public assurances come from the Securities Exchange 
Commission. The SEC is supposed to be guarding the hen house. 
This hearing raises troubling questions. Who is watching the 
hen house--the fox or the guard?
    Mr. Chairman, recent news reports have focused on David 
Becker's conflict of interest, but this hearing is not about a 
single incident. This problem is actually far deeper and goes 
to the very heart of management practices at the SEC.
    Every organization needs a set of mechanisms to prevent or 
detect fraud, waste or mismanagement. These are commonly known 
as internal controls. It would appear that internal controls at 
the SEC are not functioning properly.
    One, the Government Accounting Office tells us that the SEC 
is unable to reliably track its finances because it cannot 
control its own financial reporting. Two, the SEC's inspector 
general tells us that 30 employees, including an assistant 
regional director, viewed sexually explicit materials at work 
and only one was actually fired. Was anyone else ever 
disciplined? Three, now the news media tells us that the SEC's 
general counsel was allowed to advise the Commissioners on the 
Madoff case when he had a personal, financial interest.
    All these matters represent a breakdown in oversight and 
management, a failure of internal controls. The sad irony is 
that the SEC is the Federal agency in charge of making sure 
publicly traded companies have effective internal controls and 
public governance structures. In fact, Mr. Chairman, if these 
events happened at a publicly traded company, the SEC would be 
investigating itself and what would be the penalties?
    Federal agencies are subject to the Federal Managers 
Financial Integrity Act which dictates that they provide annual 
assurances to Congress that their internal controls are 
adequate. This law has been in effect since 1982 and governs 
not just financial management, but program management as well.
    The Federal Managers Financial Integrity Act is within this 
committee's jurisdiction. Therefore, this hearing has an 
important legislative and oversight purpose in the Commission's 
compliance with the law and others. Mr. Chairman, the anecdotal 
example of internal breakdowns are symptoms of a much larger 
systemic breakdown. Since there is no SEC to investigate the 
SEC, today I challenge my colleagues.
    Thank you, Mr. Chairman. I yield the balance of my time.
    Mr. McHenry. I thank the gentleman.
    I now recognize the ranking member of the Subcommittee on 
Government Organization, Efficiency and Financial Management, 
Mr. Towns, former chairman of the full committee, for 5 
minutes.
    Mr. Towns. Thank you very much, Mr. Chairman, and thank you 
for holding this hearing today.
    The SEC is at an important crossroad. It is successfully 
emerging from a troublesome period leading up to collapse of 
the country's financial system. It is paused to take the lead 
in reforming Wall Street and preventing another financial 
meltdown through its enforcement of the Dodd-Frank Act.
    This hearing will examine financial management, the work 
force and internal operations at the SEC. It is encouraging to 
see all the new initiatives Chairman Schapiro has put in place 
in the last 2 years. The SEC hired its first chief operating 
officer to oversee the accounting functions, financial 
reporting and internal controls, and we salute you for that, 
Madam Chair.
    The SEC has also hired a new chief information officer to 
oversee its information technology functions. The Chairperson 
has restructured the entire Enforcement Division, recruited 
experts and has put a new governing structure in place. This is 
commendable as well.
    As with any organization, lapses can, do and will occur. I 
understand the SEC has taken disciplinary action against those 
who have been accused of misconduct at the Commission and that 
greater accountability has been integrated into the 
disciplinary process.
    The SEC is responsible for safeguarding the confidence of 
American investors in the financial markets and I hope our 
hearing today will help our financial watchdog fulfill its 
mission.
    I now yield the balance of my time to the ranking member of 
the full committee.
    Mr. Cummings. I thank the gentleman for yielding.
    This committee is responsible for ensuring that our 
government operates effectively and efficiently. That means 
holding public officials to the highest standards, demanding 
excellence at every turn and eliminating even the appearance of 
impropriety.
    Today, the committee intends to examine against David 
Becker, the former general counsel of the SEC. I do not know 
Mr. Becker, I have never met him, never talked to him, and the 
minority was excluded from Mr. Becker's interview when Chairman 
Issa's staff interviewed him, but I do want to make sure that 
everyone who comes before this committee is treated fairly, 
including Mr. Becker, Chairwoman Schapiro and others.
    If I understand the facts correctly, Mr. Becker's parents 
invested about $500,000 with Bernie Madoff in 2000. Mr. 
Becker's mother died in 2004 and when her funds were divided 
among Mr. Becker and his two brothers in 2006, they had 
increased to about $2 million.
    Mr. Becker joined the SEC in 2009, he notified the SEC 
officials about his inheritance and when issues arose relating 
to his inheritance, he sought advice from SEC ethics officials 
and received clearance to proceed. Some have suggested that Mr. 
Becker may have benefited financially from the SEC's later 
decisions, but it appears that the opposite may be true.
    The basic question the SEC faced was whether to support an 
asset valuation method used by the trustee representing the 
Madoff victims, called the cash-in-cash-out method, or a 
different valuation method proposed by several law firms called 
the last statement method.
    Under the first, Mr. Becker's inheritance would be subject 
to litigation to recover or clawback assets on behalf of the 
Madoff victims. Under the second, it appears that it would not. 
Based on the court filings, the SEC chose to support the first 
method. This meant that the trustee could sue Mr. Becker and 
his brothers to recover some of his mother's inheritance which 
is exactly what happened.
    Mr. Chairman, in your briefing memo for today's hearing, 
you acknowledged that the SEC's decision was ``actually 
detrimental to Mr. Becker's interest.'' Nevertheless, I have 
serious questions about the conclusions of the SEC's Ethics 
Office, Chairman Schapiro, that these issues had no effect on 
Mr. Becker's financial interest. Someone else of questionable 
character might have tried to take advantage of this situation. 
I also have questions about whether Mr. Becker's interests 
should have been disclosed more widely within the SEC and I 
hope we can learn more about this process today.
    I also invite my Republican colleagues to join us in making 
sure that the SEC has all the resources it needs. There is a 
proposed cutting of $148 million from their budget and we do 
need a robust SEC.
    Chairwoman Schapiro, I read what you have done and what you 
have accomplished. You inherited a mess. You inherited an 
agency that Senator McCain said the former Chair should resign, 
so we understand that.
    Again, I am looking for a fair hearing and one where we can 
get to the bottom of all of this.
    I yield back.
    Mr. McHenry. I thank the ranking member.
    All Members may have 7 days to submit opening statements 
for the record.
    I will now recognize the panel. We have the Honorable Mary 
Schapiro, Chairman, Securities and Exchange Commission; Mr. 
Jeffrey Risinger, Director, SEC Office of Human Resources; Mr. 
Jonathan Jack Katz, the former Secretary of the Securities and 
Exchange Commission for 20 years; Mr. Stephen Crimmins, a 
securities attorney with K&L Gates--he served as deputy chief 
litigation counsel of the SEC's Enforcement Division from 1993-
2001; and Ms. Helen Chaitman, the attorney representing 
approximately 350 investors in Mr. Bernard L. Madoff's 
investment securities firm.
    It is the policy of the committee that all witnesses be 
sworn before they testify. Please rise and raise your right 
hands.
    [Witnesses sworn.]
    Mr. McHenry. The record will reflect that all the witnesses 
answered in the affirmative. With that, I thank you.
    We will begin at this time with Chairman Schapiro. I think 
you heard the Members' opening statements and we would love to 
hear your comments, especially about this conflict that has 
been discussed. Ms. Schapiro.

  STATEMENTS OF MARY SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND 
EXCHANGE COMMISSION, ACCOMPANIED BY JEFFREY RISINGER, DIRECTOR, 
    OFFICE OF HUMAN RESOURCES, U.S. SECURITIES AND EXCHANGE 
COMMISSION; JONATHAN KATZ; STEPHEN J. CRIMMINS, K&L GATES, LLP; 
       AND HELEN CHAITMAN, ESQ., BECKER & POLIAKOFF, LLP

                   STATEMENT OF MARY SCHAPIRO

    Ms. Schapiro. Thank you very much, Chairman McHenry, 
Ranking Members Quigley and Towns, members of the subcommittee.
    Thank you for inviting me to testify today regarding the 
financial management, work force management and internal 
operations of the Securities and Exchange Commission. As you 
know, I am joined by Jeff Risinger, Director of our Office of 
Human Resources.
    When I arrived at the SEC 2 years ago, the agency was 
reeling from a variety of economic events and mission failures 
and in need of across the board reform. We needed more experts, 
better training, improved communication among our divisions and 
offices and an effective strategy for handling tips and 
complaints. These challenges were exacerbated by inadequate 
infrastructure, material weaknesses in financial management and 
a culture that had failed to keep up with an increasingly 
complex financial marketplace. We immediately and 
comprehensively set out to change the way the Commission 
worked. My written testimony details the reforms of the last 2 
years, but I would like to highlight a few.
    We brought new leadership and senior management to 
virtually ever office and hired the Commission's first chief 
operating officer. We revitalized and restructured our 
enforcement and examination operations and revamped our 
handling of tips and complaints. We broke down internal silos 
and created a culture of collaboration. We recruited more staff 
with specialized expertise and real world experience and 
expanded our training. We enhanced safeguards for investors' 
assets through new rules and the leveraging of public 
accounting firms.
    Although we have made significant progress, we continue to 
seek ways to improve our operations. After all, our core 
responsibility is pursuing fraud, reviewing corporate 
disclosures, overseeing the largest capital markets in the 
world and inspecting the activities of thousands of financial 
intermediaries are essential to restoring investor confidence 
in the wake of the financial crisis.
    Our funding has presented challenges. From 2005 to 2007, 
the SEC experienced 3 years of frozen or reduced budgets, 
forcing a 10 percent reduction in the agency staff. Similarly, 
the agency's investment in new or advanced systems declined 
approximately 50 percent between 2005 and 2009.
    While SEC staffing levels are just now returning to 2005 
levels, the securities markets have undergone tremendous growth 
since then. Indeed, during the past decade, trading volume has 
more than doubled, the number of investment advisors grew by 50 
percent and the funds they manage increased to $38 trillion. 
Operating under the continuing resolution only exacerbates the 
imbalance between our resources and the magnitude of our 
mission.
    At the same time, the Dodd-Frank is significantly expanding 
the SEC's responsibilities for the derivates market, hedge fund 
advisors and union support advisors. In addition, we are also 
charged with enhanced supervision of rating agencies, 
heightened regulation of asset-backed securities and the 
creation of a new whistleblower program.
    For these reasons, I am concerned that without additional 
resources, we will not be able to fulfill these 
responsibilities in the manner in which Congress intends and 
the American people deserve.
    Finally, I would like to address the issue of former 
Counsel David Becker's role in light of his mother's ownership 
of an account at Madoff that was closed years before the fraud 
was revealed.
    Mr. Becker informed me, I believe shortly after he arrived 
in 2009, that his mother had an account with Madoff before she 
died and that it had been closed a number of years before he 
returned to the agency. It did not strike me that his mother's 
account closed years ago would present a financial conflict of 
interest.
    Mr. Becker was, and is, an experienced attorney who had 
served as general counsel under three chairmen. I relied on him 
to present any ethics related issues to the ethics counsel and 
follow the ethics counsel's advice. I understand that is what 
he did.
