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





                    FIXING THE WATCHDOG: LEGISLATIVE
                    PROPOSALS TO IMPROVE AND ENHANCE
                 THE SECURITIES AND EXCHANGE COMMISSION

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 15, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-62
















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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 15, 2011...........................................     1
Appendix:
    September 15, 2011...........................................    67

                               WITNESSES
                      Thursday, September 15, 2011

Atkins, Hon. Paul S., Visiting Scholar, American Enterprise 
  Institute, and former Commissioner, United States Securities 
  and Exchange Commission........................................    39
Crimmins, Stephen J., Partner, K&L Gates LLP, and former Deputy 
  Chief Litigation Counsel, Division of Enforcement, United 
  States Securities and Exchange Commission......................    41
Katz, Jonathan G. ``Jack,'' former Secretary, United States 
  Securities and Exchange Commission, on behalf of the U.S. 
  Chamber of Commerce............................................    43
Pitt, Hon. Harvey L., Chief Executive Officer, Kalorama Partners, 
  LLC, and former Chairman, United States Securities and Exchange 
  Commission.....................................................    45
Schapiro, Hon. Mary L., Chairman, United States Securities and 
  Exchange Commission............................................    10
Saumya, Shubh, Partner and Managing Director, the Boston 
  Consulting Group, accompanied by Michael Shanahan, Senior 
  Partner and Managing Director, and Chandy Chandrashekhar, 
  Managing Director..............................................    12
Verret, J.W., Assistant Professor of Law, Stanford University 
  School of Law, and Senior Scholar, Mercatus Center, George 
  Mason University...............................................    47

                                APPENDIX

Prepared statements:
    Atkins, Hon. Paul S..........................................    68
    Crimmins, Stephen J..........................................    81
    Katz, Jonathan G. ``Jack''...................................    86
    Pitt, Hon. Harvey L..........................................   101
    Schapiro, Hon. Mary L........................................   120
    Saumya, Shubh................................................   136
    Verret, J.W..................................................   141

              Additional Material Submitted for the Record

Atkins, Hon. Paul S.:
    Addendum to his testimony....................................   143
Schapiro, Hon. Mary L.:
    Written responses to questions submitted by Representatives 
      Schweikert and Grimm.......................................   147
    Written responses to questions submitted by Representative 
      Garrett....................................................   150

 
                    FIXING THE WATCHDOG: LEGISLATIVE
                    PROPOSALS TO IMPROVE AND ENHANCE
                 THE SECURITIES AND EXCHANGE COMMISSION