    When I returned to the agency in 2009 having served there 
in the late 1980's and early 1990's, appointed by President 
Reagan and President Bush, I read many letters from Madoff's 
victims, people who have lost everything. My entire focus was 
on how to fix the SEC to ensure that another tragedy like 
Madoff could never happen again, and how to make sure within 
the contours of the Securities Investors Protection Act that we 
could get the most money to people who were literally losing 
their homes.
    I am proud of how much we have accomplished in the past 2 
years working tirelessly with an extraordinary staff to improve 
the operation of the Commission and enhance the public's 
perception of the integrity of our work and the fairness of our 
decisions.
    While Mr. Becker did solicit and follow advice from the 
ethic's counsel, I realize in light of this incident that as 
chairman, I have to ensure that we go beyond what may be 
required in any particular situation. On matters like these, I 
have to be looking around the next corner, looking beyond the 
horizon and thinking above and beyond what may be appropriate 
advice from the ethics counsel to make sure nothing occurs that 
could raise questions about the Commission's mission or 
processes.
    To ensure that this matter is fully reviewed, I requested 
that the SEC inspector general conduct an independent review 
and analysis of all of the relevant facts. In addition, under 
the leadership of our new ethics counsel, we have been 
performing a top to bottom review of our ethics program.
    In the meantime, I look forward to answering questions 
about this matter to the best of my recollection, but I can say 
to this committee with assuredness, we will learn from this 
experience and we will take all actions necessary to earn the 
trust the public places in us.
    Thank you.
    [The prepared statement of Ms. Schapiro follows:]
    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT] 
    
    Mr. McHenry. Thank you, Chairman.
    I would counsel the committee that the lights before you, 
at 1 minute to go, it will turn yellow and red means stop. With 
that, if you could keep your comments to 5 minutes we would 
certainly appreciate it.
    Mr. Risinger.

                 STATEMENT OF JEFFREY RISINGER

    Mr. Risinger. Mr. Chairman, I am happy to be before the 
committee today. I look forward to taking your questions. I 
don't have any further statements.
    Mr. McHenry. Five seconds. That might be a record. Thank 
you and congratulations.
    Mr. Katz.

                   STATEMENT OF JONATHAN KATZ

    Mr. Katz. Good afternoon, Chairman McHenry, Chairman Platz, 
Ranking Member Quigley, Ranking Member Towns, members of the 
two subcommittees. It really is an honor to be invited to 
testify on the operations of the Securities and Exchange 
Commission today.
    It is a matter of great interest and importance to me 
personally because for most of my career, I was an employee of 
the SEC. For 20 of those years, I served as the Commission's 
Secretary, which was one of those unusual positions that 
afforded me a rare opportunity to participate firsthand in 
virtually every aspect of the Commission's responsibilities.
    I retired from the Commission in January 2006. In the five 
intervening years, I have really been fortunate. I have served 
as a technical advisor to a variety of securities commissions 
in governments in emerging market countries and have also had 
the opportunity to speak and write about financial regulation 
in the United States.
    In 2008, the Center for Capital Market Competitiveness at 
the U.S. Chamber of Commerce invited me to conduct a study and 
to write a report on how to improve the efficiency and 
effectiveness of the SEC. I wrote this study based upon 
interviews with more than 50 current and former SEC staff 
persons and Commissioners who agreed to be interviewed and gave 
me their ideas, insights and criticisms, the best of which I 
shamelessly stole.
    In addition to this report, in 2009, I wrote a second 
article for the Pittsburgh Law Review. This article focused 
primarily on the Enforcement Division of the SEC, a subject 
that I did not discuss in the Chamber report. Unlike the 
Chamber report which reflected the collective views of a wide 
range of people, this article was really my own personal views. 
In both documents, I attempted to constructively identify what 
could be done to make the agency a more effective capital 
market regulator.
    Today, I am aware that one of the focal points is, of 
course, the SEC's budget and question of resources. I have to 
answer that I, like most people, agree that the SEC does need 
more staff to carry out its responsibilities, but why more 
money and more staff is necessary, I don't think it is 
sufficient. To do the job well, the agency has to reexamine how 
it does that job and I think it has to make changes. I think it 
is time to critically self examine the core functions and 
recognize that most of them just haven't been very effective.
    My concern is that just having more people do more of the 
same thing in the same way is not the best solution. I think we 
need fundamental changes in organization and management and 
mission definition. Chairman Schapiro has identified a number 
of the initiatives she has undertaken and I commend her on 
them.
    I worked for seven chairmen and four acting chairmen and I 
will tell you that with the possible exception of John Schad, 
the first chairman I worked with, Chairman Schapiro has 
probably focused more of her attention on management and 
organization than any of the other intervening Chairmen, but 
again, these are first steps and I think more needs to be done.
    I want to highlight five points that are contained in my 
witness statement. I don't have time to go through all of them 
but if people have questions, I would be happy to do it.
    I think the agency needs a partial reorganization. I 
advocate what is referred to internationally as the Twin Peaks 
approach, one division that deals with all aspects of retail 
financial services regulation and another division that handles 
all credential functions, the so-called safety soundness and 
stability functions.
    I think the agency needs a chief operating officer. I 
applaud Chairman Schapiro for appointing one, but I think you 
have to go further. You need a chief operating officer who 
really is that and has more than the title. The way I 
distinguish it is when you try and build a house, the architect 
and owner design the house, but you need a general contractor 
to actually get it done, to build it well, to keep you on 
budget and on time.
    I see my time is almost up, so I will quickly identify two 
other things. I think there needs to be substantial changes in 
enforcement. When you look at Madoff, you understand, in my 
opinion, this was not a question of culpability, a few bad 
people doing bad things.
    Madoff is similar to other failures of the Commission in 
the past. These are structural issues that go with how the 
Division of Enforcement frames its responsibilities and 
conducts those responsibilities. It has to be proactive, not 
reactive, and its results have to be aimed at remediation, not 
penalties. Penalties are the function of the Justice 
Department. In that respect, I would advocate very strongly for 
beefing up a Criminal Securities Office in the Department of 
Justice so that the agency doesn't have to rely upon the 
Southern District of New York which has limited jurisdiction.
    Just in closing, I want to mention what I think is the most 
important recommendation of all, the need for a special study 
of the securities markets. In 1961, the SEC was similarly 
troubled, the markets were in similar upheaval.
    Congress appropriated funds to create a special study of 
the securities market. A group of technocrats, experienced 
people in government and from industry spent 18 months studying 
the markets and studying how the SEC functioned. They issued a 
five volume report that literally for 25 years was the 
touchstone for everything the SEC did. I think we need another 
one.
    Thank you very much for the time. I am happy to answer 
questions.
    [The prepared statement of Mr. Katz follows:]
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    Mr. McHenry. Thank you, Mr. Katz.
    Mr. Crimmings, you are recognized for 5 minutes.

                STATEMENT OF STEPHEN J. CRIMMINS

    Mr. Crimmins. Thank you, Mr. Chairman.
    Chairman McHenry, Chairman Platts, Ranking Member Quigley 
and Ranking Member Cummings, thank you for hearing us today.
    Over the last decade, we have seen an explosion and the 
size and complexity of our capital markets, exponential 
increases in trading volume, workers doing thousands of trades 
in a few seconds instead of maybe a hundred trades a day, high 
speed, computer driven trading strategies, fragmentation of 
trading away from the exchanges and into dark pools and ECNs 
and 24/7 globalized stock trading.
    We have seen investment products become so complex that the 
sophisticated traders that trade them don't always fully 
understand what they are and scary systemic risk that threatens 
recurring crises.
    Now after the crash, we see many investors pulling out and 
staying out of stocks and mutual funds. Investors are still 
scared and sidelined with their decimated 401(k)'s. Investor 
perceptions are critical. These people will be unwilling to 
continue to risk their capital or risk their capital again if 
Wall Street's cop on the beat becomes the cop on furlough.
    Last summer, in the depths of the worst financial crisis in 
80 years, Congress recognized that the Securities and Exchange 
Commission needed twice the budget to be relevant in today's 
huge, complex and hyper-charged markets. Whatever issues anyone 
in Congress has with the SEC, I would respectfully suggest that 
the answer is not to starve in the wake of the crash, the 
answer is not to create an environment where it will be easier 
for the frauds just to prey on investors.
    Instead, the answer is for all of us, here and now, to 
commit firmly to do whatever it takes to make the SEC the 
strong and smart overseer that our capital markets deserve to 
recover and grow.
    One thing is of paramount importance. Nobody is asking the 
taxpayer for one dime to fund the SEC. What is often forgotten 
in the discussion is that American taxpayers pay absolutely 
nothing to run the SEC each year. Under 1996 legislation 
adopted by a Republican Congress and a Democratic President, 
the money to run the SEC comes entirely from Wall Street 
transaction fees and assessments designed to cover the entire 
cost of the SEC's budget.
    Because of this a substantially increased SEC appropriation 
paid for with this successful 15-year old funding mechanism 
would require no tax dollars whatsoever and would add nothing 
to the deficit. In short, the Wall Street user fee money is 
already there. Congress just has to let the SEC use it to 
police Wall Street.
    Madoff was a tragedy. The SEC missed Madoff and Chairman 
Schapiro and others have not tried to evade or run away from 
that fact, but so did FINRA whose predecessor installed Madoff 
as its vice chairman, and so did the Justice Department, and so 
did the New York attorney general with Madoff right in his own 
backyard, and so did how many others, including the 
sophisticated financial services firms that regularly 
interacted with him. Madoff was an industry icon and idol and 
nobody knew that he was really a crook.
    Yet, through thick and thin, the SEC was out there bringing 
almost 700 complex cases for enforcement every year against 
almost 2,000 defendants every year and with greater funding, 
could have brought far more.
    We hear criticism of the SEC's recently departed general 
counsel, David Becker. His power, I suggest, is misunderstood. 
He was not the Secretary of some Cabinet level department. 
Instead, he was the general counsel, one of multiple senior 
advisors at a five member, bipartisan commission, composed of 
two Republicans, two Democrats and one independent.
    Whatever his power, the point is that he did not use it to 
benefit himself. The month after he left the agency still to 
this day, it remains unclear exactly how any of the Madoff 
related claims are ultimately going to be calculated. In any 
event, the Madoff Trustee, Irving Packard reports to the court, 
not to the SEC, and he will make his own decisions on what he 
wants to claim.
    Finally, we need some perspective. What we are talking 
about is whether the Dorothy Becker estate will get to keep the 
$500,000 that Dorothy originally invested or whether it will 
also get to keep some small amount on top, the inflation 
adjustment. That seems to be where this is all breaking down 
and being discussed.
    The senior ethics official with whom Becker consulted ruled 
that whatever theoretical conflict this may actually have 
presented, it did not create such a conflict that he needed to 
recuse himself, based on what was known at that time. The 
possibility of a claim against this estate of a particular type 
at some future date was at that time speculative. Now we know 
more, of course.
    [The prepared statement of Mr. Crimmins follows:]
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    Mr. McHenry. Thank you for your testimony.
    Ms. Chaitman, you are recognized for 5 minutes.

                  STATEMENT OF HELEN CHAITMAN

    Ms. Chaitman. Thank you so much for giving me this 
opportunity to speak to you. I speak on behalf of approximately 
500 Madoff investors whom I represent and I speak, as well, on 
behalf of every American who hopes to save enough money in his 
lifetime to retire on that money. I speak on behalf of every 
American who relies upon the brass plaque on his broker's desk, 
SIPC. We are told when we invest that every account is insured 
up to $500,000 and yet, SIPC has taken the position in the 
Madoff case that the law doesn't apply to it.
    If I had to grade the SEC's performance with respect to its 
essential function of protecting investors with respect to the 
Madoff case, I would give the SEC an ``F.'' The SEC, instead of 
enforcing the law against SIPC, which it is charged by Congress 
with the obligation to do, instead of enforcing the law, we now 
know that in January 2009, the SEC agreed with SIPC that for 
the first time in its history, it would not pay SIPC insurance 
to each Madoff victim based upon the investor's last statement.
    SIPC is an insurance entity established by Congress which 
has the power to assess the Wall Street firms who raised the 
funds to protect investors. The statute doesn't give SIPC the 
right to define how it is going to allow a claim. The statute 
mandates that a claim is based upon the customer's last 
statement. Yet, the SEC joined in SIPC's violation of the 
statute.
    This is not just my opinion, this is the opinion of 
Chairman Garrett who has proposed H.R. 757 and in proposing 
H.R. 757, which is simply a clarification of the law, one could 
view H.R. 757 as a statement to the SEC, you cannot avoid the 
law and SIPC cannot avoid the law. Mr. Garrett made a statement 
when he introduced this bill that SIPC has violated the law and 
the trustee in the Madoff case has violated the law.
    If you recall, in 1970 when SIPC was enacted, investors 
were encouraged to relinquish the protection of having 
certificated securities. That was something that Wall Street 
wanted. In exchange for relinquishment of that protection, 
investors were promised SIPC insurance. SIPC insurance was 
raised to $500,000 in 1978; it was never raised thereafter.
    In the Madoff case, SIPC decided that was going to be too 
expensive for its Wall Street members and so it was going to 
try to come with an entirely new basis for insuring accounts. 
For the first time in SIPC's history, it decided it didn't 
insure the balance on the last statement, it only insured the 
net investment over the life of the account which might have 
been 20 years, 30 years, 40 years.
    There is no evidence that any investor in today's stock 
market has or what he owns other than the statements he 
receives from his broker. We don't have the luxury of going 
back to certificated securities. The Internal Revenue Service 
relies upon those statements, every investor relies upon those 
statements for planning their retirement, for their estate 
plans for their children. There is no basis in law for what the 
SEC did in this case.
    This is not a question of insufficient funding for the SEC. 
This is a question of doing its mission which is to protect the 
investor.
    I am not here to opine on whether or not Mr. Becker had a 
conflict of interest. I don't think there can be any doubt 
about it. Whether he advocated the constant dollar adjustment, 
which obviously reduced his own exposure, or whether he said to 
the SEC when he came onboard in February 2009, you have made an 
illegal agreement with SIPC which would have worked to his 
advantage, his judgment was clouded because everyone in the SEC 
forgot the law.
    There is one way to remedy this and to restore confidence 
in the capital markets for the average American. That is to 
enact H.R. 757.
    Thank you.
    [The prepared statement of Ms. Chaitman follows:]
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    Mr. McHenry. Thank you for your testimony. I thank the 
panel for its testimony. With that, we will begin questioning 
on our side by Dr. Gosar of Arizona. He is recognized for 5 
minutes.
    Mr. Gosar. Chairman Schapiro, when David Becker, your brand 
new general counsel, first came to you in February 2009 and 
said, my mother had an account with Bernie Madoff, why didn't 
you ask him any questions about it? Why didn't you even ask 
simple questions like, how much money?
    Ms. Schapiro. Congressman, to the best of my recollection, 
and just so I can be clear, I haven't looked at any emails or 
whether there might be any contemporaneous notes or anything 
like that in this period of time, so I am recalling back 
because our inspector general is looking at all that, so I am 
recalling 2 years ago.
    The best of my recollection was that Mr. Becker told me 
that his mother, who had passed away years ago, had an account 
at Madoff. Because the account was closed years before, I did 
not think that the account of a long deceased relative would 
raise an issue of a conflict of interest in Mr. Becker's work.
    I did expect that he would go to the ethics counsel, an 
experienced government official, a government lawyer who served 
under three Chairmen at the SEC, and we use our ethics counsel 
all the time for their advice. I expected him to run it by the 
ethics counsel and to follow their advice and that is the way 
it went forward.
    Mr. Gosar. It seems that if the same situation existed in a 
publicly trade company that you were investigating, would you 
have such a cavalier approach to that?
    Ms. Schapiro. It is hard for me to imagine this situation. 
These are the government ethics rules.
    Mr. Gosar. An ethics rule nonetheless.
    Ms. Schapiro. It is very hard to answer in the abstract. It 
would depend on the rule.
    Mr. Gosar. It just seems there is a very different aspect 
that what is good in the private sector and publicly trade 
situations is not going well for the government.
    Let us go to my next question. Ms. Chaitman, do you believe 
the account valuation method that David Becker recommended to 
the Commission as its attorney would have befitted his personal 
financial interest?
    Ms. Chaitman. There is no question that the constant dollar 
approach, which apparently Mr. Becker invented, would benefit 
him personally and reduce his clawback exposure, but the more 
significant problem with the conflict of interest Mr. Becker 
had is that it clouded his judgment. The law is absolutely 
clear that every investor is entitled to SIPC insurance based 
on his last statement. Mr. Becker had an obligation, as general 
counsel of the SEC, to make sure that the SEC complied with the 
law and enforced it against SIPC. That is the great failure 
which has caused devastation to all of my clients.
    Mr. Gosar. Chairman Schapiro, your agency's inspector 
general compiled a 457-page report about the SEC's failure to 
uncover Madoff's ponzi scheme. That report devotes 2 sections 
out of 11 to describing in great detail every possible 
connection between SEC employees and Madoff.
    Do you think that your general counsel's receiving funds 
from a Madoff account would have been appropriate material, the 
inspector general or not?
    Ms. Schapiro. That would be a much better question for the 
inspector general. I have a pretty high level of confidence 
that he did quite a thorough report on the agency's failures 
with respect to Madoff.
    Mr. Gosar. The Inspector General's Madoff report mentions 
on page 382, that two family members of an employee in the 
Office of Internet Enforcement invested $1\1/2\ million and 
$500,000 respectively with Madoff. The inspector general found 
it necessary to make sure that this employee had no involvement 
in any Madoff examination.
    Do you think that the inspector general would have been 
interested in a similar situation involving your chief lawyer, 
a senior SEC official who served as general counsel from 2000 
to 2002 while the SEC was ignoring whistleblower complaints 
about Madoff?
    Ms. Schapiro. I can't predict. I can imagine that he might 
have been and of course he is looking at all of these issues 
now. I expect that he will thoroughly explore that.
    Mr. Gosar. I understand that you inherited a horrific 
problem but it always starts with top down. Private sector, 
businesses always look at accountability within the hierarchy. 
It seems like we have a two-edge sword here that we should have 
demanded better accountability. Would you agree?
    Ms. Schapiro. Congressman, I would agree that from where I 
sit now and understanding all the things that I understand now 
that I didn't understand in 2009, having arrived at the SEC and 
discovered that I had an agency in absolute ruin in some 
regards on my hands to manage and not knowing obviously all the 
steps that would be taken by the Trustee or the decisions the 
Commission would make down the road, but knowing those things 
now, I wish that Mr. Becker had recused himself, absolutely.
    Mr. McHenry. The gentleman's time has expired.
    The gentleman from Illinois, Mr. Quigley, is recognized for 
5 minutes.
    Mr. Quigley. Thank you, Mr. Chairman.
    Madam chairman, the New York Times reported on March 5th of 
this year that the SEC has declined to enforce the requirement 
from Dodd-Frank that would make rating agencies subject to 
expert liability under the securities law. This would make 
rating agencies liable for faulty ratings. Could you comment on 
the timeline for implementing this measure?
    Ms. Schapiro. Yes, I would be happy to. The way the rule 
works is that if a rating is included in a registration 
statement for securities, then the rating agency must consent 
to having liability. That is the Dodd-Frank requirement.
    We had preexisting SEC rules that require for AXA-backed 
securities registration statements, that if a rating was used 
to sell the securities, the rating needed to be included in the 
registration statement. Rating agencies have absolutely, 
unequivocally--at least the ones that are in existence now--
refused to consent. That made public offerings of AXA-backed 
securities impossible because they couldn't get the consent of 
the rating agencies to include the ratings, but they used the 
ratings to sell the securities.
    We temporarily set aside our rule, our requirement that the 
AXA backed issuers disclose the ratings in the registration 
statements because we didn't want to be holding up all public 
offerings of AXA-backed securities and pushing them into the 
private markets which we felt were not as good for investors.
    Right now, our staff is working through reconsideration of 
our disclosure requirements. I believe they will recommend that 
we eliminate our preexisting requirement for including the 
ratings and therefore, the liability provisions can go forward.
    We are also hopeful that some of the newer rating agencies 
that have indicated an interest in becoming registered with us 
will actually be willing to consent, which is I think how 
Congress hoped the law would work.
    Mr. Quigley. Can you guess on the timeframe for that?
    Ms. Schapiro. I can't but I would be more than happy to. I 
would say over the next couple of months, but I would be happy 
to get you a more definitive answer right away.
    Mr. Quigley. Thank you. You talked about the agency that 
you inherited and you talked to a certain extent about the 
reforms necessary and those you have implemented. As to Mr. 
Katz's point, whether or not more assets, and I think you need 
the assets to do your job, help more than the need for in a 
sense restructuring, reforming and reinventing yourself.
    Are you looking at the agency from that perspective and the 
broader picture? If you were to start over, what would you do 
and how would you do it?
    Ms. Schapiro. Absolutely. I actually would do again many of 
the things we have already done. This has been an agency that 
has been sort of taken upside down and shaken pretty hard over 
the last 2 years--new leadership across the board in every 
major office and division, a new chief operating officer, a new 
chief ethics counsel, our first ever chief compliance officer.
    We also restructured our Enforcement Division and put 
people into specialized groups where they could get deep 
expertise to bring enforcement cases more quickly in particular 
areas like structured products or the Foreign Corrupt Practices 
Act or insider trading.
    We have also restructured our examination program, both of 
those, enforcement and examination, largely in response to the 
failures that were so vividly demonstrated in the inspector 
general's report on Madoff.
    We have also brought new technology, which is going to be 
critical to us. We have too many people doing low value work 
because we don't have the technology.
    Mr. Quigley. What do you mean low value work?
    Ms. Schapiro. For example, when we bring enforcement cases, 
we bring in massive amounts of electronic data so that we can 
look at trading records or we can look at email transmissions 
between parties who might be sharing non-public information.
    We need to be able to use analytics to find the important 
information and all of that, not have people plowing through 
all that information. When the markets fell so dramatically on 
May 6th, it took us 5 months to reconstruct trading data 
because we don't have the capacity in the SEC.
    Mr. Quigley. That was the final question we have limited 
time. Are you a technological match for those that you are 
regulating?