                              ----------                              


                      Thursday, September 15, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:02 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Manzullo, Biggert, 
Garrett, Neugebauer, McHenry, Pearce, Posey, Luetkemeyer, 
Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 
Grimm, Canseco, Stivers; Frank, Waters, Maloney, Gutierrez, 
Watt, Sherman, Baca, Miller of North Carolina, Scott, Green, 
Perlmutter, Himes, and Carney.
    Chairman Bachus. Good morning. The hearing will come to 
order. Without objection, all Members' written statements will 
be made a part of the record, and at this time, the Chair 
recognizes himself for an opening statement.
    This morning, we will continue our examination of the Dodd-
Frank Act. Section 967 of Dodd-Frank required the Securities 
and Exchange Commission to hire an independent consultant to 
examine the Commission's operations, structure, and need for 
reform.
    The SEC hired the Boston Consulting Group to conduct the 
study, and the consultant's report was issued last March. The 
study and the report recognized that much needs to be done at 
the SEC to improve the effectiveness and efficiency of the 
organization, and I think that is a good starting point for 
this committee and Congress. I don't think there is an 
agreement on exactly what needs to be done when it comes to 
reforming the SEC, but all of us agree that the status quo is 
unacceptable.
    I think all of you have the Boston Consulting Group's 
recommendations, so I won't go over that again. It was a three-
step process. I will say that what I have introduced, and I 
think if you hear nothing else I say, hear this, it is not 
legislation. It was not introduced on the Floor of the House. 
It is a discussion draft. It is simply meant as a starting 
point for all of us to discuss various options.
    I think there are probably two basic paths we can take, and 
I think both of them are very logical. One would be for the SEC 
to reform itself; physician heal thyself. I think that is a 
rational, appropriate approach.
    Another approach would be legislation. A lot of Republicans 
and Democrats and others have said that before the SEC obtains 
additional funding, there need to be reforms. On the other 
hand, some of my colleagues have argued, I think with some 
persuasion, that with their expanded role, there is a need for 
an immediate funding increase, and in fact my personal view is 
that an increase in funding is probably necessary as part of 
the reform process.
    We have tried--and I just had a discussion with the ranking 
member where he mentioned that five of the six witnesses were 
selected by the Republicans. We did that, but I will say this: 
We had witnesses--we invited witnesses who were on the record 
publicly saying, let the SEC reform itself. So we didn't try to 
invite witnesses who would come and agree with this discussion 
draft. In fact, some of our witnesses will--
    Mr. Frank. Mr. Chairman, yes, I acknowledge that, and I 
appreciate that. I was really talking about for the future. 
That is why we discussed it privately, not publicly. That was 
not meant as a criticism today, just a procedural for the 
future because I acknowledge what you just said.
    Chairman Bachus. I am going to introduce my written 
statement into the record, and I go into some more detail, but 
again, let me close by stressing that there is nothing sacred 
about this discussion draft. It is merely an attempt to start 
the discussion that I think we all agree--I know, Chairman 
Schapiro, you inherited an agency that needed reform, that I 
think acknowledged itself that there were inefficiencies. You 
also have inherited an agency that has been given vastly 
greater responsibilities, and with that in mind we will simply 
go forward, and I think that we can share the best ideas on 
both sides of the aisle and with the Administration.
    And with that, I will recognize the ranking member.
    Mr. Frank. Let me ask that Mr. Scott be recognized first 
for 3 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. This is 
indeed a very important hearing and a very timely hearing, and 
I want to thank Chairman Bachus for this hearing today 
regarding proposals to reform the Securities and Exchange 
Commission. I certainly want to welcome Chairwoman Schapiro and 
the other gentleman, Mr.--I am afraid to attempt your name for 
fear I may hurt it a lot, but I will try--``Saumya.''
    As a result of the Dodd-Frank financial reform legislation 
that originated in this committee last year, the SEC was 
required to hire external consultants to examine its structure, 
operations, and funding. This was following, as we know, a lack 
of awareness by the SEC during the financial crisis of the 
dangers presented by the approval of subprime mortgages as well 
as inadequate supervision of the largest investment banks at 
this time.
    Following a study, the Boston Consulting Group released its 
findings this past March, including recommendations for 
increased investment in infrastructure as well as 
reorganization of the SEC to increase its effectiveness and 
cooperation with other Federal agencies. But despite these 
findings, Chairwoman Schapiro has expressed a lack of resources 
available to the SEC to meet the majority of the Boston Group's 
recommendations. However, she has stated that some of the 
recommendations would be put into practice by means of some 
structural reorganization, so I am interested in finding out 
today what changes have been made and if the SEC is able to 
conduct any additional reforms in order to improve the 
Commission's effectiveness.
    Let me just take a moment to talk about the need for these 
resources, particularly at this time when we are faced with the 
budget crisis, the debt crisis, the challenge to find $1.5 
trillion or $2 trillion. We have to find a whole lot of money. 
So there is some thought about putting the increases that are 
needed on hold for the SEC; but let me point out that 
increasing the SEC's budget would not, and I repeat would not, 
have any impact on the deficit. And it is because of this 
reason: By statute, the SEC's transaction fees paid by Wall 
Street firms will be set to match the agency's appropriated 
funding levels, so cutting the SEC budget's request, it is 
important for us to establish today, will not help solve the 
Nation's debt problem. So we need to keep that in mind.
    Furthermore, I anticipate the opportunity to discuss the 
legislative proposals that seek to overhaul the SEC's 
structure, including its ability to use reserve account funds 
and to lock the SEC structure into statute. We need to make 
sure that by proposing such legislation, we will still allow it 
to evolve with market changes, and that we are not preventing 
the SEC from conducting its intended purpose. This is indeed an 
important hearing. I thank you, and I thank the witnesses for 
coming.
    Chairman Bachus. Would the gentleman yield for 10 seconds?
    Mr. Scott. Sure.
    Chairman Bachus. What the gentleman pointed out is that the 
SEC is funded by user fees, and I think that was an important 
distinction; that it is not, does not result in and contribute 
to a deficit or to the Nation's debt. And obviously, that is 
something we will need to consider if we determine that funding 
is necessary, which I think we all agree it is.
    Mr. Scott. You are absolutely right, Mr. Chairman. Thank 
you.
    Chairman Bachus. Mrs. Biggert for 1\1/2\ minutes.
    Mrs. Biggert. Thank you, Mr. Chairman, and good morning to 
the witnesses and thank you for being here. I look forward to 
hearing your thoughts on how we can improve what has been 
happening at the SEC to ensure that recent regulatory failures 
never happen again.
    While the crisis exposed a systemwide regulatory failure, 
there is plenty of blame to be shared between the regulatory 
agencies, Congress, and the industry. Today, we are going to 
focus on the SEC, and Chairman Schapiro, I realize that most of 
all--that everything that happened was long before your time, 
and I certainly appreciate the Herculean task that you have 
been given. With Dodd-Frank having tasked the SEC with 
expansive new regulatory powers and responsibilities, I think 
that this is a heavy lift. And before the Commission undertakes 
these additional responsibilities over complex derivatives, 
hedge funds, and credit rating firms, I know that you have a 
lot of work ahead of you. So I am anxious to hear the Boston 
Consulting Group's recommendations, and, most importantly, I am 
anxious to hear from you, Chairman Schapiro, on the efforts 
taken to reform the agency and your strategy for overseeing the 
vast new responsibilities mandated under Dodd-Frank.
    And I would also like to hear a little bit about what we 
have been asking the Department of Labor, to make sure that 
they worked with you and you worked with them. I know that you 
have been very accommodating that way, but I was very 
disappointed to see that the Department of Labor had come out 
with regulations, and you are still working on the study and 
everything, so I was very disappointed in what the Department 
of Labor has done.
    With that, thank you again for being here, and I look 
forward to your testimony.
    Chairman Bachus. Mrs. Maloney for 1 minute.
    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Frank, for calling this very important hearing. And I welcome 
both of our panelists today. One of the important 
recommendations of Dodd-Frank was to have a review of how we 
could streamline, bring the SEC into the 21st Century, make it 
more effective because there are substantial new 
responsibilities given to the SEC.
    I know that a later report will be coming out from the IG 
shortly, and I truly do believe that if this report is 
substantive, its detail can be a guidepost as we move forward 
with recommendations. But with the new responsibilities, the 
SEC needs the funding to get the job done while they are 
implementing these changes to be literally even more effective.
    I was interested in one of your particular recommendations 
on evaluating nonperformance, the fact that there is no way to 
evaluate whether or not someone is actually responding to 
whistleblower complaints, how they respond to them, how they 
respond to industry, or really whether or not they are doing a 
good job for the SEC and for the government. But in any event, 
I congratulate the SEC, its report, their response, and the 
Boston Consulting Group, and I look forward to your testimony.
    Chairman Bachus. Thank you. Mr. Garrett for 1\1/2\ minutes.
    Mr. Garrett. Thank you, Mr. Chairman. Thank you for the 
witnesses here. We are looking forward to a good discussion on 
the operations and the effectiveness of the SEC.
    I also wish to thank Chairman Bachus for allowing this 
committee today to consider the SEC Regulatory Accountability 
Act as part of today's proceeding. This is a bill that I 
introduced with about 14 of my colleagues to ensure that the 
SEC, basically being an independent agency, would be subject to 
the President's recent Executive Order to try to improve 
regulation and regulatory review.
    In addition, what the bill would do is it would strengthen 
the Commission's cost-benefit analysis by: first, making sure 
there is actually a problem that the proposed regulations are 
trying to address; and second, requiring a cost-benefit 
analysis be performed by the SEC's chief economist. These are 
really basically commonsense reforms that make a lot of sense, 
I think, especially in light of how the Commission continues to 
seem to struggle with this issue.
    For instance, in the recent unanimous opinion of the D.C. 
Circuit Court of Appeals, which vacated the Commission's proxy 
access rule, the court stated, ``Unfortunately, the Commission 
acted arbitrarily and capriciously for having failed once again 
to adequately assess the economic effects of a new rule.'' And, 
``inconsistently and opportunistically frame cost and benefits 
of the rule.''
    So while I understand Chairman Schapiro may have concerns 
about this legislation, H.R. 2308, clearly a stronger 
commitment by the agency to a good cost-benefit analysis by the 
SEC I believe is essential. Why? To ensure that we do not 
unduly overburden registered companies or negatively impact job 
creation here in this country. I thank you and I yield back.
    Chairman Bachus. Mr. Himes for 2 minutes.
    Mr. Himes. Thank you, Mr. Chairman. And let me add my 
thanks to BCG and to Chairwoman Schapiro. I wanted to take my 2 
minutes now, just to make a point that I think follows up on 
Congressman Garrett's point, because I hope that the regulatory 
agencies and that my friends in the Majority will think about 
cost-benefit analysis in this area in a slightly different way 
than they are.
    I have been uncomfortable sitting here listening to a 
traditional way of evaluating cost-benefit analysis. And by the 
way, I fully buy into the notion that a rule's costs should 
match its benefit. As I thought about it, most of the 
regulation we do regulates activities that are a little bit 
predictable, that happen on a continuum, by which I mean if you 
decide to allow a little bit more particulate matter into the 
air, more kids are going to have asthma. You can predict that. 
Look, we will make a decision about how much of that we want or 
don't want. Motor vehicles, we will set a speed limit, and 
40,000 Americans die on the roadways today, and that is a 
decision we have either implicitly or explicitly made around 
regulation.
    The financial industry is different. We are talking about 
truly catastrophic events, if we get it wrong, that we have all 
lived through. And I am not sure you can analyze the cost 
associated with the incredible destruction of American wealth, 
and the millions of people out of work that happens when you 
get what the statisticians call a ``tail event.'' It may not 
happen very often, but when it happens, it is devastating. This 
was understood by the Bush White House when they persuaded us 
into the Iraq War by holding up a picture of a mushroom cloud. 
Catastrophic event. It may be low probability, but you will do 
almost anything to avoid that event.
    Now, I recognize that is not the best analogy, but it is 
not completely inapt. We should be prudent and do perhaps 
almost anything to avoid the destruction of household wealth 
that we saw in the meltdown. And by the way, we have seen them 
more often.
    Chairman Bachus. Another minute.
    Mr. Frank. The gentleman has another minute, I would add.
    Mr. Himes. Thank you. Since Glass-Steagall was weakened and 
a variety of our financial services regulations were 
lightened--and by the way, in some instances, they were good 
ideas, but starting in the 1990s, we saw emerging market crises 
in Russia in 1998 and in Mexico in 1994, the Internet bubble, 
and now truly the catastrophic tail event where Americans lost 
tens of trillions of dollars of wealth, and millions of 
Americans were thrown out of work partly because we got the 
regulation wrong.
    So my plea is, let us not think about this like motor 
vehicle safety and speed limits or about particulate matter in 
the air which, by the way, we should debate. Let's think about 
this as being extra prudent, going the extra mile to avoid 