    Ms. Schapiro. Not at the moment, we aren't. We have a 
phenomenal new chief information officer who is making real 
progress, I think, but we are a long way from the people that 
we are regulating in terms of our technical capability, but I 
think we can get there. I think we can put up a good fight 
anyway.
    Mr. Quigley. Thank you. I yield back.
    Mr. McHenry. I thank the gentleman. I now recognize the 
Vice Chair of the TARP, Financial Services and Bailouts 
Subcommittee, Mr. Guinta of New Hampshire, for 5 minutes.
    Mr. Guinta. Thank you very much, Mr. Chairman.
    Mr. Katz, thank you and thank all of the witnesses for 
being here today. wanted to direct my first question to you, 
sir.
    In your testimony, you talked about the size, structure and 
complexity of the U.S. capital markets and financial companies 
that have grown substantially in the past 30 years. I think 
your position is that you are comparing the SEC over that same 
period of time and the fact that it has not grown, changed or 
modified substantially. I wanted to get a little clarification 
on that first, if you would.
    Mr. Katz. Obviously I think everyone would agree that the 
capital markets of today are exponentially greater, but my 
point was more directed to the way the SEC is structured. It is 
not just a question of size; it is a question of a structure 
that corresponds to the entities you are regulating. The point 
I was making is that in the early 1970's when basically the 
current organizational structure of the SEC was last reformed, 
you had market regulation that focused on stock exchanges and 
broke dealers. You had a Division of Investment Management 
Regulation which focused on mutual funds and investment 
advisors. They were two very separate components of the 
industry and there really was very little overlap.
    That no longer exists. Because of consolidation in the 
industry and the blending of the roles, the fundamental 
distinction between a stock broker who is a commission-based 
seller of securities and an investment advisor, who is an under 
management advisor on a comprehensive portfolio, is a 
historical artifact. It doesn't exist.
    Because you have two divisions upon two different laws, 
according to a model that no longer exists, you get these 
anomalies. The fight over fiduciary duty differential was 
embedded in the laws but more importantly, you had two 
different divisions who had different ways of thinking about it 
and neither of them wanted to compromise. They both wanted to 
maintain their piece of it.
    Mr. Guinta. Does that speak a little bit to the silo effect 
that you have been referring to?
    Mr. Katz. Absolutely. I used to joke that the silos at the 
SEC were so real that in fact, that they had locked doors and 
that because all the paper in the agency used to have to come 
through my office, I actually had a skeleton key that 
occasionally allowed me to unlock each of the silo doors and 
get inside. Most people don't. Turf is a real issue in any 
organization, no matter what the size. It is compounded because 
remember you have different securities laws that were written 
at different points of time for different segments of the 
industry. Each division sort of jealousy guards the law that it 
controls. The market has changed.
    Mr. Guinta. I listened to what Chairman Schapiro mentioned 
in her earlier comments about some of the improvements, 
modifications and changes that she has made and they sound 
laudable and responsible. That being said, I wonder what type 
of congressional action may or may not be necessary given the 
systemic problem that we have seen within the SEC. I don't want 
to get into the specifics, but the things we have been talking 
about here. We have to prevent these from happening again. 
People in our Nation need to have confidence, not just in the 
SEC, but in the markets as well. I wonder what you could say 
about the type of intervention you feel Congress should be 
considering?
    Mr. Katz. That is a very difficult question for me to 
answer. The reason is I spent virtually my entire career at the 
SEC and I think it is very different for Congress to 
micromanage the internal organization and operations of a 
government agency. You can set policy, you can give direction, 
but I think it is dangerous when Congress tells the agency this 
is how you get it done. I think the agency really has to take 
this responsibility on. Chairman Schapiro has brought in an 
entirely new team of senior people. I don't know most of them. 
They seem very competent.
    My hesitation is this. If you rely exclusively on a team of 
people coming in to effect change, when those people walk out 
the door, the change walks out with them. You need to change 
the structure, you need to change the culture and most 
importantly, you need the agency to define what it is it is 
trying to do and how do you measure whether it has gotten it 
done. You need that discipline, but that is for the agency to 
do.
    Mr. Guinta. Thank you, sir.
    Chairman Schapiro, I only have a few seconds left, but what 
assurance can you give us that new management team is 
effectively managing and maintaining the necessary changes?
    Ms. Schapiro. I have to say I think change starts with 
leadership absolutely and having a whole new leadership team 
makes an enormous difference. They are very committed to 
working together and institutionalizing cooperation and 
collaboration among all of the divisions.
    For example, we now have the College of Regulators for the 
largest financial institutions. It is no longer just the 
Trading and Markets Division that looks at them, it is no 
longer just the examination group. There is a group of people 
drawn from all over the agency who could have potential 
interest in the health of that financial institution who meet 
regularly to talk about what is going on in that company, to 
look at the financials, to meet with the staff of that 
financial institution. So the College of Regulators is just one 
example. We have task forces across the agency. We are merging, 
in some of our offices and will eventually in all of them, our 
examination programs for investment advisors and broker dealers 
which Mr. Katz mentioned.
    Finally, I should say that we have just commissioned, and I 
believe it is going to be released today, Dodd-Frank required 
us to hire an independent consultant to do a very in-depth 
study of the SEC's organizational structure. That will be 
released today. I fully expect that there will be some really 
helpful ideas there for us to further improve how we operate.
    Mr. McHenry. The gentleman's time has expired. With that, I 
recognize the ranking member, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me thank all of you for being here. I really appreciate 
you taking the time to come.
    Chairman Schapiro, the SEC plays a critical role in 
protecting investors and ensuring that our financial markets 
operate effectively. You have stated that freezing the SEC 
budget impedes the agency's ability to meet its mission, which 
is to protect investors, to maintain fair, orderly and 
efficient markets, and facilitate capital information. Can you 
put that in concrete terms for us?
    If the SEC does not have the budget to properly oversee 
capital markets, how would this effect your staffing?
    Ms. Schapiro. Yes, sir, I would be happy to. I think the 
two things that are most severely impacted by a limited budget 
at the SEC are capability to hire the new kinds of talent and 
expertise we need, economists, people who worked in hedge funds 
on trading desks, financial analysts, the new expertise that 
will help us keep up with what is going on in the marketplace.
    The second is the fact that it will slow down and really 
hurt our efforts at reforming our technology and bringing it up 
to speed and giving us the capacity to do the things we need to 
do in order to keep up with Wall Street. I know we will never 
meet their budgets. I understand that. I have no expectation 
and don't believe the American public should pay for us to have 
a $3 billion a year technology budget, but we have to do much 
better than we have been able to do.
    I think those are the two primary things that are really 
impacted. It plays out in lots of other ways. When we don't 
have a sufficient travel budget, examiners can't travel to go 
into that mutual fund where most Americans hold their investing 
wealth, and examine the mutual fund's books and records. They 
can't go to the investment advisor or to the broker dealer.
    In little ways, the lack of resources plays out but the 
real fundamental ways are bringing in those people that we need 
to really reform and transform the agency so people know that 
we have at least a fighting chance at staying on top of what is 
happening on Wall Street so we can also respond when the 
emergencies come along as we saw on May 6th when the market 
absolutely fell apart, scared people very badly in the retail 
investing public and in the institutional investing public as 
well. We need the capability to respond to those things very, 
very quickly.
    Mr. Towns. What about the flexibility? Do you have that? 
For instance, if there is a crisis situation and you need a 
specific type of person and in order to get that person, you 
might need additional resources to be able to track who you 
need to do the job at that particular time, do you have that 
kind of flexibility?
    Ms. Schapiro. We have had some flexibility over the last 2 
years because Congress has been generous in our budget, but if 
we continue with the CR level or are cut, the answer to that is 
no. May 6th required us to go out and bring in experts to help 
us analyze and go through all the trading data so we could 
reconstruct for the public to see what was happening every 
second in the marketplace when the Dow dropped 500 points in a 
matter of a few minutes.
    Responding to emergencies is one of the things I do worry 
about. That is where we lose flexibility if we don't have a 
sufficient appropriation.
    Mr. Towns. Thank you, very much. On that note, I yield 
back.
    Mr. McHenry. Thank you. With that, I recognize Mr. Mack 
from Florida for 5 minutes.
    Mr. Mack. Thank you, Mr. Chairman. I also want to thank the 
panel for being here today to give us an opportunity to get 
your insights and to ask a few questions on a very serious 
topic.
    I would like to start with Chairman Schapiro, if I might. 
Do you feel as Chair of the agency that ultimately it is your 
responsibility to ensure that all of the employees are acting 
in accordance with SEC employee conduct standards?
    Ms. Schapiro. I have responsibility for the agency in that 
sense. I cannot tell you that with 3,800 employees, I can take 
individual responsibility for each and every one to ensure that 
they are following the requirements the way they should be.
    Mr. Mack. Ultimately, it is your responsibility as the 
Chair of the SEC?
    Ms. Schapiro. Ultimately, I am responsible for the agency's 
conduct.
    Mr. Mack. If I could direct your attention to slide No. 4, 
Chairman Schapiro, are you familiar with the rule that is being 
presented on the screen?
    Ms. Schapiro. Yes.
    Mr. Mack. After reading through my material and hearing 
your testimony, it seems to me that you weren't completely 
knowledgeable of this rule at the time you hired David Becker. 
Please allow me to read it so everyone in the room can 
understand the entire rule.
    ``The Securities and Exchange Commission has been entrusted 
by Congress with the protection of the public interest in a 
highly significant area of our national economy. In view of the 
effect which Commission action frequently has on the general 
public, it is important that members, employees and special 
government employees maintain unusually high standards of 
honesty, integrity, impartiality and conduct. They must be 
constantly aware of the need to avoid situations which might 
result either in actual or apparent misconduct or conflicts of 
interest and to conduct themselves in the official 
relationships in a manner which commands the respect and 
confidence of their fellow citizens.''
    Chairman Schapiro, were you familiar with this rule at the 
time that you received David Becker as your general counsel?
    Ms. Schapiro. I can't tell you whether I had read it. I 
have been in and out of government most of my career, so I am 
generally aware of the ethics rules.
    Mr. Mack. I only have a little bit of time. A moment ago, 
you said you were familiar with the rule.
    Ms. Schapiro. I am but you just asked me was I aware of it 
at the time that David Becker arrived at the Commission. I am 
telling you I can't recall whether I had reread the rule 
recently at that point or not.
    Mr. Mack. Throughout your time in the 1980's and 1990's, 
you were familiar with this rule?
    Ms. Schapiro. Yes, I am generally aware of the ethics rules 
and that it is each employee's obligation.
    Mr. Mack. Regarding David Becker's work with the Madoff 
case, do you believe that Mr. Becker was sufficiently aware of 
the need to avoid actual or apparent conflicts of interest?
    Ms. Schapiro. I want to be very careful. I believe he did 
what he thought was appropriate and what was required of him, 
going to the ethics counsel and seeking advice, getting that 
advice and following it. Do I wish now that he had been more 
sensitive to the potential for this issue to raise an 
appearance of a conflict? Yes, I wish that had happened.
    Mr. Mack. A few more questions. Do you think that you were 
sufficiently aware of the need to avoid actual or apparent 
conflicts of interest?