events which may be rare, although they are less rare now than 
they used to be, because when they happen, they are almost 
unthinkably catastrophic.
    Thank you, I yield back the balance of my time.
    Chairman Bachus. Thank you.
    Mr. Neugebauer for 1\1/2\ minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman, and thank you for 
holding this hearing. As we began to have this hearing today, I 
went back and reviewed some of the headlines for the SEC over 
the last few years: ``Report Says SEC Failed in Oversight of 
Bear Stearns,'' that was The Washington Post; CBS News, ``Court 
Documents Show How SEC Failed to Nab Madoff in 2006''; 
Washington Post, ``Madoff Again''; CNBC, ``SEC Ignores 
Complaints about Stanford''; ABC News, ``How Big is the SEC's 
Porn Problem?''; New York Times, ``SEC Hurt By Disarray in Its 
Books''; ``Improvements Needed in SEC's Internal Controls and 
Accounting Procedures.''
    And so as we begin to have this debate, one of the things 
that Washington always seems to say is when we have 
deficiencies, we need more regulation, and we need more money. 
But really when you go back and look at a lot of the failures 
through the regulatory standpoint of the past crisis that we 
went through, a lot of those existing laws were on the books 
that would have prevented a lot of those events from happening. 
And so, I think one of the things that concerns me is that 
before we start doling out more money--some people say that 
doesn't create the deficit; it is a tax on the economy when you 
increase fees. But, before we go down that road, we need to 
make sure that we have regulators that are capable and 
structured to do their job before we expand that. And so I 
think we have to be very careful here of rewarding bad behavior 
with more money and more regulations.
    I look forward to hearing from the witnesses today. Thank 
you.
    Chairman Bachus. Mr. Perlmutter for 1 minute.
    Mr. Perlmutter. Thanks, Mr. Chairman. And I agree with Mr. 
Neugebauer; we have to make sure that what is on the books is 
enforced. Under the Bush Administration, there was very little 
enforcement, and so I do want to do the cost-benefit analysis 
for my friend from New Jersey, because between July of 2008 and 
January of 2009, the market dropped 6,000 points. It is $1.3 
billion per point when the cops were taken off the beat, and we 
had a catastrophe, as Mr. Himes talked about. That is $7.8 
trillion of wealth that evaporated. It was gained back with 
stronger enforcement. But for every man, woman, and child in 
America, that was $26,000 of wealth that evaporated in the 
stock market during that period of time. So now, let's try to 
do the cost-benefit analysis of that catastrophe.
    Pretty much everybody has a 401(k) or a pension, so this 
affected a lot of people. And that is the reason for 
regulations and for the enforcement of regulations, which I 
hope that this SEC will continue to do. And with that, I yield 
back.
    Chairman Bachus. Thank you. Mr. Dold for 1 minute.
    Mr. Dold. Thank you, Mr. Chairman. I certainly want to 
thank Chairman Bachus and Subcommittee Chairman Garrett for 
their proposals to reorganize, improve, and reform the SEC. For 
decades, the SEC has been a critical factor in the historical 
success of our capital markets by helping to protect investors, 
to facilitate capital formation, and to promote transparent, 
fair, orderly, and efficient capital markets. But like every 
other regulatory agency, the SEC is not perfect, and the 
financial crisis manifested some of those imperfections. But 
even without the financial crisis, Congress should regularly 
review the SEC and other regulatory agencies to ensure that 
they are cost-effective, transparent, accountable, responsive, 
and efficient, especially in this constantly changing and 
competitive global marketplace.
    Our regulatory agencies must have rational management and 
organizational structures; strong, clear, ethical standards; 
and effective checks, balances, systems, and controls. I am 
confident that all of us, Democrats and Republicans, market 
participants and regulators, share those objectives that will 
facilitate smart and cost-effective regulation.
    And I look forward to hearing from our witnesses. Thank 
you, Mr. Chairman.
    Chairman Bachus. Thank you. Mr. Frank is recognized for 7 
minutes.
    Mr. Frank. For as much time as I may consume--I don't know 
if a couple other of my Members may come. I have to confess, 
Mr. Chairman, my mind wandered for a bit when I was here. I was 
thinking of something else, and as I listened to my friend from 
Texas, I thought for a minute we were talking about the 
Pentagon when we were talking about not rewarding inefficiency 
with more money, and I got momentarily encouraged that maybe we 
would begin to think about spending constraints there.
    But alas, I came back to this hearing, and the answer is, 
yes, you do want to make people be more efficient, but you 
don't penalize the American public further because agencies 
that were supposed to be protecting them didn't do the job well 
enough. And, yes, it is important to get more efficient; but, 
no, that is not in this case a substitute for funding when you 
are significantly increasing resources.
    It is also the case that some of the inefficiencies 
resulted or some of the poor results resulted from ideological 
differences, from policy differences. The Boston Consulting 
Group, and I very much, Mr. Chairman, by the way--and I 
appreciate what you said about the hearing, and I think the 
witness list is a good representation. The reason I appreciated 
your comments is I think we should be trying to do both, which 
is to improve efficiency and deal with funding.
    But let me just read a couple of things from the Boston 
Consulting Group's report: ``Despite the material increases in 
responsibility driven by Dodd-Frank and the concomitant 
increase in workload, the SEC's resources have not grown in 
proportion.'' Next, and this is very important, on page 69 of 
the report, ``While the SEC's funding has grown over the 
decades, in recent years the growth has not kept pace with the 
SEC's expanded role. Consequently, while the agency can 
certainly use its resources more efficiently, it still faces a 
resource disconnect,'' i.e., with the greatest affliction to 
the world, they wouldn't have the money to do what they are 
supposed to do.
    And then on page 147, ``While assessing which activities 
the SEC should undertake is beyond the scope of BCG's studies, 
senior management itself has identified several high-priority 
regulatory activities that it cannot implement today, even with 
the efficiencies described above.'' They cannot implement 
today, even with the efficiencies described above, including 
the agency's demand for technology and expertise. You can't 
``efficient'' your way into modern technology and to getting 
the kind of personnel that you need. And, by the way, the BCG 
said, look, you are never going to have all the money in the 
world. Prioritize your activities.
    So this is a reference to what would happen if they did do 
the prioritization. This is not saying, do everything. This 
says, after prioritization. And here's what the BCG says, not 
the SEC, but the Boston Consulting Group: ``Based upon a very 
preliminary estimate, a range of an incremental $200 million to 
$300 million may be required for the initiatives described in 
choice one.''
    And finally, one of the options that some people have said 
they might do if they don't get the money is in the event 
that--this is on page 150--in the event that the funding 
environment does not change, an alternative option is the SEC's 
role to be changed to fit the budget. The SEC would then need 
to rethink what activities it should perform and delegate 
greater--I am sorry. It should then need to rethink what 
activities it should perform, delegate greater authority to 
SROs. The new SEC would change from being an actor that 
actively regulates markets and market participants to an 
overseer that primarily monitors the regulatory actions of 
others to whom it has delegated regulatory activity.
    Let me just ask you in terms of time, is that based on 5 
or--
    Chairman Bachus. The gentleman can have another minute.
    Mr. Frank. I will just finish with this. I will just take 1 
more minute. There is one major additional responsibility that 
I believe is very important. That is the shared responsibility 
with the Commodities Futures Trading Commission over derivative 
regulation. Among the mistakes that were made by Congress and 
the President earlier, around 2000, when derivatives were 
exempted from regulation, when the swap market grew up. So the 
swap market grew up in an area, in fact it is not even correct 
to call it deregulation, it is nonregulation of a very 
important activity.
    We have given the SEC, along with the CFTC, the 
responsibility to regulate derivatives. We are talking about 
AIG, we are talking about interchanges between financial 
institutions, not so much end users. The notion that they could 
take on that added responsibility is a very complicated one. We 
want it done right. Derivatives is a complicated business, and 
we don't want to impinge on end users. To do that without a 
significant increase in funding is clearly impossible.
    So I welcome the Boston Consulting Group. They argue that 
we may have been overly prescriptive in the legislation last 
year, and I am open to that. I think that is one of the things 
we may be able to agree upon, Mr. Chairman, about giving them 
more flexibility within the context of assuring these things. 
But let's be very clear. We have a major new grant of 
responsibility in derivatives, and the notion that can be done 
without a significant increase in funding is greatly flawed.
    Thank you, Mr. Chairman. I will reserve the balance of my 
time.
    Chairman Bachus. At this time, Mr. Canseco for 1 minute.
    Mr. Canseco. Thank you, Mr. Chairman. According to the 
SEC's Web site, their mission is to protect investors, maintain 
fair, orderly, and efficient markets, and to facilitate capital 
formation. In order to carry out this mission for Fiscal Year 
1999 through Fiscal Year 2010, the SEC's annual budget tripled 
from $340 million to $1 billion. Looking back over those years, 
one can't help but think of the words Enron, WorldCom, Madoff, 
Stanford, and Lehman. The recent failures of the agency were 
not due to the lack of funding or authority. They were due to 
poor communication and bureaucratic roadblocks that resulted in 
billions of dollars of losses for innocent investors, 
essentially regulators asleep at the wheel. The old-fashioned 
solution is to throw more money at the problem and hope it goes 
away, but more money doesn't solve inefficiency. Only a serious 
reform can fix the SEC.
    I look forward to today's hearing on this important topic 
and commonsense measures introduced by Chairmen Bachus and 
Garrett. Thank you.
    Chairman Bachus. Ms. Waters for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman, for holding 
this hearing this morning on the future of the Securities and 
Exchange Commission. I am very interested to hear how the SEC 
is moving forward to implement the recommendations outlined in 
the Boston Consulting Group report. As you know, constructive 
organization reforms at the SEC can help to increase the 
Commission's effectiveness, but of course we cannot overlook 
the fact that despite pursuing greater efficiencies, the SEC 
continues to be underresourced by the Congress, and that 
ultimately undermines their effectiveness.
    I also wanted to note my concerns about Chairman Garrett's 
legislation, which seeks to subject the SEC to very onerous 
cost-benefit tests when not only issuing new rules but also 
enforcement orders.
    First, the SEC already has to consider what impact any rule 
or regulation would have on efficiency, competition, and 
capital formation before issuing it, so this bill is redundant. 
This is evidenced by the fact that the D.C. Circuit Court of 
Appeals recently struck down the SEC's proxy access rule on the 
grounds that it contained an insufficient cost-benefit 
analysis. Clearly, the SEC is already held to a high standard 
by the court.
    Second, I am concerned that Chairman Garrett's bill would 
conflict with the SEC's mission. The bill almost exclusively 
focuses on limiting burdens on the market and puts no emphasis 
on protecting investors.
    Finally, I am concerned that enforcement actions could now 
also be subject to a cost-benefit analysis. I feel this would 
be inappropriate. Enforcing securities laws should be a matter 
of protecting the rule of law, plain and simple.
    I am also concerned about Chairman Bachus' draft 
legislation which would enshrine in law an organizational chart 
for the SEC. I am concerned about whether the SEC would be able 
to respond to rapidly changing capital markets under the 
provisions set forth in this bill.
    Mr. Chairman, I would hope that we have a bipartisan effort 
to support the SEC in ways that will allow them to do their job 
and protect the investors and the consumers. And I would hope 
that we would just give them the opportunity to do what they 
have to do and to realize their mission.
    I yield back the balance of my time.
    Chairman Bachus. Thank you.
    At this time, we have votes on the Floor. We are told it is 
going to be about 45 minutes, so we will return at the end of 
that time. We have 3 minutes left on our side. I am simply 
going to say this: We talked about funding, and as one Member 
said, ``If it is a user fee, it is a tax on the industry. If it 
is an appropriation, it does affect the deficit.''
    That is another decision that Congress needs to make as to 
how the SEC is funded. I think most of my colleagues in the 
past have supported user fees, but at the same time, some have 
stressed that Congress needs to maintain at least some review 
by the appropriators. So that would obviously be a discussion 
we would also have.
    Another thing I think we all need to acknowledge is that we 
do have a law in place, Dodd-Frank. We have different views on 
different provisions of that law, but it is a reality, and 
statutorily the SEC is charged with implementing that Act. And 
so, those are things that have to be factored in. And I do 
acknowledge that the Boston Consulting Group did say that 
additional funding was necessary. I am not going to argue with 
what is in print. Thank you.
    We will recess at this time.
    [recess]
    Chairman Bachus. The committee will come to order. At this 
time, I would like to introduce the two witnesses from the 
first panel: the Honorable Mary Schapiro, Chairman of the U.S. 
Securities and Exchange Commission, who was not there during 
Madoff; and Mr. Shubh Saumya, partner and managing director of 
the Boston Consulting Group. Mr. Saumya is accompanied by 
Michael Shanahan, senior partner and managing director, and 
Chandy Chandrashekhar, managing director. They will participate 
in the question-and-answer session, but will not give an 
opening statement.
    I welcome our witnesses.
    So at this time, Chairman Schapiro, you are recognized for 
your opening statement, which you don't have to limit 5 
minutes. You have the discretion to get yourself in as much 
trouble as you need. No, I am kidding. Thank you.

 STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, UNITED 
           STATES SECURITIES AND EXCHANGE COMMISSION

    Ms. Schapiro. That is very good advice, Mr. Chairman. Thank 
you, Chairman Bachus, Ranking Member Frank, and members of the 
committee.
    Thank you for the opportunity to discuss the organizational 
assessment of the Securities and Exchange Commission performed 
by the Boston Consulting Group and other issues regarding the 
SEC. When I arrived at the SEC 2 years ago, the agency was 
reeling from a variety of economic events and mission failures 
that had severely harmed the ability of the agency to--we acted 
swiftly and comprehensively to reform the way the Commission 
operates. We brought in new leadership in virtually every 
office, including the Commission's first Chief Operating 
Officer and first Chief Compliance Officer. We revitalized and 
restructured our enforcement and examination operations, 
revamped our handling of tips and complaints, took steps to 
break down internal silos and create a culture of 
collaboration, improved our risk assessment capabilities, 
recruited more staff with specialized expertise and real-world 
experience, expanded our training programs, and enhanced 
safeguards for investors' assets through new rules and by 
leveraging public accounting firms.
    Our goal, throughout these many changes, has been to create 
a more vigilant, agile, and responsive organization to perform 
the critical mission of the agency. I believe our efforts are 
paying dividends. Last year, the SEC returned $2.2 billion to 
harmed investors, twice the agency's budget for that year. And 
last fiscal year as well, $2.8 billion in disgorgement and 
penalties were ordered in SEC enforcement actions, a 176 
percent increase over the amounts ordered in Fiscal Year 2008. 
We have brought enforcement actions ranging in scope from 
complex cases against parties that have played significant 
roles in the recent economic crisis to lesser known cases 
involving real harm to individual investors. Our examiners and 
enforcement investigators now collaborate frequently and 
effectively, resulting in a number of recent enforcement 
actions generated from exam referrals. We are proud of our 
progress but we continue to seek ways to improve our 
operations.
    Last fall, as required by the Dodd-Frank Act, the SEC 
engaged the services of BCG, a top tier organizational 
consulting firm with significant capital markets expertise to 
conduct a broad and independent assessment of the SEC's 
organization. It was gratifying that BCG confirmed what we 
believed, that over the past 2 years, the SEC has improved the 
effectiveness of its operations. Nevertheless, we agree as well 
with BCG that the SEC still has significant opportunities to 
further optimize its available resources.
    However, even assuming further optimization, BCG still 
concludes that the SEC will not have the personnel resources to 
perform all the activities that are within the agency's 
responsibility. BCG also concludes that insufficient resources 
have contributed to a gap in the SEC's ability to develop 
needed information technology systems. Beyond the resource 
issue, BCG provided useful insights into how the SEC might 
continue its efforts to ensure that it remains a vigilante, 
agile, and responsive organization. Given the broad scope of 
the BCG reports recommendations, determining and executing the 
appropriate course of action will require careful internal 
coordination and a significant commitment of staff and other 
resources. That process has already begun. We have organized 
our work streams around four principle goals: optimizing the 
agency's mission and structure; strengthening capabilities; 
improving controls and efficiencies; and enhancing our 
workforce.
    In addition, we have already implemented or are in the 
process of implementing a number of BCG recommendations, 
including clarifying the role of the Chief Operating Officer 
and enhancing his ability to make needed changes, build in high 
priority staff skills, establishing a continuous improvement 
program, improving the Office of Administrative Services, 
optimizing the organizational design of the Office of 
Information Technology, redesigning the Office of Human 
Resources, and prioritizing among the many SEC 
responsibilities. As we move forward, however, it is important 
to note that BCG believes that substantial up-front investments 
will be required to implement its recommendations.
    While some portion of these costs can be paid for through 
the efficiency gains outlined in the report, those savings will 
not be sufficient to cover the full investment needed to 
achieve our goals. In addition to the report, the committee has 
requested my views on two pieces of legislation, the SEC 
Modernization Act of 2011 and the SEC Regulatory Accountability 
Act.
    Although I appreciate the intent of both bills, my written 
testimony describes some significant concerns with regard to 
these bills' impact on the agency's structure, and our ability 
to flexibly respond to changing market conditions as well as 
our ability to police the financial markets. For example, the 
Regulatory Accountability Act requirement for cost-benefit 
analysis of all SEC orders could undermine our ability to issue 
enforcement orders against wrongdoers, delay exemptive orders 
needed to facilitate the introduction of new investment 
products to the market, and impede the capital formation 
process by delaying orders to companies that accelerate 
registration of their securities. I would welcome the 
opportunity to work with the committee on both pieces of 
legislation to ensure any legislation truly improves the SEC's 
ability to achieve its mission.
    The SEC recognizes that implementation of many of the ideas 
in the BCG report will require a long-term commitment and 
sustained effort over several years to successfully implement. 
While we are still in the early stages of implementing the 
recommendations, we are committed to an open and transparent 
process. Thank you again for the opportunity to testify, and I 
am, of course, happy to answer any questions you may have.
    [The prepared statement of Chairman Schapiro can be found 
on page 120 of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Saumya?