    Ms. Schapiro. On my part, yes. I believe I am.
    Mr. Mack. You said now a couple times, I think, that you 
wished Mr. Becker would have recused himself. Is that because 
of the fallout or do you really believe he should have recused 
himself?
    Ms. Schapiro. I believe, as I said, at the time from my 
perspective, a close account from a long since deceased 
relative didn't appear to me to raise a conflict of interest, 
but I believe now, knowing what we know now, not because of the 
fallout, though that is very real, but because if we could 
connect the dots and look ahead and see what all the steps 
would have been, yes, it would have been appropriate to have 
recused.
    Mr. Mack. Let me say this. Also earlier, you kind of 
referred to the budget as kind of the reason why some of these 
mistakes happened. How much does it cost to follow that rule?
    Ms. Schapiro. That is a personal initiative. It doesn't 
really cost anything.
    Mr. Mack. So the argument about the budget as it pertains 
to this rule, doesn't hold water? The argument about the budget 
in your opening statement that you talked about really doesn't 
pertain to this rule?
    Ms. Schapiro. No, and I didn't mean to suggest in any way 
that it did.
    Mr. Mack. Thank you.
    Mr. McHenry. The gentleman's time has expired. With that, I 
recognize the ranking member of the full committee.
    Mr. Cummings. I don't want that to be left hanging. I never 
heard you, and I heard all of your testimony and I have read 
your testimony, Ms. Schapiro, you never made that allegation. I 
want to make that clear. I haven't heard it. I think it is a 
very unfair statement.
    Let me go on. Chairman Schapiro, I must tell you that when 
I was talking to my staff--as a matter of fact, when we were 
emailing back and forth at 4 a.m. this morning about this case, 
because it does trouble me to a degree with regard to the 
appearance of a conflict of interest.
    I think when we hear what Ms. Chaitman had to say, that 
shows you why, and I am sure you see it, we have to make sure 
that we don't even have the appearance because what happens is 
that every decision made by Mr. Becker then becomes suspect. It 
is my favorite author, Covey who in the book, ``The Speed of 
Trust,'' says that ``Once trust is lost, everything moves more 
slowly.'' So I cannot begin to tell you how pleased I was when 
you walked in here today and said we will go beyond what may be 
required. That is so very, very important.
    In my office, I have five people that whenever there is an 
ethics question, they all have to agree and if one vetoes, it 
is out the door. Why? Because the public is looking over our 
shoulders, we want to do the right thing and we want to make 
sure that it is right.
    This has been a major wake up call, hasn't it. Here in this 
committee, it is so easy for us to get into a gotcha mode, but 
I must tell you, after I read about what you had done at the 
SEC since you have been there, and having sat on this committee 
and watched Mr. Cox and what he did with this organization and 
how it went down under him, to see you come and try to sweep up 
the mess, I must commend you.
    The sad part about it is that one of these little incidents 
basically can almost destroy that trust. Do you understand what 
I am saying?
    So I want you to commit to this committee, if you will. 
Tell me, if these incidents come up again, tell us the 
difference in how you might approach it. I understand what you 
did. A fellow comes to you, he tells you, years ago, I got an 
inheritance and he wants to know about a conflict. You listened 
to it for a while. You have 3,800 employees to deal with, you 
hear him and then you say, you know what, the expert on this is 
the ethics guy. Make sure you check with him and he got an 
opinion.
    How would you deal with this differently now, looking 
backward?
    Ms. Schapiro. We have a new ethics counsel, first of all, 
who is doing sort of a top to bottom review of our program, but 
I think I need to work with all of our employees and 
communicate with all of our employees about a heightened 
sensitivity to issues like this.
    I have worked so hard in the last 2 years to try to put 
this agency back on the right path and to earn the trust of the 
public. You are right, a small thing like this, not so small 
thing like this, can really set us back. It is not fair to 
3,800 hardworking employees.
    It is just like when somebody mentioned in their opening 
statement that employees had viewed pornography at the SEC. It 
infuriates me because most people there are working their 
hearts out day and night to try to do the right thing. It hurts 
the reputation of every single one of us.
    I have to work with our employees to make sure that we 
increase their sensitivity to issues like this. I think with 
our new ethics counsel and their review of the program and how 
it might be strengthened, we will get some good advice. I think 
the inspector general is likely to have some recommendations 
that will be very helpful too.
    Mr. Cummings. I read in your testimony where you talked 
about technology and trying to keep up with these ever changing 
transactions and how complicated they have become. I want to 
make sure you have all the resources you need to address this 
because so many of our constituents on both sides lost a lot of 
money. Like Mr. Crimmins said, they need confidence to reenter 
this system of stocks.
    Ms. Schapiro. I agree.
    Mr. Cummings. Thank you.
    Mr. McHenry. I thank the ranking member. With that, we 
yield for 5 minutes to Mr. Ross of Florida.
    Mr. Ross. Thank you, Mr. Chairman.
    As a kid, I always wanted to be a lawyer and fortunately I 
found a law school that would take me. I went to law school and 
I always had a deep seated respect for the sanctity of the law, 
so much so that I was gratified that the American Bar 
Association and my state bar association required not only a 
course but an examination on the Code of Professional 
Responsibility.
    Ms. Schapiro, I understand that you too are a lawyer and 
that even though you inherited quite a mess at a time of great 
disarray at the SEC, my question is as a lawyer, when Mr. 
Becker came to you, did you not think that a further 
investigation should be made? As a lawyer, we do conflicts 
checks, we make sure of that and it just seems to me that if 
further inquiries had been made at that time, this might have 
been avoided.
    Ms. Schapiro. I don't disagree with you that if further 
inquiries had been made, this might have been avoided. I can 
only say what I said at the beginning, that when he raised it 
with me, that he had a closed account, I didn't know if it had 
been a net winner account, a net loser account or anything 
else, from a deceased relative, it didn't raise for me a 
conflict of interest question.
    Mr. Ross. The fact that he asked for a waiver from his 
subordinate is indicative of a problem, an inherent internal 
problem there from an ethical standpoint.
    Ms. Schapiro. I don't know that he asked for a waiver and I 
again, I have no access to any contemporaneous documents of any 
sort. He asked whether or not he had a conflict and was advised 
that he did not have a conflict.
    Mr. Ross. Did you know who was advising him that there was 
no conflict?
    Ms. Schapiro. It was the ethics counsel of the SEC at that 
time who is no longer the ethics counsel.
    Mr. Ross. As general counsel, that would be under him, 
would it not?
    Ms. Schapiro. I believe that is the case in most agencies.
    Mr. Ross. Do you feel this would be avoided again in the 
future?
    Ms. Schapiro. I would love to say absolutely without a 
doubt, but it would be my very strong hope that with a very 
strong new ethics counsel that we hired from the Treasury 
Department with long government experience, with a revamping of 
our programs and with some additional education and training 
for our people, I would hope and expect that we could avoid 
this.
    Mr. Ross. I think the American public needs that assurance 
that credibility is going to be there.
    Mr. Risinger, with regard to human resources, are your 
employees all part of the general schedule in terms of 
compensation?
    Mr. Risinger. Congressman, actually we have a separate pay 
schedule that we received from legislation of Congress back in 
2001, 2002.
    Mr. Ross. Were you subject to the pay freeze that the 
President issued?
    Mr. Risinger. Yes, we are.
    Mr. Ross. That just really affected the cost of living 
increases, didn't it?
    Mr. Risinger. It does affect the cost of living increases.
    Mr. Ross. What about within pay grade or step increases? 
Did it affect that?
    Mr. Risinger. We have a merit pay process that is the 
equivalent of step increases for the rest of the government, so 
that is technically affected by the pay freeze.
    Mr. Ross. In your disciplinary procedures, let me ask you 
this. What is the probationary period for any employee?
    Mr. Risinger. It is generally a year.
    Mr. Ross. One year. After 1 year, if there is a 
disciplinary situation, is a presumption in favor of the 
employee if they have been found in violation or alleged 
violation of any personnel policies?
    Mr. Risinger. The Federal laws that we have to follow in 
terms of disciplining employees set out a number of standards 
that we have to go through. There are actually 12 factors that 
you have to look at when you are issuing discipline and one of 
them is a factor that says, is this the level of discipline 
that is necessary to stop the behavior and not more than that. 
So there is a presumption that you are taking a preventive or 
corrective step, not necessarily a punitive step.
    Mr. Ross. These would have been the same procedures 
employed in those involved in the viewing of pornography, 
correct?
    Mr. Risinger. That is correct.
    Mr. Ross. Only one person was fired as a result of that?
    Mr. Risinger. Of the cases we have had since 2005, 50 
percent or 51 percent have either resigned, retired or have 
proposed removals in place. We have had a number of suspensions 
and reprimands as well.
    Mr. Ross. What is the attrition rate in your agency?
    Mr. Risinger. In the agency, in normal years, it is 7 to 8 
percent. In the last couple of years because of the economy, it 
has been in the 3\1/2\ to 4 percent range.
    Mr. Ross. How does that compare with Federal agencies 
overall?
    Mr. Risinger. If we are talking just attrition in general, 
I think that is pretty equivalent with other agencies.
    Mr. Ross. Last question. Ms. Chaitman, with regard to the 
Madoff situation specifically, I saw where you put them on 
notice, what was going on. What action do you think would have 
requested be done in order to avoid this conflict?
    Ms. Chaitman. Under the statute, Congress mandated that the 
SEC go into court and enforce the law against SIPC. That is 
precisely what I asked Ms. Schapiro to do in my April 2, 2009 
letter. In fact, when Ms. Schapiro testified on July 14th 
before the Subcommittee on Capital Markets that she was going 
to do everything in her power to provide the maximum SIPC 
coverage for all investors, I assumed that she was, in fact, 
going to follow my request. Now I have learned that in January 
2009, the SEC had already agreed with denial of SIPC insurance 
to more than half of the victims.
    Mr. Ross. Thank you. I yield back.
    Mr. McHenry. Thank you. Mr. Yarmoth of Kentucky for 5 
minutes.
    Mr. Yarmoth. Thank you, Mr. Chairman.
    Thanks to all the witnesses for your testimony.
    Over the last couple weeks I have been plowing my way 
through the Financial Crisis Inquiry Report which is anything 
but bedtime reading. It will not put you to sleep, I guarantee 
you that--as a matter of fact, quite the contrary.
    I am sure, Chairman Schapiro, that you are aware of what 
the report concluded, particularly with regard to the SEC. I 
was interested in an assessment of where you think you still 
need to go to make sure that the failings in the system as it 
concerned your agency won't recur?
    Ms. Schapiro. As I have not looked at the report recently, 
it obviously focused a lot on the failures of the SEC's 
Consolidated Supervision Program for the five largest 
investment banks, all of which during the financial crisis 
essentially disappeared or converted to bank holding companies 
under the regulation of the Fed. I think there are a lot of 
lessons. I testified before the FCIC about the failures of the 
agency with respect to that program.
    There are a couple of things. One is that it was a 
voluntary program, a voluntary regulatory program which, in my 
view, doesn't work very well. We had insufficient resources 
devoted to the regulation of the five largest investment banks. 