 STATEMENT OF SHUBH SAUMYA, PARTNER AND MANAGING DIRECTOR, THE 
   BOSTON CONSULTING GROUP, ACCOMPANIED BY MICHAEL SHANAHAN, 
       SENIOR PARTNER AND MANAGING DIRECTOR, AND CHANDY 
               CHANDRASHEKHAR, MANAGING DIRECTOR

    Mr. Saumya. Chairman Bachus, Ranking Member Frank, and 
members of the Financial Services Committee, my name is Shubh 
Saumya, and I am a partner and managing director at the Boston 
Consulting Group. In my capacity as the partner responsible for 
leading the BCG team that conducted this review, I am pleased 
to appear before you this morning on behalf of BCG to discuss 
the report that BCG completed concerning our organizational and 
operational review of the U.S. Securities and Exchange 
Commission. As this was a significant undertaking involving 
many BCG professionals, I am accompanied by two of my 
colleagues who will be able to assist in responding to your 
questions, Chandy Chandrashekhar, who was responsible for the 
IT review, and Michael Shanahan, who was responsible for the 
organizational and people review.
    Our study of the SEC was conducted pursuant to Section 967 
of the Dodd-Frank Wall Street Reform and Consumer Protection 
Act and resulted in a 263-page report which we delivered to 
Congress and the SEC on March 10, 2011. We leveraged a number 
of proprietary methodologies and tools, reviewed extensive 
documentation, undertook analysis, and conducted more than 425 
discussions with current and former SEC officials, regulated 
entities, peer regulators, self-regulatory organizations 
(SROs), and industry groups. We focused on the four subjects 
that the SEC identified in the statement of work for this 
project: first, organizational structure; second, personnel and 
resources; third, technology and resources; and fourth, 
relationships with self-regulatory agencies, or SROs.
    To carry out its mission, the SEC requires both a 
regulatory framework with clear authorizations as well as a 
robust set of internal capabilities to fulfill its mandate. Our 
study focused on the latter. We found that while the SEC has 
initiated steps to better fulfill its mission as well as its 
expanded mandate under Dodd-Frank, the agency can do more to 
shape a more effective organizational structure and to address 
capability gaps we identified.
    To this end, we developed a portfolio of initiatives which 
will create real efficiency and effectiveness improvements for 
the agency. We recommended that the SEC implement these 
initiatives immediately and rigorously on a ``no regrets'' 
basis because they are foundational to the agency's future. 
These initiatives fall into four major categories and are as 
follows: First, reprioritize regulatory activities. The SEC 
should engage in a rigorous assessment of its highest priority 
needs in regulatory policy and operations and reallocate 
resources accordingly. Second, reshape the organization. The 
SEC should reshape its organizational structure, roles, and 
governance to maximize efficiency, effectiveness, and 
collaboration as well as to drive continuous improvement. 
Third, invest in enabling infrastructure. The SEC should invest 
in key enabling infrastructure, including technology, human 
resources, risk management, and high priority staff skills.
    And finally, enhance the SRO engagement model. The SEC 
should implement initiatives to enhance its role as both an 
overseer of and co-regulator with SROs. In our report, we 
outline an implementation plan for these initiatives that 
carefully sequences them in a way as to create significant 
efficiencies that would help fund the investments and 
capabilities called for in the plan. As an initial matter, we 
recommended that the agency create a project management office 
to coordinate the immediate implementation of the recommended 
initiatives.
    We also recommended that after the SEC has implemented 
these initiatives, Congress should reflect on whether or not 
the resulting organization adequately meets its expectations 
for the agency's efficiency and effectiveness. If Congress 
determines that the optimization still does not meet its 
expectations, then we recommend that it consider either 
increasing funding to allow the SEC to better fulfill the 
current role, or changing the SEC's role to fit available 
funding. We have reviewed the draft bills you will discuss 
today. The proposed SEC Modernization Act of 2011 contains a 
number of provisions which, based on our reading of the draft 
bill, appear to be consistent with options outlined in our 
report.
    Moreover, there are several provisions of the Modernization 
Act which appear to posit actions beyond those outlined in our 
report. In addition, several provisions of the Act appear to go 
beyond the scope of our study. The other proposal, the SEC 
Regulatory Accountability Act, H.R. 2308, addresses regulatory 
mandates that are beyond the scope of our study. Again, thank 
you for your time and attention. My colleagues and I are happy 
to answer any questions that you may have.
    Chairman Bachus. Thank you.
    [The prepared statement of Mr. Saumya can be found on page 
136 of the appendix.]
    Chairman Bachus. Mr. Saumya, what do you think would be the 
number one structural change that ought to be made at the SEC? 
And should it be made before additional funding or additional 
staff hires? Or what should that sequence be?
    Mr. Shanahan. There are a number of structural 
recommendations that we have made which we consider that it 
should implement, but we gave several choices for those. One of 
them was, of course, the relationship of IM and TM, and the 
issue of the challenge of market dynamics having made broker-
dealers and investment advisers more similar in the approach 
rather than dissimilar, and having two separate divisions 
dealing with that posed challenges around information and best 
practice sharing.
    Chairman Bachus. In that regard, would we first need to 
settle the question of who is going to be the primary regulator 
over the investment advisers?
    Mr. Saumya. We did note that there is a lot of dialogue on 
that topic of harmonizing investment adviser and broker-dealers 
exam. In the set of options that we identified, one option got 
to a structure that assumes that you have resolved that. But 
clearly, as an input to finally deciding the right structure, a 
resolution on that would be important.
    Chairman Bachus. I think they could be combined 
irregardless because I think the SEC would continue to have 
oversight and accountability, even if you had an SRO or 
something.
    Mr. Saumya. Yes. Because the SEC would have to oversee the 
SRO in a very robust manner.
    Chairman Bachus. That is right. Thank you.
    Mr. Shanahan. And the second major structural option that 
we said was how to organize the exam, and there are pros and 
cons on either side of how the exams should be organized. Right 
now it is a separate office, as you are aware. And we have 
pointed out that that has its pluses and minuses. In the recent 
past, it has had several pluses by raising the standard of exam 
and the consistency of the exam and having won individual 
accountability for prioritizing an exam. There is also 
potentially an added advantage of it being independent from 
enforcement--independent so that it is not necessarily a slave 
to enforcement, as it were.
    The cons, however, are clear as well. Separating exam from 
divisions means that you lose the possibility of information 
flow between the two. Not only do you need that operationally, 
but you need that for learning. Exam can feed back to rules, 
and rules can transfer to exam much more seamlessly if they are 
together. And second of all, there is some career mobility if 
you combine the two that is lost if you separate the two.
    Chairman Bachus. Thank you. Chairman Schapiro, you have had 
the report since March. I am sure you have reviewed it. Has the 
agency undertaken any of the recommendations to date?
    Ms. Schapiro. Yes. We have, Mr. Chairman, undertaken quite 
a few of the recommendations. Understandably, a lot of these 
involve a longer-term process because some of the 
recommendations are really quite massive. And so, on top of all 
the other work the SEC is engaged in, it will take us some 
time. But we have already consolidated the Office of the 
Executive Director under the Office of the Chief Operating 
Officer and have eliminated the Executive Director. We have 
established a continuous improvement program to look for cost 
savings wherever we can in the agency so that we can redeploy 
those savings to other activities. That is savings in terms of 
programs and operations. We are in the process of training all 
of our employees for a full rollout of our new performance 
management system, which was highlighted by BCG.
    We have reorganized the Office of Information Technology 
with new leadership, and that is starting to yield dividends as 
well. And we have begun the full review of the design and the 
structure of the other infrastructural parts of the agency, 
including the Office of Administrative Services. That work 
should be done in November and then we will be able to go 
forward with it. In addition, we have offloaded some 
responsibilities that we think can be done more efficiently by 
outsourcing to agencies.
    So as you well know, our financial management program is 
being outsourced to a Shared Federal Service Provider, the 
Department of Transportation, and all of our leasing activity 
is being outsourced to the General Services Administration. We 
have also, as you know, reorganized enforcement to great 
result, I believe, reorganized the examination program, and the 
other more workstreams that I mentioned are well under way with 
respect to the other recommendations.
    Chairman Bachus. Thank you. And the ranking member is 
recognized for 5 minutes.
    Mr. Frank. Thank you, Mr. Chairman. Let me say--and you 
have been very reasonable here. As I listen, I am now prepared 
to reconsider the extent to which we were as prescriptive as we 
were last year in the bill with regard to the SEC. I think one 
of the things that we can perhaps work together on is to find 
ways to convey our sense of the importance of particular 
activities without necessarily having a separate entity. One, 
for example, that I know you have been very concerned about, we 
have the whole municipal securities issue. We clearly believe 
that municipalities have been badly treated by this system. By 
the way, with regard to the ratings agencies, which we will get 
back to, they are extraordinary. They managed to be very wrong 
in two different directions. These are people who have 
systematically overrated private securities but systematically 
underrated public entities. I am not now talking about the 
United States. I am talking about State and local government, 
full faith and credit, general obligation bonds which never 
default.
    Moody's threatened to downgrade some AAA communities that I 
represent. I asked them why, and they said, ``We are not saying 
that they are going to default. We are saying that they are 
more likely to default than some others.'' That is kind of like 
saying, if you live in Iowa, you have more chance of being 
eaten by a shark than if you lived in Montana. That might be 
statistically the case. Neither one would be relevant to any 
rational human being. And we have had the problem of the 
municipalities under fiscal stress being misadvised.
    We did enhance the fiduciary responsibility of advisers. 
But setting up the office may have gone too far. So I am 
prepared to work with the chairman and work with the agency and 
find out if there are ways that we can make sure we have 
enhanced the importance.
    Now let me ask you, Chairman Schapiro, in the bill by Mr. 
Garrett, H.R. 2308, on raising the bar for adopting 
regulations, there are two points that occurred to me. One, Mr. 
Pitt, in his testimony, makes a very interesting point that we 
should not be telling you to decide whether or not to do things 
that we have told you you have to do, that it is appropriate 
for you to decide how to do them. But if you read the bill, it 
would give the SEC the option of deciding to ignore a 
congressional mandate, and that obviously would have to be 
fixed. More seriously--maybe harder to fix. I take that back--
maybe perhaps more intended is this reference in the bill to 
saying that it covers not just regulations but orders. And it 
says, before you could issue any order pursuant to such laws 
and any intended regulation or order, etc.--am I correct, would 
that mean that an enforcement order would have to go through a 
cost-benefit analysis? What would that language mean for you in 
terms of enforcement?
    Ms. Schapiro. Congressman, I think as we read the bill, it 
would require a cost-benefit analysis for enforcement orders 
which would obviously have huge implications for our 
prosecution of securities fraud. But also, for exemptive orders 
that we utilize to enable industry to bring products to market 
more quickly. Exchange traded funds, for example, operate by 
virtue of exemptive order from the Investment Company Act. 
Orders to accelerate the registration of securities--
    Mr. Frank. I appreciate that. But again, particularly I 
have to say with regard to enforcement, the notion that before 
you could issue an enforcement order, you have to do a cost-
benefit analysis seems to me really quite odd.
    Ms. Schapiro. I think it would be very damaging to the 
enforcement program.
    Mr. Frank. All right. Let me just go now to Mr. Saumya. And 
I really appreciate the quality of the report and the way in 
which you have presented it. Am I correct that what you are 
saying is that, yes, there are ways to be made more efficient 
and some choices, but if you are going to continue with major 
new responsibilities--and the biggest single responsibility, it 
seems to me, we gave the Commission last year was derivatives, 
particularly swaps which have previously been exempted. Is 
there any way for them to take on the new responsibilities 
regarding swaps without an increase in the appropriation, no 
matter how much efficiency improves?
    Mr. Saumya. As we described in the report, Congressman, as 
the SEC is currently constructed and given the productivity of 
its resources, the added workload clearly leaves them a 
capacity gap. We also identified a series of initiatives which 
we recommended the agency immediately adopt which will create 
efficiencies and restructure the organization in a way that 
will clarify roles and improve productivity. This will go some 
way towards addressing the capacity gap that has been 
identified. The challenge to know precisely how far it will go 
is that the need is determined by the regulatory agenda that 
you all have.
    So there is the swaps issue that you raise. But there are 
other sets of issues, for example, the investment adviser exam. 
That is a big issue. And depending on where the Congress and 
the agency determines, whether it should be increased, how much 
they should be increased has a very material impact on the 
actual resource need.
    Mr. Frank. By ``capacity gap,'' you mean not enough money, 
is that correct?
    Mr. Saumya. Capacity gap, money--yes.
    Mr. Frank. Let me just say, my last point, as I read all 
the testimony--I may not be able to come back to Commissioner 
Atkins. He had one thing in there in which he talked about how 
much more logical it would be if we were--and better if we 
would be able to merge the SEC and CFTC, to which I can only 
say, I wish. If I was making a new country, there would be one 
such entity. But unfortunately, interests do vest.
    So I will say yes, you are right. But unfortunately, that 
is a little beyond us. And let me also say, in anticipation, I 
did appreciate former Chairman Pitt's reemphasis of the 
importance of a self-funding operation. That is something that 
is within our grasp. And I think that got defeated, frankly, by 
turf. It was the fact that the Senate appropriators felt so 
strongly about that, that we lost it. I am hoping we can get 
back to that. And I think Mr. Pitt is right, there are ways to 
make that conform to oversight. Thank you for your indulgence, 
Mr. Chairman.
    Chairman Bachus. I thank the ranking member. Our staff is 
working on the shark question, and they have determined that it 
would be a long freshwater swim either way.
    Let me ask for a clarification. You are saying in the 
Garrett amendment, it asks for cost-benefit analysis even 
before a rule is proposed?
    Mr. Frank. As I read the bill--I am on page 2--``before 
promulgating a regulation under the securities laws, as defined 
in section 3, or issuing any order pursuant to such laws, the 
Commission shall'' and it does all of those things.
    Chairman Bachus. Yes, and before it proposes.
    Mr. Frank. Yes.
    Chairman Bachus. So that would be tough to do. I may have 
to take another look at revising that.
    Mr. Frank. I think the cost-benefit analysis of following 
this bill--
    Chairman Bachus. I would like to make an announcement 
before we move on. Mr. Miller has asked that the 2:00 hearing 
be postponed and the two witnesses have agreed. There were only 
two witnesses at that hearing. So the International Monetary 
Policy and Trade Subcommittee will hold its hearing to examine 
the impact multilateral development banks have on America's 
national security at a later date, September 21, 2011, at 2:00 
p.m. So that has been rescheduled. With that, Mrs. Biggert.
    Mrs. Biggert. Thank you, Mr. Chairman.
    Chairman Schapiro, I hope I am not off message with this 
hearing. But I did want to go back to the study that Dodd-Frank 
required the SEC to--one of the issues, and that was to study 
the current standard of care for broker-dealers and investment 
advisers. I know that you released the study. I am not happy 
with the outcome of that. And that was to harmonize the 
different standards that currently exist. Can you point to any 
economic research or analysis that shows the need for this 
harmonization?
    Ms. Schapiro. Congresswoman, as you know, the study itself 
did go through some economic analysis and we did seek data from 
commenters about that. We would normally provide our economic 
analysis when we proposed a rule which we have not done in this 
context. While the staff is thinking through what the contours 
of a rulemaking might look like, and are continuing to meet 
with industry and investors who have interests in it, we have 
also asked our economists to gather whatever data is available 
to help inform that discussion and that rule-writing process. 
But we have not yet proposed to go forward with a specific rule 
at this time.
    Mrs. Biggert. There has been talk about--because so much is 
involved--to have assistance in the examination and oversight 
of investment advisers, and it has been suggested that there be 
SROs, such as FINRA. Of course, you are very familiar with 
FINRA. Would this be something that you think would happen?
    Ms. Schapiro. I didn't participate in the staff's study 
because of my affiliation with FINRA. I was under the 2-year 
recusal period at that time. The staff laid out three 
alternatives. I think we can all agree that covering or 
examining 9 percent of investment advisers, that hold $43 
trillion worth of assets, a year really isn't sufficient. So 
the staff's alternatives were that there be a fee mechanism for 
advisers to pay for the SEC to be able to examine them, that 
FINRA be given the authority to do at least the examination of 
duly registered broker-dealers and investment advisers, or that 
there be an SRO created.
    I think unless there is sufficient funding for the SEC to 
do this, we have to look very seriously at an SRO. Whether it 
is FINRA or not is a question I would not address. But I think 
we have to find a way to have better oversight of 
intermediaries who have such enormous interplay with retail 
investors, and an SRO is one of the vehicles to do that.
    Mrs. Biggert. And despite your efforts to study, I was 
concerned that the Department of Labor then unilaterally moved 
to publish a rule that could conflict with any new standard 
that your Commission might propose. I know that there was some 
talk about at least getting together and working together, so I 
was really surprised that the Department of Labor came out 
ahead of what you had decided. And I don't know that there was 
any real coordination or conversations. I know that you tried 
to get together, but is this going to be a problem?
    Ms. Schapiro. We reached out to the Department of Labor. We 
had a number of conversations. We participated in some of their 
roundtables. But at the end of the day, they have 
responsibility for the administration of ERISA and the 
definition of fiduciary under ERISA. The SEC doesn't have that 
responsibility. We did make clear in our study that when we 
talk about fiduciary duty in the context of investment 
advisers, it is not with regard to ERISA standards.
    Mrs. Biggert. Thank you very much. I yield back.
    Mr. Schweikert [presiding]. The gentlewoman from New York.
    Mrs. Maloney. Thank you for your testimony and for your 
report. I would like to ask Mr. Saumya, in BCG's report, your 
preliminary estimate of needs ranged from $200 million to $300 
million and your report estimated a shortfall in staff needed 
to fulfill the current mission of 375 to 425 full-time 
equivalents. And yet we are all aware that the funding level 
proposed by the House is $1.185 billion for Fiscal Year 2012. 
So my question is, did your study or did BCG consider the 
effects of limiting the SEC's budget to $1.185 billion when 
conducting the analysis and recommendations?
    Mr. Saumya. As we looked at the SEC, as currently 
constructed, we analyzed the workload and said, there is a 
capacity gap. Having recognized that, we then laid out a set of 
options and implementation plans against that. That will create 
material efficiencies at the agency, which should help address 
part of this capacity gap. We also recommended that given the 
circumstance, the agency should look very hard at its 
regulatory activities and reprioritize its resources to the 
most important activities that it is doing, and transparently 
engage in a dialogue with Congress to indicate what activities 
it will have to scale back or stop in order to redirect 
resources to higher priority activities.
    Mrs. Maloney. So you did not recommend what they should not 
do since there is quite a gap when you need $200 million to 
$300 million to do the job, as you estimated, and roughly 400 
additional people to do the job. That is quite a gap. I would 
like to ask Ms. Schapiro and Mr. Saumya, how will investor 
protections be impacted by the funding proposal or the cap of 
$1.185 billion when the Boston report says that you need $300 
million to $400 million more to get what is required to do the 
job? Did you do an investigation of how investor protections 
will be impacted by this cap that limits the number of people 
you can hire and limits really the resources that are in front 
of you?
    Clearly, you have more to do than the resources that are 
there before you. So Mr. Saumya, did you look at how it will 
impact investor protections, the fact that the money is not 
there, the personnel is not there by your own report, by the 
facts?
    Mr. Saumya. Since we left it to the agency to determine and 
reprioritize their activities, depending on what they choose to 
emphasize and what they choose to scale back, that would have 
to furnish an impact. So the agency is best suited to address 
that question. If I may just go back to the point that was made 
earlier, the $200 million to $300 million that was talked about 
includes a lot of capital spent for technology, which is a one-
time spend, not a budget increase, because that then sets up a 
lot of productivity opportunities at the agency, which is how 
it should be.
    Mrs. Maloney. Did you break that down in the report, how 
the $200 million to $300 million should be spent?
    Mr. Chandrashekhar. We identified a number of areas where 
money will have to be spent somewhere, would have been in 
technology, personnel and others, specific upgrades that are 
needed to be made to individual systems and capabilities.
    Mrs. Maloney. That would be helpful, I think, if you gave 
us a clear breakdown of capital versus resources. And so then, 
let me turn to Ms. Schapiro. How will investor protections be 
impeded by a funding level proposed by the House that is $1.185 
billion, even though your responsibilities have grown, I don't 
know how many times more, twofold, threefold, fourfold?
    Ms. Schapiro. Our responsibilities have grown dramatically. 
And I would say that while we are engaged in this process of 
looking at how we prioritize what we do, our responsibilities 
are a result of Congress making decisions over many years about 
what is important for this agency to do. So I think it is very 
difficult for us to cast aside whole areas of responsibility 
and announce that we won't be doing them anymore because we 
don't have the funding when Congress has directed us to do 
them. But under the House budget proposal, there are a couple 
of areas I would focus on as particularly concerning.
    Clearing house oversight is one of them. Clearing houses 
clear close to $2 trillion a day worth of transactions. There 
are nine clearing houses. We have 10 dedicated examiners to 
perform that function. We will not be able to operationalize 
the OTC derivatives rules. We will get the rules done, but we 
will not be able to operationalize them and that will result in 
a lack of oversight, and frankly uncertainties for an industry 
that has to operate under that regulatory regime.
    I think that we will see the number and scope of our 
enforcement actions decline. We may decline to prosecute where 
the costs of investigating or litigating are just too high. We 
may name fewer respondents or defendants in our cases. Our exam 
coverage, which I think is already inadequate, will suffer. We 
have 700 examiners for 15,000 regulated entities.
    One-third, as I said before, of investment advisers have 
never been examined. We will not have examination resources for 
hedge fund advisers when they come under our responsibility in 
the first quarter. We will have to cut IT spending clearly, 
which will be unfortunate because we need to modernize systems 
like EDGAR, which receives all corporate filings, is used by 
the public, by the staff, and by public companies, and is a 
critical system for the SEC. I think we will also be hindered 
in our ability to hire industry expertise.
    We will essentially be in a hiring freeze in 2012 under the 
House number. And I think something that business cares very 
much about, as we do, is that our ability to quickly and 
efficiently review the increasing flow of IPOs could be 
hindered as well. And that is something I don't think any of us 
wants to see happen.
    So across the agency, I think you would find there are real 
impacts on investor protection but also on capital formation 
and those processes that are critical right now.
    Mrs. Maloney. My time has expired. Thank you.
    Mr. Schweikert. Thank you. Mr. Luetkemeyer.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. Ms. Schapiro, 
very quickly, I am just curious to follow up on Mrs. Biggert's 
comments and questions with regard to DOL's fiduciary role. 
Have you been working with them in concert to try to resolve 
that situation?
    Ms. Schapiro. Our staffs have spent a lot of time talking, 
and from our perspective, trying to educate them about the 
securities laws and how investors are protected under the 
securities laws through either fiduciary duty or suitability 
requirements and about the panoply of regulatory requirements 
that exist to govern the relationship between an adviser or 
broker and their customer. But as I said, at the end of the 
day, we don't administer the ERISA law. The Department of Labor 
does, and it has to be their call about whether or not to 
propose rules under that statute.
    Mr. Luetkemeyer. Is it your assertion then that the ruling 
does not infringe on an area of fiduciary responsibility that 
falls under the SEC's oversight?
    Ms. Schapiro. Certainly, it will impact some regulated 
entities that the SEC also has responsibility for, who might be 
advising customers about their IRA accounts, for example, and 
are likely to also be registered as securities brokers.
    Mr. Luetkemeyer. You are not concerned about that?
    Ms. Schapiro. I know the industry is gravely concerned 
about it. And we have spent a lot of time talking with them 
about it. As I said, we have met with DOL. We have explained 
the issues to them. But it is their responsibility to do what 
they believe they need to do under ERISA, and we have no 
capability with respect to ERISA.
    Mr. Luetkemeyer. Yes. But don't you think that if they are 
getting into your territory, you should work with them to let 
them know that they have overstepped--they can't hide behind 
that authority or adopt rules here that are going to impact 
other things that they shouldn't have any ability to impact?
    Ms. Schapiro. I believe they do have the ability. And as I 
said, I think the most the SEC can do is really to help educate 
them about how the securities regulatory regime, we believe, 
protects investors in this context. But the people subject to 
SEC regulation, because they are broker-dealers, may also be 
subject to State insurance regulations or by the DOL under 
ERISA. They are--unfortunately, I think they would say--subject 
to multiple regulatory regimes. So I don't think we can say 
that just because we have a regulatory responsibility, that DOL 
is excluded from doing what they believe they need to do under 
ERISA.
    Mr. Luetkemeyer. My concern is that we certainly are going 
to limit the ability of individuals to be able to have the 
expertise to advise them on their securities. I had a meeting 
yesterday with an individual. He is the only gentleman in the 
entire county who has a securities license. And you continue to 
allow other entities to get into security advising situations. 
So I think it is going to dramatically continue to impact the 
ability of individuals to get expertise to be able to make the 
wise decisions. I am very concerned about this.
    Ms. Schapiro. I share that concern, Congressman. I will 
tell you, we are very sensitive as we look at what we might do 
in this area to be careful about being business model neutral 
to the extent we can, to understand that access to financial 
services is something that all citizens should have at a 
reasonable cost and in a reasonable way. We are very sensitive 
to those concerns as we think about what we might do here.
    Mr. Luetkemeyer. I would certainly urge you to be working 
with the DOL folks and Treasury to try to find a way to work to 
come up with some sort of a common ruling here on this. I am 
not against trying to make sure that the consumers are 
protected, but I think that the pendulum has swung a long way 
in the wrong direction on this issue, and I think we need to 
bring it back to where we have all of the agencies working 
together to find the best fit and the best common ground to 
allow some protection, yet allow the products to be sold by the 
individuals and so consumers can get what they need.
    Very quickly, I have one more question for you. I am the 
sponsor of the Communities First Act, which is the independent 
community bankers bill, this year, and we are wanting to raise 
the threshold on shareholders on some small companies from 500 
to 2,000. It hasn't been done, it hasn't been raised in years, 
and I would just kind of like your opinion or to see if you 
have any concerns. I know raising it that high suddenly, you 
don't have to have as many folks to regulate and examine, so 
maybe we are taking a little burden off your shoulders.
    Ms. Schapiro. This is a very important issue to us right 
now. You may have seen that we just announced the creation of a 
Small Business Advisory Committee. I believe a community banker 
serves on that committee. We have met a number of community 
bankers who have raised this issue about the 500 shareholder 
reporting threshold and the burdens it places on those in the 
community. And so we have a fairly robust review going on right 
now of a number of issues around small business capital 
formation. The 500 shareholder limit is well advanced in our 
deliberations, and we are also looking at a number of other 
issues like crowdfunding and the general solicitation ban, 
quiet periods and so forth. So we have a full menu, and we are 
very anxious to get our first advisery committee meeting called 
and the input of experts on the ground who can help us with 
these issues.
    Mr. Luetkemeyer. I am anxious to see your results. Thank 
you very much for your time today. Thank you, Mr. Chairman. I 
yield back.
    Mr. Schweikert. Mr. Gutierrez?
    Mr. Gutierrez. Thank you very much, Mr. Chairman. Chairman 
Schapiro, when we wrote, drafted the Dodd-Frank bill, and 
passed it in the House and the Senate, one of the things that 
we did was say there was going to be a study so we could kind 
of streamline and the improve Securities and Exchange 
Commission. And so, one of the bills we have before us today 
would kind of codify the recommendations made by the study 
group. Is that going to help you streamline and improve the 
efficiency of the Securities and Exchange Commission in your 
opinion?
    Ms. Schapiro. I think, Congressman, there are some things 
in the bill that are worth exploring. I will say my primary 
concern is that we not set a rigid structure for the agency in 
statute. This is an agency I think we could all say didn't 
evolve quickly enough and rapidly enough in response to changes 
in the markets and the world over the last several years, and 
we need the flexibility to organize the SEC on an ongoing basis 
over time to be responsive to tremendous developments in the 
marketplace. So that would be my primary concern with the bill.