We didn't have people with the right kind of expertise and I 
think in some ways perhaps the most important thing is it 
required a very different kind of supervision than the SEC has 
traditionally done. It required prudential supervision as 
opposed to the SEC's going onsite, doing an examination, 
leaving and then perhaps bringing an enforcement case.
    We didn't have the right mindset within the agency I think 
for that kind of constant prudential oversight approach that 
was really necessary. There was a lack of management focus, I 
think, with respect to the program. There was a willingness to 
believe what our people were being told by some of the leaders 
in some of those financial institutions that failed, a lack of 
skepticism which I think really hurt us as well. That program 
was discontinued by my predecessor, Chairman Cox.
    Mr. Yarmoth. With regard to the present situation, because 
most people who observe the situation now, agree I think that 
the situation in terms of too big to fail, the largest 
investment banks have, in fact, gotten larger and that the wild 
west atmosphere in terms of risk taking and so forth may not 
have been curtailed at all. Is this a concern that you share? 
Anyone else on the panel is welcome to respond as well.
    Looking at the Wall Street profit picture and so forth, it 
looks like there hasn't been a whole lot of change in behavior.
    Ms. Schapiro. I do think I can speak perhaps most 
particularly to the over-the-counter derivatives market where 
we have a very direct responsibility, although much progress is 
being made internationally with respect to accounting standards 
and other prudential measures.
    Getting the over-the-counter derivatives market into a 
transparent marketplace so that regulators can understand the 
buildup and concentration of risk in financial institutions I 
think is going to be a very, very important piece of this. We 
are working through those rules as is the Commodities Futures 
Trading Commission. About half of them or so have been proposed 
and I would expect while we are going to miss for some of them 
the July 21st deadline, we will get them over the finish line 
over the course of the rest of this year. Then there will be 
implementation and phasing periods to go through. I think that 
will make a difference.
    I think the work the FDIC is doing with the Fed and others 
on living wills and plans for financial institutions to wind 
down their business appropriately will also make a very big 
difference and then, of course, the capital requirements.
    Mr. Yarmoth. A final question on that subject. We talked 
about the problem potentially with resources and the dangers 
that would ensue if your budget was cut. Are you confident that 
the legislative action that was taken, Dodd-Frank, is 
sufficient or that there are things that we yet need to do to 
make sure that we don't have a situation recur as it did 2 
years ago?
    Ms. Schapiro. I think it makes large strides toward filling 
the gaps that existed in the regulatory regime. I will say that 
one of my concerns about the budget is that we don't have the 
capacity to operationalize the rules that we are putting into 
place--getting swap markets participants registered and the 
swap data analyzed and market surveillance taken care of. Those 
are things that we will have to put off, but I think it is 
incumbent upon all of us as regulators who see these markets 
close up to continue to tell Congress where we think the issues 
are, where perhaps Dodd-Frank wasn't the right approach and 
where we think there are still gaps.
    Mr. Yarmoth. Thank you very much.
    Mr. McHenry. I thank the gentleman. With that, I yield 5 
minutes to the chairman of the full committee, Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman.
    Madam Chair, I just went over to the Business Roundtable 
and back, so I had the opportunity to see about one-third of 
corporate America's profits in that room, almost all public 
companies, probably all public companies except one, all 
regulated by the SEC. I was there talking about impediments to 
job creation.
    I am going to give you a little relief from the question de 
jour for a moment and ask, Dodd-Frank is not perfect and it was 
not what you might call a low cost, low budget way to get 
better performance with less cost. You have asked for 28 
percent budget increase. In fact, if you had only the budget 
increase necessary to do the work you were not doing as well as 
you wanted to without all the new losses, what would that 
budget increase be in your estimation? In other words, what 
would it cost to do it right without piling on new regulations 
when there is no question there have been problems properly 
enforcing your existing portfolio?
    Ms. Schapiro. Mr. Chairman, I would have to actually do the 
math but maybe this helps.
    When we did our 2012 request, we viewed 40 percent of the 
positions and it was a total of 780 positions or 584 full-time 
equivalents. We viewed 40 percent of those as going to our 
ongoing programs--that is 312 positions--and 60 percent going 
to Dodd-Frank in limitations, so hedge funds, oversight, over 
the counter derivatives, municipal advisors, whistleblower 
programs, clearing agencies and so forth.
    Mr. Issa. To followup on that quickly, the transparency 
elements that were asked for and agreed on by SEC and other 
agencies never got into Dodd-Frank, so you don't have a common 
mandate for reporting for transparency that had been worked out 
in the conference and then didn't happen.
    From this committee's standpoint we are interested, and you 
can answer for the record if you are not completely ready 
today, how much savings could you get if, in fact, there was 
transparent interoperability both inward and whenever possible, 
out to the public for oversight?
    Ms. Schapiro. That is a great question and I would like to 
answer it for the record because I do think it is important, 
particularly when you have a market like the over-the-counter 
derivatives market with two regulators in the same space, that 
we try to be as consistent as we possibly can and leverage each 
other as effectively as we can. If I can come back to you on 
that, I would like to.
    Mr. Issa. I appreciate that and I want to give you an 
opportunity to be thoughtful because that is a major initiative 
of this committee on a bipartisan basis in the last Congress 
that didn't happen and we would like to renew it but would 
certainly take your input.
    In the remaining 2 minutes, I do want to ask, Mr. Becker's 
conduct in retrospect was not a good idea. It certainly has not 
led to confidence in the independence, transparency and non-
biased behavior of the SEC when we look through the tail light.
    How can we know that the changes you are asking to be 
reviewed are going to clearly eliminate anything like this in 
the future? Where do we get the confidence in that?
    Ms. Schapiro. Mr. Chairman, I think it is a fair question. 
You and I have had many conversations and I try to be very 
transparent and up front. We will obviously be public about 
what our inspector general finds and what recommendations he 
makes, what our new ethics counsel finds as she reviews our 
program and recommendations she makes. We will be happy to come 
back and talk to Congress about those findings and those 
recommendations and see if we can develop some metrics that 
would actually help us figure out whether we are getting it 
right.
    Mr. Issa. Your ethics counsel served under the general 
counsel, a career position but under the general counsel, 
correct?
    Ms. Schapiro. Yes.
    Mr. Issa. Would you consider moving that to be independent 
direct report so that there would only be one person, a 
political appointee like yourself, that would be between the 
public and ethics questions rather than having a general 
counsel who has a number of jobs?
    You don't have to answer that today but I would like you to 
consider that. In so many different HR situations in the 
private sector, there is a clear independence of HR which is a 
lot of the questions. A question of conflict was more than a 
legal question, particularly when it included somebody who was 
the boss of the person they went to for this 25 minute session 
and clearance, so give that some thought. I won't ask for an 
answer today.
    Ms. Schapiro. I will do that.
    Mr. Issa. Finally, as the time runs out, we on the 
committee want to work to try to be helpful. We realize we only 
have a portion of the portfolio that you see; you see much more 
of the regulatory and financial oversight of another committee, 
but the question I have for you is, in our conduct of this 
investigation, as we look at Mr. Becker's total portfolio of 
money, other things he may have done and how this might have 
affected or not affected the Madoff Trust, will you promise 
your cooperation to this committee today?
    Ms. Schapiro. I will promise my cooperation to the fullest 
extent I can. I don't know that I can compel him in any way to 
do anything.
    Mr. Issa. He has already come in voluntarily. We have the 
ability to compel him but it is really making sure that we can 
have a quick and transparent. Your IG would normally be willing 
to share any information that was not directly related to a 
criminal referral and so on. Anything you can do to pledge to 
help us will allow us to move from where we are as quickly as 
possible onto something else. That is why I ask today.
    Ms. Schapiro. Yes, of course I will help.
    Mr. Issa. Thank you. I thank you all for your indulgence 
and I yield back.
    Mr. McHenry. Thank you.
    Mr. Connolly of Virginia for 5 minutes.
    Mr. Connolly. Thank you, Mr. Chairman.
    Chairman Schapiro, aren't you the chairman who appointed 
the inspector general who, in fact, is charged with 
investigating Mr. Becker?
    Ms. Schapiro. No, sir. He was appointed by my predecessor.
    Mr. Connolly. By your predecessor. That investigation 
continues?
    Ms. Schapiro. Yes. I requested the investigation.
    Mr. Connolly. You requested the investigation?
    Ms. Schapiro. Yes.
    Mr. Connolly. We just heard a line of questioning asking 
you to look at a budget without additional regulation that was 
burdensome and so forth. The Dodd-Frank legislation added some 
regulation in areas that heretofore had not been regulated at 
all, is that correct, Chairman Schapiro?
    Ms. Schapiro. Yes, that is absolutely correct.
    Mr. Connolly. For examples, take derivates. How big are 
derivates? What is the value of the derivatives market?
    Ms. Schapiro. The last number I saw was $600 trillion, I 
believe.
    Mr. Connolly. I am sorry, did you say trillion?
    Ms. Schapiro. Yes, sir.
    Mr. Connolly. It is entirely unregulated until Dodd-Frank 
passed, is that correct?
    Ms. Schapiro. Yes, it is largely unregulated.
    Mr. Connolly. Whatever could go wrong with an entirely 
unregulated $600 trillion market?
    Ms. Schapiro. We saw some things that went wrong and 
presumably that is what motivated the Dodd-Frank Act.
    Mr. Connolly. So maybe that is one of those burdensome 
additional pieces of regulation we are just going to have to 
put up with. That burdensome additional regulation requires SEC 
to staff up and to acquire the requisite expertise to enforce 
the regulation you are now charged with, is that correct?
    Ms. Schapiro. Yes, we believe so. We are able to do the 
rule writing that has been ongoing this year but to 
operationalize those rules, we need additional staff.
    Mr. Connolly. We heard Mr. Katz in his testimony say that 
simply having more SEC staffers do the same thing would not 
protect investors or promote capital formation. How many areas 
of additional or new regulation are requiring you to ramp up in 
terms of expert staffing?
    Ms. Schapiro. We obviously have derivatives, hedge fund 
regulation, we are creating a new whistleblower office although 
that is work that we need more help with but it is not unknown 
to us. We have to increase our oversight of credit rating 
agencies under the act and we have to register a whole new 
category of registrant in the municipal securities markets 
called municipal advisors, so there are half a dozen or so new 
areas for us to undertake regulation.
    Mr. Connolly. Just listening to you tick off that list, 
none of those sound like frivolous burdensome additional pieces 
of regulation. They sound like thoughtful additions to the 
regulatory framework in light of the biggest meltdown on Wall 
Street in 80 years. Would you share that view?
    Ms. Schapiro. I do think all of these areas are ones that 
needed to be addressed. As we write the rules, we are working 
very hard in collaboration with other regulators, but also with 
the public, with investors and the industry to make sure that 
we write as sensible rules as we possibly can.
    Mr. Connolly. Mr. Katz, would you share that view or is 
this just another example of having simply ``more SEC staffers 
doing the same thing?''
    Mr. Katz. There is a quantitative nuance difference in what 
I said and the way I think you characterized it. The agency has 
an enormously large number of new areas of regulatory 
authority. The question is, when you go about regulating hedge 
funds, or regulating municipal securities markets, are you 
going to regulate hedge funds exactly the way you regulate 
investment advisors, which is arguably what they are, or 
investment companies, which is sort of a close cousin?