    There are some other issues with which I would also 
disagree, but we are more than willing to try to work with the 
committee to see if there is some legislative approach that 
does make sense.
    That aside, though, you should understand we are very 
committed to reforming the SEC. I came to an agency pretty 
badly broken in many regards, and we have undertaken tremendous 
reforms already. We know we have a long way to go. We are open-
minded and trying to be thoughtful and careful about how we do 
that, but also to proceed with some sense of urgency. But I 
worry about it being locked into statute and in 5 years 
discovering that the model doesn't work and we need an act of 
Congress to put the agency back together.
    Mr. Gutierrez. Let me then follow up with the following: my 
friend from New Jersey, Mr. Garrett, has a bill that would 
require cost-benefit analysis before you could, the way I 
understand it, proceed.
    Tell me how you see the bill and cost-benefit analysis, and 
does that give you the kind of flexibility and quickness that 
you might need in order to respond to what you suggest are 
changing markets and maybe failures in the past that you have 
come to attempt to address?
    Ms. Schapiro. Sure. And let me say at the outset, I support 
good standards that are clear. But they have to be achievable 
for us, and they have to be consistent with our mission, and I 
really feel that the way this bill is structured, almost no 
agency of government could meet all of these standards and all 
of these requirements as they are laid out.
    We already do cost-benefit analysis. We look at effects on 
competition of our rulemaking. We consider the impacts on small 
business. We test and estimate the paperwork burden of our 
information collection. We look at whether our rulemaking will 
promote efficiency, competition, and capital formation. So we 
do extensive cost-benefit analysis, and we know we can do it 
better, and we are committed to doing it better. But this bill 
adds so many new provisions, 11 new factors that the agency 
is--
    Mr. Gutierrez. Eleven new factors that have to be 
considered before you can do what?
    Ms. Schapiro. Before proposing not just regulations but 
also orders which emanate from enforcement cases and exemptive 
orders, and orders even approving self-regulatory rules. So it 
is an extraordinarily different standard than applies anywhere 
else in government, and it is I think almost impossible to 
meet.
    Mr. Gutierrez. I thank you for those answers because it 
seems to me that we have a Congress and a Majority, Members on 
the other side of the aisle who are always speaking about new 
requirements and new standards that they believe inhibit the 
ability of the small business person and business in general to 
succeed and to thrive, and that they advocate for smaller, less 
government and fewer regulations.
    I find it curious that when it comes to the agency whose 
major purpose is the Securities and Exchange Commission to 
watch, they want more regulations and they want to hamper it, 
and they want to tie it up in knots. I don't quite understand 
how it comes to government in general when it is vis-a-vis the 
business community. And then when we have a group that is 
supposed to monitor part of that business community, investment 
business community, we would even want more regulations. And I 
would suggest that in a society in which something as simple as 
a credit card for 25,000 miles, I did get the credit card, I 
got the 25,000 miles, the only frequent flyer mile ticket I 
could get was from Chicago to Milwaukee, a 90-minute drive. 
Apart from that, I didn't get any other benefit.
    I say that part in jest, but in part because I said if 
those are the consequences to me, imagine the other kinds of 
things consumers are subjected to and that we need to monitor.
    Thank you for your time today and your commitment.
    Mr. Schweikert. Thank you, Mr. Gutierrez, although I think 
Milwaukee feels a little disparaged right now. Chairman 
Garrett?
    Mr. Garrett. And I thank the Chair. So I guess I am in the 
position of actually being the Republican here defending more 
regulation, and that is what my bill would essentially do.
    Let me just begin by reading something from the previous 
Executive Order: ``The American people deserve a regulatory 
system that works for them, not against them, regulatory 
policies that recognize that the private sector and the private 
markets are the best engines for economic growth.'' That is not 
from this Administration. That actually goes all the way back 
to 1993 from the Clinton Administration, trying to do what we 
are trying to do now effectively with--through their Executive 
Order, with a piece of legislation that we are discussing here.
    I know a couple of issues came up through the ranking 
member, one of which pertains to our legislation dealing with 
the issue of applying to orders, right? So since this is a 
discussion draft, this is the reason why we are going through 
regular order here, this is something that wasn't done in the 
past term, but we would like to go through regular order, an 
opportunity to hear if there are problems with the legislation 
and whether they can be fixed. So that is one that we are more 
happy to discuss whether it can be fine-tuned with regard to 
orders.
    The second point I guess that was raised was the issue with 
regard to putting the cart before the horse or not, where we 
say that you have to identify the problem first that you are 
going to potentially address through a regulation. I guess 
there was some comment by the ranking members or others saying, 
that seems to be the reverse order.
    Again, let me go back to the Executive Order of Bill 
Clinton that says that was his intention, that you have to 
identify a problem before you actually start doing the whole 
regulatory process. He said each agency shall identify the 
problem that it intends to address, including where applicable, 
so on and so forth, as well as assess the significance of that 
problem. And I think that only makes sense, that you begin 
doing it in that manner.
    Now, I appreciate the fact that you did say that you 
already do cost assessment analysis, but as you heard in my 
opening comments, the D.C. Circuit Court of Appeals begs to 
differ with the nature and the quality of the rulemaking. So I 
guess my initial question is, what is your reaction to that and 
what steps are you going to take in reaction to the Court of 
Appeals' decision with regard to the proxy assess rule, not so 
much on the proxy assess rule per se but on the process?
    Ms. Schapiro. Sure. Obviously, we are disappointed by the 
court's decision--they vacated the rule--because we thought it 
was important that it be possible for long-term shareholders 
with a significant economic stake in a company to be able to 
have their nominee for director considered by other 
shareholders. Nonetheless, we take very seriously our 
obligation to consider the costs and benefits and the economic 
impact of the rules we adopt. And I believe if you were to look 
at the SEC's rules compared to many other financial regulatory 
agencies, you would see that we do a much more extensive cost-
benefit analysis than others do. That said, though--
    Mr. Garrett. Maybe I will just digress there, and I don't 
mean this flippantly at all. It may sound that way when I say 
this. If you have information on other agencies that you 
would--I would be more than happy to take a look at them as 
well. I know it sounds that way, but we should be making sure 
that everyone--you agree on the same level and the same 
thoroughness.
    Ms. Schapiro. I do think it is important that everybody do 
robust cost-benefit analysis. All of that said--and I think our 
staff has done a very good job on many rules--I have asked the 
staff to reevaluate the whole process for conducting the 
analysis, not just the process of the economic analysis, but 
the substance of it, assuring that we better integrate, for 
example, our economic analysis throughout the course of the 
rulemaking process. We are expanding our Risk FIN Division in 
stature and size so we have more economic firepower. We are 
taking more care with our rules to explain the choices that we 
make.
    Mr. Garrett. Let me just stop you there, too; because as 
far as one of your other comments, you said our legislation 
would mandate you to consider more factors in the process. I 
think you said 11 different factors. Actually, our legislation 
says not that you ``shall'' but that you ``may'' consider those 
factors. We are just saying these are things that Congress 
believes should be considered.
    Ms. Schapiro. That is right; they are not mandatory.
    Mr. Garrett. Right.
    Ms. Schapiro. But because they are contained in statute, 
they are highly likely to be used in a challenge against the 
agency of the next rule that doesn't make a mandatory 
evaluation of each of the factors. And finally, we want to 
explain more clearly, learning from the proxy access decision, 
how we make the choices we make and how we consider the 
differing views that come in through the comment process and 
through other means.
    Mr. Garrett. My time is really just up, but can you get 
back to us? We just had a hearing on the separate issue of 
investment advisers, that issue and the study that came out of 
that. I know you have worn two hats in your life, both here and 
over in your previous position, as to the cost basis, for the 
cost of doing these examinations. And I would just be curious; 
we know the disparity with regard to the examinations between 
investment advisers and broker-dealers. I would just be curious 
if you have numbers, an explanation as to not just the numbers 
of examinations that are done but the actual--the nature of the 
examinations on both, and also the cost.
    Ms. Schapiro. I am sure we could do--it won't be 
scientifically precise, but I am sure we could do ballpark 
figures for broker-dealer examinations versus investment 
adviser examinations.
    Mr. Garrett. Great. And I yield back. Thank you.
    Mr. Schweikert. Thank you, Chairman Garrett. Mr. Sherman.
    Mr. Sherman. Thank you. I want to focus on credit rating 
agencies. Dodd-Frank had a couple of provisions. One involved 
moving around the organizational boxes, and I regard that as 
pretty inconsequential, like moving around the deck chairs on 
the Titanic. And then the Boston Consulting Group makes that 
part of the bill or recommends that part of the bill may be 
made even less consequential in that you are not even going to 
change the boxes, you are just going to have the two existing 
boxes talk to each other, which makes it even less 
consequential. But since it started off as inconsequential, 
that is not my focus here.
    My concern is that due to the work of Senator Franken and 
myself, there is a very consequential provision, and that is a 
provision that requires the SEC to create a system to assign 
the credit rating agencies rather than the current system in 
which the home team selects the umpire, and whoever is selected 
gets a million bucks or two million bucks or whatever their fee 
is. I have used the analogy what it would be if the home team 
selects the umpire. We are used to softball leagues where the 
umpire gets some beer, and so might not bend over backwards to 
get the chance to umpire again. These umpires get paid a 
million bucks or more.
    Is the fact that there is nothing here in this report about 
the SEC organizing to undertake this new function, is that in 
some way prejudicial to undertaking the function? Or is this 
report simply irrelevant to Senator Franken's work and my work?
    Ms. Schapiro. I would like to have my colleagues address 
that as well, but let me just say that we think it is a 
tremendously consequential part of Dodd-Frank.
    Mr. Sherman. Are you referring to the--
    Ms. Schapiro. No, not the boxes. I am referring to the 
study of whether there is a better, less conflicted business 
model that might be explored for credit rating agencies. We 
have out for comment right now and are receiving comments on a 
series of questions about different ways to structure how we 
might do that and to get information in so the staff can go 
ahead and proceed with that study.
    As you know, it was not one of the 1-year deadline items 
under Dodd-Frank, so it took its place in queue a little bit 
behind other things.
    With respect to the credit rating agency office, let me 
just say that the work of the office is ongoing, even if the 
structuring of it has not been changed, to have it report 
directly to--
    Mr. Sherman. If I can reclaim my time. My concern with your 
answer seems to be that the SEC's sole obligation is to just do 
this study and that you are free to reenshrine the status quo. 
I think you are obligated by the statute to radically change 
this giant conflict of interest, and I hope you are structured 
in order to accomplish that goal.
    Ms. Schapiro. As I recall, and I haven't looked at this 
provision in a while, we are required to either implement the 
proposal that is in the statute or come up with another 
proposal. The study is a prelude to our being able to do that 
in an informed way.
    We are also doing, as the statute required, an annual exam 
of every nationally recognized statistical rating organization, 
and we have created the Office of Credit Rating Agencies. It is 
just not reporting directly to the chairman, as the statute 
would require, at this point, because we don't have 
reprogramming authority to do that.
    Mr. Sherman. Who reports to whom, I leave to you and the 
Boston Consulting Group. And I am glad to establish that at 
least these charts here don't mean that you are not ready to 
implement the results of that study.
    But maybe the Boston Consulting Group can comment. Did your 
proposal for how to organize the SEC envision that the SEC 
would be selecting the credit rating agency for each debt 
issuer, or is this the organization chart for an SEC that 
doesn't undertake that responsibility?
    Mr. Saumya. Congressman, the issue that you just raised was 
not part of the scope of our work, so we did not look at that. 
This was simply to look at the proposal that had been made to 
create the credit rating office, to look at overseeing credit 
rating agencies, and that are existing functions at the agency 
today. We recognize the importance of this, and we were laying 
out options on how best they could be organized.
    Mr. Sherman. I misunderstand your answer here. You seem to 
be saying your report ignored the possibility, or I think the 
mandate, that the SEC undertake this new responsibility and was 
focused only on how to organize to meet its current 
responsibilities? You are shaking your head. Does your report 
lay out a program for organizing the SEC that would be 
selecting the credit rating agencies for debt issuers?
    Mr. Saumya. Our report assumes that the agency will follow 
what is required under the legislation. This was simply an 
organizational design issue that we focused on.
    Mr. Sherman. Okay. Given the fact that the Chairwoman has 
indicated that it may be--my reading of your report is that you 
simply ignored that the SEC would undertake that function.
    Ms. Schapiro. Congressman, if I could just add, at the time 
when the study is completed and the SEC determines what the 
right structure is, whether the SEC will select a credit rating 
agency, whether a self-regulatory organization might do it, 
whatever we determine to be the optimal new business model, 
then we will, of course, have to restructure the SEC to 
accommodate that.
    Mr. Sherman. Okay.
    Ms. Schapiro. So that we are doing it--
    Mr. Sherman. Hopefully, the fee you have paid to Boston 
Consulting Group will cover any additional work necessary at 
that time. And I yield back.
    Mr. Schweikert. Thank you, Mr. Sherman. Two quick things. 
Chairman Garrett has a motion, and then we will move to Mr. 
Posey.
    Mr. Garrett. Right. I ask unanimous consent to enter into 
the record a letter to the Commission with regard to beneficial 
ownership reporting rules and how they may or may not be 
changing and the revisions for the record.
    Mr. Schweikert. Unanimous consent? So ordered. Why not?
    Mr. Posey, it is your turn.
    Mr. Posey. Thank you very much, Mr. Chairman. Madam 
Chairman, a colleague came up to me and said the SEC is 
fracking crazy, and I thought they needed a vocabulary lesson, 
and then I read the Wall Street Journal article that now the 
SEC is determining that it is going to regulate fracking in the 
mining industry. And I wondered, with all the victims, 
potential victims, citizens who are at risk for securities 
abuse, why in the world the agency feels it is necessary to go 
into the environmental business now, further into the 
environmental business than before, when there is so much work 
yet to be done. And the agency was whining about not having 
enough money in the budget now to focus on securities per se, 