    My point is that if you look at the way the Commission has 
regulated advisors, and regulated mutual funds, it hasn't been 
terribly effective. If you take the same approach for hedge 
funds, yes, that would be doing the same thing in those 
approaches, even if it is a new substantive responsibility with 
a new category of registrant.
    Mr. Connolly. Would you say, Mr. Katz, that some of the 
problem preceding the Wall Street meltdown in September 2008, 
for example, had to do frankly with the quality of the 
appointees, namely a whole bunch of people who didn't believe 
in regulation in the first place and therefore, didn't do it?
    Mr. Katz. I have to tell you that there is an old saying at 
the SEC that the Commissioners decide the policy, but 
ultimately, it is the staff that decides what it means and how 
it gets done. One of the interesting things about the SEC, the 
relationship between Commissioners and the staff is that it is 
a close relationship. Because the Commission is a bipartisan 
body, you are always going to get five people with diverging 
points of view, some of whom will support the staff, some of 
whom will disagree with the staff.
    I can't think of an occasion where you had five 
Commissioners on one side of the table and the staff on the 
other side at loggerheads. That doesn't happen. You invariably 
get some supportive of Commissioners, some Commissioners who 
are critical and you also get that divergence of view among the 
staff.
    Financial regulation is never a question of identifying a 
single right answer.
    Mr. Connolly. Thank you, Mr. Katz. Unfortunately, my time 
is up but I would love to pursue this further, but I certainly 
believe that the narrative that somehow SEC is treading into 
waters it has no business treading into is fallacious. If 
anything, we needed more people guarding the hen house. If we 
are going to talk about the fox guarding the hen house, that 
may have been true in the 2008 period of time but is not true 
today.
    I thank the Chair.
    Mr. Katz. Excuse me, Mr. Chairman, if you might indulge me? 
There is one very quick point I wanted to make that Mr. Yarmoth 
brought up.
    Mr. McHenry. Please.
    Mr. Katz. That was the question of the consolidated 
supervised entities regulatory process at the SEC. There is a 
lot of confusion about that. There was a voluntary process. The 
reason it was a voluntary process is not because of a 
deregulatory attitude at the SEC; it is because the Commission 
sought from Congress the authority to make it a mandatory 
process as part of the Gramwich Bill, which eliminated glass 
eagle.
    Congress explicitly prohibited the Commission from making 
it a mandatory process. The Commission had a weak hand, it 
played the weak hand as best it could.
    Mr. Platts. Thank the gentleman.
    I will yield 5 minutes to myself.
    I chair the Subcommittee on Government Organization, 
Efficiency and Financial Management, so I am going to focus on 
a related but slightly different area that relates to our 
jurisdiction. I had the privilege of chairing the same 
subcommittee from 2003 to 2007.
    We had a subcommittee hearing July 2003 about the SEC, 
about financial management at the SEC, about internal controls 
and we heard testimony at that point they had just put in a new 
financial management system in 2002. In the testimony of the 
Executive Director, James McConnor at the time in July 2003, he 
said we have this new system and we are going to be certified 
basically in January 2004 for audited financial statements. 
Here we are 7 years later, plus, and we are now talking about 
the same thing, a new system using DOT Enterprise system to put 
in place a new system.
    Chairman Schapiro, I appreciate the changes you have made, 
the COO, the new chief operating officer and other leadership 
changes and systemic changes within the SEC. Why should the 
American people believe when we were told 7 years ago we got it 
right and we were going to be able to go forward; how is it 
different today?
    Ms. Schapiro. Thank you. My understanding is that was the 
Momentum system, I believe, and it was deployed 9 or 10 years 
ago and in the beginning, it did meet the agency's needs, but 
then over time, the agency deferred upgrading over many years 
and as a result, it began to lack the functionality that was 
necessary to do the job. Gaps were created, work arounds were 
developed and as a result, the SEC ended up with two material 
weaknesses in its controls over financial reporting in our 
audit which is a disgraceful position for the Securities and 
Exchange Commission to be in.
    With our new chief operating officer, our new chief 
financial officer and our new information officer, we made the 
decision that rather than incur the risks of developing a new 
system at the SEC, perhaps not really a core competency for us, 
that we would be better served by outsourcing financial 
management.
    We went through a process and identified the Department of 
Transportation, which is an authorized Federal Share Service 
provider used by the GAO for their financial management system, 
and made the decision that the best way for us to remediate our 
material weaknesses, generate the kind of reporting that we 
need, minimize all these manual workarounds and all of this 
would be to outsource to them. I think it is the right decision 
for the taxpayer, I think it is the right decision for the SEC.
    Mr. Platts. The followup related to that is, in the audit 
that was done at the end of this past year, a clean opinion, 
but failure to sign off on the internal controls, two related 
questions.
    First, how would you describe the internal effort to get 
the clean opinion other than the internal controls and I ask in 
the sense of in July 2003, SEC said it was a heroic end of the 
year effort, it wasn't because we had a system in place, here 
is the data, we are ready to go. Was there again a heroic end 
of the year effort to be able to have that audit?
    Ms. Schapiro. I think there were some heroics involved. I 
can't compare to 2003 but I think we did put together a senior 
team of people to really shepherd the process through. They 
were diligent and they stuck with it, but they are also very 
much onboard for this decision to outsource.
    Mr. Platts. Interim controls, not until last year in Dodd-
Frank did it require the auditor to sign off on the internal 
controls. For almost 20 years under the Federal Managers 
Financial Integrity Act adopted in 1982, actually over 20 
years, that we have to have strong internal controls. Although 
that wasn't required to be signed off, I assume you are really 
conscious of the fact that it wasn't a new requirement that you 
have good internal controls, it was just a new requirement that 
it be signed off by the auditor and whoever has been overseeing 
those internal control systems, clearly were not fulfilling 
their responsibilities?
    Ms. Schapiro. Absolutely, and under our chief operating 
officer, we will deal both with the audit issues with respect 
to internal controls, but also the attendant business 
processes, so it is not just a technology answer for us. It is 
going to have to be business process, free engineering process 
as well.
    Mr. Platts. I am going to try to squeeze in two more 
questions in 20 seconds.
    In your testimony, you talk about the follow-on person that 
you have for the audit recommendations of your IG and GAO. In 
your testimony, you state that you appointed an audit followup 
official and empowered her to ensure that agency managers are 
held accountable for timely and appropriate followup.
    How are they being held accountable? One thing that 
frustrates me is when we find something that went wrong and I 
have asked for many years now, was anyone disciplined, was 
anyone fired for not doing what they were supposed to do? In 
what way are they being held accountable?
    Ms. Schapiro. We are very closely tracking audit 
recommendations, both from GAO and from our inspector general. 
I can tell you that in my 2 years as chairman, we have 
successfully closed 350 inspector general recommendations 
compared to 190 in the prior 2 years. We are aggressive about 
doing it and I will tell you that in the inspector general's 
semiannual report, he also talks about our progress with 
respect to closing recommendations and whether there has been 
any management disagreement with his recommendations. He is 
quite on top of it and quite transparent.
    Mr. Platts. I think that is critical going forward. My 
subcommittee is especially going to look at staying on top of 
those recommendations and special internal controls. It goes to 
the broader issue discussed here about ethics and if you don't 
have internal controls, that is the foundation for not just 
good financial management, but for a good ethics environment.
    Ms. Schapiro. I agree completely.
    Mr. Platts. We, as a subcommittee, and partner with 
Chairman McHenry here today, that is what we are going to be 
looking at.
    I will yield back and yield now to Ms. Speier from 
California for 5 minutes.
    Ms. Speier. Thank you, Mr. Chairman.
    I thank you all for your participation in this hearing. I 
was particularly impressed by the testimony of Mr. Katz and Mr. 
Crimmins.
    I am somewhat surprised because I am looking at the title 
of the hearing and the sign above the chairman's head that 
reads, ``Can American Taxpayers Trust Today's SEC to Manage 
Itself and Do Its Job.'' I thought it might be interesting to 
substitute Congress and ask the same question and see if we 
would fare as well.
    Chairman Schapiro, having served over 2 years on the 
Financial Services Committee, I have watched you and I think 
you are truly committed to doing the right thing. Before you 
came back as Chair, under Chairman Cox, the number of actual 
enforcement actions at the SEC was reduced by 80 percent and 
the number of disgorgement actions were reduced by 60 percent--
a stunning failure at a time when all the mischief was going on 
with Wall Street.
    We look back at the savings and loan crisis and we 
recognize that referrals from various regulators, there were 
10,000 of them, and of those 10,000, there were 1,000 that 
turned into convictions and 500 people went to jail. These were 
CEO level folks that went to jail.
    The American people are looking at us, looking at Congress, 
looking at you and saying, who is going to jail? Who is being 
charged? The truth is there hasn't been a lot. My first 
question is, have you made any referrals to the Justice 
Department, to the U.S. attorney, as a result of the Wall 
Street meltdown?
    Ms. Schapiro. I am confident that we have. I guess I would 
like to supplement the record, if I might, on that. I just 
don't know the numbers or the details about it because, as you 
know, we don't have criminal prosecution authority, although we 
have continued to bring a relatively high number of cases and 
some very large impact cases coming out of the financial crisis 
in the past year.
    Ms. Speier. So you will get back to the committee and 
actually tell us how many referrals you have made?
    Ms. Schapiro. I would be happy to.
    Ms. Speier. The CEO of Galian is being tried now. Mr. Kupta 
who is a director of a significant Wall Street firm, evidently 
is being looked at as having shared insider information, 
although he didn't appear to have acted on it. Have any actions 
by the SEC been taken against those two individuals?
    Ms. Schapiro. We filed a proceeding against Mr. Kupta last 
week and we have filed multiple proceedings coming out of the 
Galian investigation over the course of the last 6 months or 
so.
    Ms. Speier. In 2004 and 2005, the GAO said to the SEC that 
it should take a look at and close its revolving door. The SEC 
then reported back to the GAO that it had done that, although 
the GAO now says that never happened. The reverse situation of 
Mr. Becker is the fact that you have staff that work within the 
SEC and then they are lured away by lucrative salaries outside 
and oftentimes, the people that are lured away are lured away 
by the companies that they were actually investigating.
    We need to do something about the lack of a revolving door 
and I want to know, first of all, have you made any policy 
changes in an attempt to deter these revolving door practices?
    Ms. Schapiro. We have instituted requirements that senior 
employees seek ethics counseling before they leave the agency. 
We require all employees to have a post employment briefing so 
they don't violate ethics rules when they are leaving. Of 
course we are subject to the governmentwide restrictions and we 
have some unique to the SEC restrictions, but our inspector 
general in looking at a specific revolving door incident has 
given us last week some additional recommendations for 
tightening up our rules. We are going to look at those very 
seriously and I hope to go forward with them.
    Ms. Speier. What about a cooling off period? Why not 
require that persons within the Commission that have the 
authority to make determinations and were investigating are not 
allowed to be hired by those who they have investigated for a 
period of 2 years?
    Ms. Schapiro. I think there is a lot of appeal to that. The 
only hesitation I have is that we are so dependent on getting 
people to come to us, even if it is just for a few years just 
to bring us current industry expertise, we have to get the 
balance right.
    Ms. Speier. I don't disagree, because that is precisely the 
problem.
    Mr. McHenry. The gentlelady's time has expired.
    I recognize myself for 5 minutes.
    Chairman Schapiro, I want to get this out of the way. I 
know there have been a number of questions about the David 
Becker conflict of interest question. I just have a couple of 
questions, yes or no. I want to proceed with it because I have 
some other issues I do want to touch on beyond this.
    After David Becker told you that he received proceeds of a 
closed Madoff account, did you suggest that he recuse himself 
from the Madoff case, yes or no?
    Ms. Schapiro. I am sorry, the premise isn't exactly right. 
My recollection is that he told me that his mother had a Madoff 
account before she died and that it had been closed. I don't 
honestly recall whether he told me he had received proceeds or 
not. He may well have, I just can't recall. As you know, I 
haven't been able to look at anything.
    Mr. McHenry. But he brought this up that he received 
proceeds from a Madoff account?
    Ms. Schapiro. He brought up that his mother had had a 
Madoff account.
    Mr. McHenry. In light of that, did you suggest he recuse 
himself?
    Ms. Schapiro. No, I didn't.
    Mr. McHenry. Did you suggest that he settle with the 
Trustee as other Madoff investors were doing at the time?
    Ms. Schapiro. No.
    Mr. McHenry. Did you suggest that Mr. Becker disclose his 
interest to other SEC staff or Commissioners who relied on his 
advice?
    Ms. Schapiro. I did not. I expected him to go to the Ethics 
Office and get ethics counsel and follow their advice.
    Mr. McHenry. You are aware that the ethics counsel of the 
SEC reported to the general counsel?
    Ms. Schapiro. Yes, although the Ethics Officer is a career 
employee.
    Mr. McHenry. But his direct report.
    Ms. Schapiro. Yes.
    Mr. McHenry. Did you suggest that Becker do any research to 
determine the amount or the character of interest that he had?
    Ms. Schapiro. No.
    Mr. McHenry. Later when Becker was providing advice about 
the net equity evaluation method, did you direct Mr. Becker to 
take any actions with respect to this potential conflict of 
interest?
    Ms. Schapiro. No, because it didn't occur to me that this 
long ago closed account would be in any way impacted, it just 
didn't occur to me.
    Mr. McHenry. So he didn't disclose to you that he was, in 
fact, the trustee who closed the account?
    Ms. Schapiro. I don't recall.
    Mr. McHenry. I understand. I am just trying to get to the 
heart of this. This raises major questions and I think you can 
understand the public's interest and the investors' interest.
    To that same degree, when Mr. Becker was filing briefs in 
court that took recommendations in terms of the net equity 
position valuation method, you didn't direct Mr. Becker to 
recuse himself?
    Ms. Schapiro. No.
    Mr. McHenry. OK. I just wanted to get those out of the way. 
Obviously we care deeply about transparency and disclosure both 
here in Congress and with regulators.
    Chairman Schapiro, Mr. Risinger, thank you for your public 
service, but we need to get to the heart of this issue. I think 
that is why we are asking these questions today and why I am.
    Ms. Schapiro. I agree, Mr. Chairman. It is why I have asked 
the inspector general to do a review, so we can get all the 
information.
    Mr. McHenry. The point is you said you wish you had known 
then what you know now and had you asked any of these 
questions, you would have known it then. That is at the heart 
of this issue. That is what is disappointing and of great 
concern in terms of public policy.
    Ms. Chaitman, in dealing with this Madoff valuation 
question, I understand the insurance piece, I do, would it have 
changed your dealings with SEC's legal counsel had you known 
that Mr. Becker was the trustee of a Madoff account?
    Ms. Chaitman. If I had known that, I would have, myself, 
demanded that he recuse himself and that the SEC take steps to 
clarify its position because as I say, both Congressman Garrett 
and I believe that the SEC has taken an illegal position in 
supporting SIPC. If I had know that Mr. Becker had a personal 
interest, I certainly would have asked Ms. Schapiro to do 
something about it.
    Mr. McHenry. Thank you.
    Mr. Katz, this raises a larger management issue. We are 
talking about capital formation, we are trying to be the 
world's markets, which we have been. When you have a 
dysfunctional agency like this with these management problems 
that you described, you said the SEC has never engaged in 
serious self examination of its performance or used appropriate 
measures of performance. Is that still the case?
    Mr. Katz. Not having seen this Boston consulting group 
report that is apparently due out, I think yes, that is the 
case. It has been a long time since the agency took a hard look 
at itself in the mirror.
    Mr. McHenry. My time has expired. With that, I recognize 
Ms. Maloney for 5 minutes.
    Votes have been called on the floor, we have 11 minutes 
remaining in the votes, so I would defer to my colleagues on 
that side of the aisle if they want to work something out in 
terms of time.
    The gentlelady is recognized now for 5 minutes.
    Mrs. Maloney. First of all, I would like to welcome all the 
panelists and thank the chairman for this important hearing. 
Certainly honesty and transparency is very important in 
government.
    I would like to get further clarification from Chairman 
Schapiro. As I understand, the controversy around Mr. Becker's 
alleged conflict of interest is about an SEC decision that 
appears to be against his financial interest. As I understand 
it, prior to Mr. Becker's return to the SEC, he was working at 
a private law firm, correct?
    Ms. Schapiro. Yes, he was.
    Mrs. Maloney. When he arrived at the SEC, you testified he 
took steps to notify both you and the SEC's ethics counsel of 
his inheritance from his mother which had been liquidated long 
before Madoff's ponzi scheme had been discovered, correct?
    Ms. Schapiro. That is my understanding.
    Mrs. Maloney. The ethics official said it was OK for him to 
work on Madoff-related issues. That is what is in the memo and 
information that I read, that the Ethics Committee is there to 
be consulted, he consulted them and they said there was no 
conflict, that is fine, go to work. Is that your recollection?
    Ms. Schapiro. Yes, I believe.
    Mrs. Maloney. Your memory is the same as the Ethics 
Committee. Chairman Schapiro, it appears that the basic 
question the SEC faced was whether to support an asset 
valuation method used by the Madoff Trustee called the cash-in, 
cash-out method, or a different evaluation method used by 
several law firms called the last statement method. Is that 
correct?
    Ms. Schapiro. Yes.
    Mrs. Maloney. Under the first method, Mr. Becker's 
inheritance would be subject to clawback litigation and under 
the second method, his inheritance would not have been subject 
to clawback. The SEC choose to support the first, the decision 
was against the financial interest of Mr. Becker. This meant 
that the Trustee could sue Mr. Becker and his brothers to 
recover some of his mother's inheritance which is exactly what 
happened, correct?
    Ms. Schapiro. That is right. The SEC did take the position 
that was cash-in, cash-out in constant dollars to reflect that 
some very elderly people who had long held Madoff accounts 
would be able to get some more money from SIPC under that 
formulation, but it was not the final statement approach that 
you mentioned that would have potentially prevented the 
clawback.
    Mrs. Maloney. But the decision was to allow the clawback, 
so I assume he participated in a decision allowing the clawback 
that was against his financial interest?
    Ms. Schapiro. The decision to clawback is one of the 
Trustee, not of the SEC.
    Mrs. Maloney. The SEC did not make that decision, the 
Trustee made that decision?
    Ms. Schapiro. The Trustee makes that decision.
    Mrs. Maloney. The Trustee makes that decision, but it was a 
decision that affected Mr. Becker.
    Ms. Schapiro. Yes.
    Mrs. Maloney. I would like either you or Mr. Crimmins to 
answer. Basically, Mr. Becker or the SEC sided with the Madoff 
Trustee. The SEC actually took action that was potentially 
detrimental to Mr. Becker's financial interest and it exposed 
him to a potential litigation worth roughly $1\1/2\ million 
because that was the proceeds, correct, in addition to the 
$500,000. Everybody seems to be criticizing Mr. Becker, but Mr. 
Becker and the SEC's decision appears to have been completely 
against his financial interest.
    I understand you have an IG report coming out and that 
eventually will clarify things more, but in first reading the 
information, it appears that the decision made was against him 
and against his financial interest and what he or the SEC 
thought was the right way to go.
    If the SEC had supported the banks' interpretation or the 
law firm's interpretation instead of the Trustee's 
interpretation, Mr. Becker might not have had any exposure at 
all, is that correct? Mr. Crimmins.
    Mr. Crimmins. The point is that the $500,000 that Dorothy 
Becker invested was going to come back. The $1\1/2\ million, as 
you indicated, was the Madoff fictitious profit was going to 
Picard's claim as the Trustee, independent reporting to the 
court, not to the SEC, that dealt with a little bit of 
difference is whether there should be some modest rate of 
return, whether there should be some adjustment for inflation.
    That is still not finally determined. A month after Becker 
has left the agency, it is a small amount and to an individual 
who was compensated at $3 million a year, roughly, and gave 
that up to go work in the public service, it is totally 
inconsequential and I would respectfully submit to the 
subcommittee, be a distraction.
    Mrs. Maloney. May just complete with one observation for 2 
seconds.
    Basically, if someone in Mr. Becker's position wanted to 
help himself financially, he would have taken the opposite 
point of view than the one that he took or the one that the SEC 
took.
    Mr. McHenry. The gentlelady's time has expired. We have 
votes on the floor, Madam.
    Mrs. Maloney. I look forward to the IG's report.
    Mr. McHenry. I think we all do. I appreciate the gentlelady 
wrapping up. We do have votes on the floor.
    I want to thank the panel.
    Ms. Schapiro. Mr. Chairman, I am so sorry, I wanted to just 
say one thing. I want to make it very clear, I don't recall 
specifically whether Mr. Becker told me he had inheritance from 
the account or whether his mother had had an account and I made 
that assumption. Because it is 2 years ago, I just don't 
recall. I want to be so clear about that.
    Mr. McHenry. We will let the record reflect that.
    Ms. Schapiro. Thank you.
    Mr. McHenry. Certainly. I think it is important the record 
accurately reflect what happened. The findings of this hearing 
are very important. We are interested in management issues. The 
Members certainly took a specific direction today dealing with 
this conflict of interest of Mr. Becker, the general counsel 
for the SEC because of the fact he was a trustee of a Madoff 
account a few years before, and the decision, as Ms. Chaitman 
mentions, that was a very different valuation than was existent 
under law and the decision he made that in some ways benefited 
him disproportionately than the other two methods.
    In terms of the budget, I think it is appropriate that SEC 
have a sufficient budget and we have strong management 
practices to make sure there is transparency and disclosure, 
safety and soundness in investing in our markets.
    In the wake of the Enron scandal, in February 2003, the SEC 
was given the largest spending increase in its history. The GAO 
said in testimony before this subcommittee in 2003, it was a 45 
percent increase at that time. This was supposed to prevent a 
future crisis, yet Madoff still occurred and the excuses cannot 
always be based on money. We would ask that we tighten up 
management practices, do what is appropriate in terms of 
bringing technology to the fore and do the best possible of any 
regular.
    It isn't wrong to use a crisis to request more. It is wrong 
to use a crisis just to request more money. So with that, the 
committee stands adjourned. Thank you for your testimony.
    [Whereupon, at 3:40 p.m., the subcommittee was adjourned.]

                                 
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