and now wants to involve itself in what appears to most to be a 
responsibility of an environmental agency, of which we have 
plenty.
    Ms. Schapiro. Congressman, that is a very fair question. We 
are not in the business of regulating fracking, and there were 
a number of newspaper articles, you might recall, a while ago 
that suggested when the SEC changed its rules for public 
companies to report their oil and gas reserves that, as a 
result of those rules being liberalized by the SEC to allow for 
reporting of potential reserves as opposed to only proven 
reserves, that companies were then exaggerating what their oil 
and gas reserves were in their public disclosure documents that 
investors rely upon to buy and sell stocks.
    I believe our review group for that industry in our 
Corporation Finance Division has asked questions in their 
comment letters as they send them back and forth to companies 
about their methodologies for estimating their reserves and 
putting that in their disclosure documents.
    I would be happy to get more information for you about it, 
but I want to assure you we are not regulating fracking in any 
way, but we do have responsibility to ensure honest and fair 
disclosure about issues like reserves.
    Mr. Posey. Generally, I have been able to pretty much trust 
the Wall Street Journal. I don't always agree with them, but 
generally, I trust what they write; they have good editorial 
and news safeguards. I am delighted to know that. If, when you 
get back to the office, anyone tells you differently or there 
is any light shed on it, I would appreciate you letting me 
know, because I am going to take your comments as the absolute 
gospel, and I am going to engage anyone who indicates that you 
are doing anything other than just verifying reserves.
    Ms. Schapiro. Let me be clear. I don't know that we are not 
asking more questions than just the verification of reserves. 
There may be other issues in the comment letter. So let me come 
back to you with as complete an answer as possible. But what I 
was trying to make clear is that we are not telling people they 
can or cannot engage in fracking or any of those kinds of 
issues, but we do ask questions to try to get a more complete 
disclosure about the risks, about reserves proven or estimated, 
and so forth, but let me come back to you with a more complete 
answer.
    Mr. Posey. The space between not regulating fracking and 
merely making sure the disclosure requirements are correct on 
their reserves is big enough to drive a million space shuttles 
through, so I think that would be important, and I hope that 
you would maybe respond to me and the chairman, with his 
permission, and anyone else who has an interest in here.
    Ms. Schapiro. Absolutely.
    Mr. Posey. In writing within the next week.
    Ms. Schapiro. I would be happy to do that.
    Mr. Posey. Thank you.
    Mr. Schweikert. Mr. Posey, anything else? Thank you, Mr. 
Posey. Mr. Carney?
    Mr. Carney. Thank you, Mr. Chairman, and I thank the panel 
for coming today. I would like to just expound a little bit on 
the two parts of the discussion that we have had today, this 
issue of cost-benefit analysis. We have heard what Mr. 
Garrett's view of that is, and he has legislation that would 
require these kind of assessments to be done. And we heard 
earlier my colleague, Mr. Himes, and his caution about how to 
do that with respect to tail effects and so on.
    So first to the BCG folks, how would you do that to 
accommodate the concerns that Mr. Himes articulated?
    Mr. Saumya. Congressman, this issue was outside the scope 
of our study. Our study focused on--
    Mr. Carney. I am not asking you really--and if you don't 
want to offer an opinion--you do cost-benefit analyses for 
clients, don't you?
    Mr. Saumya. Yes.
    Mr. Carney. How would you envision accommodating some of 
the concerns that Mr. Himes had about how you get low 
probability effects that have cataclysmic impacts on the 
financial system in this instance? Do you have any thoughts on 
that?
    Mr. Saumya. We will have to reflect on that and get back to 
you.
    Mr. Carney. Okay, thank you.
    Ms. Schapiro, do you have any view on that? If Mr. 
Garrett's bill were to pass, how would you implement that? How 
are you doing it now that accommodates the concerns that were 
articulated by Mr. Himes, which I think are real concerns? If 
you look at the financial crises that we have had historically, 
they have been created by some of these things that are not 
expected.
    Ms. Schapiro. I think it is a very difficult question. The 
costs are almost always easier to quantify than the benefits 
are, and we struggle with that; and we try, if we can't 
actually quantify benefits, to at least discuss as fully as we 
can what we believe the benefits would be and balance from 
there.
    Mr. Carney. But that is an important part. That is an 
essential part of doing an analysis like that.
    Ms. Schapiro. It is essential.
    Mr. Carney. You have to enumerate costs and benefits and 
what they are and assign values to them. And as Mr. Perlmutter 
and Mr. Himes pointed out, sometimes that is difficult to do.
    Ms. Schapiro. And failure to act has a cost as well that we 
often don't quantify, either.
    Mr. Carney. Right.
    Ms. Schapiro. I think cost-benefit analyses would be more 
useful if we did talk sometimes about if we don't act, what are 
the potential ramifications of that if other events come to 
pass.
    Mr. Carney. So do you have a view as to how you might 
implement something like this in a way that would result in 
what is in the legislation a ``reasoned determination that the 
benefits justify the costs?''
    Ms. Schapiro. I think what we do now is, while we haven't 
done it perfectly in the proxy access case, and historically in 
a handful of other rules, I think what we do now is really 
geared towards getting a reasoned judgment about whether a 
rule's benefits will outweigh its costs. And my fear about this 
legislation is that it layers so many analyses on top of what 
we already do that we are set up to fail; that there is no way 
that this agency or any other agency can possibly do all of 
these things, some of which conflict, some of which seek to 
protect market participants. Sometimes we need to protect 
market investors from market participants.
    I think there are--we would be happy to work through these 
issues in this legislation as constructively as possible, but I 
think there are a lot of things here that make it very 
difficult for us to--
    Mr. Carney. I think in concept Mr. Garrett's idea makes 
sense, but I think implementing it is difficult to do, 
particularly to accommodate the concerns that Mr. Himes has.
    I only have a minute to go, and there has been a lot of 
discussion about priorities. You mentioned earlier some of the 
things that you don't think are getting the priority that they 
ought to. Could you go over those again? And I agree that we 
ought to have a discussion about what those priorities are so 
that you know what Congress believes the priorities ought to be 
and that you have--you can challenge us or tell us what you 
think they ought to be, and we can have a reasoned discussion 
of that. In 30 seconds, could you--
    Ms. Schapiro. I would be happy to, and let me add to the 
ones I said before.
    Mr. Carney. I missed one of them. You had clearing house 
oversight, hedge fund adviser examiners, hindering of hiring 
expertise, and there was one other that you mentioned that I 
didn't--
    Ms. Schapiro. Building the necessary information technology 
infrastructure to be more efficient, operationalizing the OTC 
derivatives rules. And I would add to that our ability to 
ensure that we have a stable equity market structure in this 
country so that public companies can cheaply and efficiently 
and transparently have their stocks traded, and investors can 
feel like they are participating in a market that operates 
fairly for them. We have spent a lot of time on market 
structure, but it is an area where we have to have data and 
tools in order to really do a good job, and those cost money.
    Mr. Carney. Thank you very much. I see my time has expired. 
I do believe that we ought to extend this conversation for 
sometime in the future to go over these priorities and how to 
implement some of the things that you are trying to implement.
    Mr. Schweikert. Thank you, Mr. Carney. Mr. Pearce?
    Mr. Pearce. Thank you, Mr. Chairman. I would join my 
colleague Mr. Carney in saying that this conversation should be 
a little bit longer, so if we get the chance to visit with Ms. 
Schapiro again, that would be good.
    I would like to add my voice, Ms. Schapiro, to that of Mr. 
Posey, on the fracking. The Wall Street Journal actually says 
you are asking questions about the chemicals used, which 
somewhat deviates from the idea that we are trying to prove 
reserves.
    I see in your report, page 10, page 11, twice on page 11, 
resources constrained, environment resources constrained, 
resources do not permit, and yet you are drifting off into 
these environmental questions; and I wonder, are you asking the 
same questions of, say, the manufacturers of windmills? Those 
electric generating windmills are scattered across New Mexico; 
they kill birds, they affect the environment. Are you asking 
about that same sort of environmental impact on those 
companies?
    Ms. Schapiro. Congressman, I would like to get back to you 
with more detail. Our goal is not to vindicate any kind of 
environmental interest here.
    Mr. Pearce. It appears that you have, with all due respect, 
and I would appreciate it if you would get back with me.
    On page 2, you are describing the payouts, $2.2 billion, 
$2.8 billion. How much of that came from Mr. Madoff's 
settlement?
    Ms. Schapiro. I don't believe any of that. That has all 
gone through the SIPC process.
    Mr. Pearce. Has any investor been compensated anything from 
your efforts, from the efforts of the SEC?
    Ms. Schapiro. I would have to get back to you on whether 
any fines or penalties went into the SIPC fund from the SEC. I 
don't know the answer to that.
    Mr. Pearce. You mean we have the most highly visible 
investor defrauding that has ever occurred, and you don't know 
the answer to that?
    Ms. Schapiro. Congressman, because our goal would be not to 
take money into the Treasury and deprive the--
    Mr. Pearce. I asked if any payments have been made back to 
investors.
    Ms. Schapiro. I am sorry; I just don't know the answer to 
that.
    Mr. Pearce. Do you understand from my point of view how 
astounding that is, that the most highly visible--you are in 
charge of this, you are the one, and--
    Back in 2008, Evergreen Silver, ESLRD, a NASDAQ company, 
filed for--they had assets of a billion dollars. They make 
silver sales, they are publicly traded--they were--and they 
filed bankruptcy. They took $58 million of Massachusetts money 
with them. Do you have that on your radar scope?
    Ms. Schapiro. I am not familiar with it. I would have to 
get back to you.
    Mr. Pearce. SpectraWatt Incorporated spun off of Intel, 
they took money from Goldman Sachs, who you do have; 
SpectraWatt was a private firm, but they took large sums of 
money from Goldman Sachs. They also took public money from New 
York State. And I wonder, after they filed bankruptcy, did you 
have any insights on them?
    Ms. Schapiro. Again, Congressman, I don't--we have 
thousands of investigations ongoing at any one time. I would be 
happy to try to find information for you.
    Mr. Pearce. But your agency does have time to go in and 
worry about fracking?
    Ms. Schapiro. I am not suggesting that we do or don't have 
investigations of those particular companies. I just don't 
know.
    Mr. Pearce. I am saying that you do have the money to put a 
front page article in the Wall Street Journal that you are 
investigating fracking and the chemicals used there. I am 
saying that sometime you should take care of your business 
instead of the EPA's business.
    Ms. Schapiro. I understand.
    Mr. Pearce. A very highly visible firm just in the last day 
or two, Solyndra, came under your jurisdiction when they filed 
to incorporate and filed for a public offering. Given the 
events of the last 2 or 3 days, have you done anything to look 
at Solyndra and what you might have warned the American 
taxpayers about before we gave them $400 million or $500 
million?
    Ms. Schapiro. I can't comment on any ongoing inquiries that 
the agency has.
    Mr. Pearce. You can comment if you do or don't have an 
investigation. Do you have an investigation? Are you looking at 
that?
    Ms. Schapiro. Actually, I can't comment on whether or not 
we have an investigation.
    Mr. Pearce. Okay. We have begun to get information from the 
small investment advisers that they are facing standards that 
maybe the big guys don't face. Again, I would like at some 
point to hear your observations--we don't have time today, but 
I would like to hear your observations on why you would be 
concentrating more efforts on the small fish than the Madoff 
fish.
    I just worry that what we are going to do is implement 
regulations on the mom-and-pop operations across the country 
who had nothing to do with any of the investment problems that 
we have seen in a big way off of Wall Street. And I do hope 
that as you are implementing your regulations, you will be 
considerate of where the big fish are to fry.
    I yield back, Mr. Chairman. Thank you.
    Mr. Schweikert. Thank you, Mr. Pearce. Mr. Perlmutter?
    Mr. Perlmutter. Thanks. And I wasn't going to get this, but 
I want to respond to my friend from New Mexico. Chairman 
Schapiro, you are familiar with a company called the Reserve 
Fund, are you not?
    Ms. Schapiro. Yes.
    Mr. Perlmutter. The Reserve Fund, I would say to my friend 
from New Mexico, probably cost State governments and special 
districts zillions potentially, because it broke the buck, and 
all these guys invested in it. The SEC was all over it and 
helped recover--and my guess is New Mexico's special districts 
and local governments had a lot of money in that, as well as 
Colorado--but helped them recover on average, I think, about 95 
or 98 or 99 cents on the dollar. So that was a big one. It 
affected each State, and they were all over it. So, I don't 
know the specifics of all the little questions you were just 
asking, but certainly in defense, I want to say that.
    Now, let's get to the guts of this thing. I appreciate the 
gentleman from Boston Consulting and your study. The question 
is: Should there be more private, in effect, assistance and 
enforcement and oversight with an umbrella kind of potentially 
being--what we are saying is there is not enough money to do 
all the jobs that are assigned to the SEC at this point. There 
may be other ways to do it, using FINRA or some other 
organizations.
    Here is my question--or it may be coming from the 
legislation. I am looking at an article today in the Denver 
Post about outsourcing of government jobs, where it says, for 
example, a study found that on average the Federal Government 
paid contractors $268,653 per year for computing engineering 
services while government workers in the same occupation made 
$136,456. Human resources, the annual rate was $228,488 for 
contractors, more than twice the $111,000 for the same services 
done inhouse.
    I have no problem with the private sector making a lot of 
money. We had Mr. Ketchum in here from FINRA a couple of days 
ago and he said, ``I want to be fully accountable to the 
Congress.'' I am not sure if he really means all of that 
because the salaries at FINRA are pretty substantial. But 
whoever it is, whether it is the public organization, the SEC, 
or assigning it to somebody else to help, there is 
responsibility. And I mentioned the math earlier about how a 
6,000 drop in the stock market translates to $7.8 trillion, 
which is a lot of money. That is a huge user fee for a lot of 
people.
    So explain to me, if you would, either Ms. Schapiro or the 
others, there is responsibility with or without Dodd-Frank. Can 
the agency do it on the budget that it has today?
    Ms. Schapiro. I will be happy to start. I think I have been 
pretty consistent with Appropriations and in testimony 
generally over the past year, that we cannot operationalize the 
Dodd-Frank rules without additional resources. We agree with 
the BCG report that we have the opportunity to optimize the use 
of our resources. We are looking for savings wherever we can 
find them. We have some opportunities to do things differently 
that we think will free up some resources. But at the end of 
the day, we are taking a piece of the $600 trillion over-the-
counter derivatives markets under our responsibility--hedge 
fund regulation, credit rating agencies, municipal advisers, 
large new areas of responsibility that the Congress, and 
frankly the American people, will expect us to do well; and 
without significant additional resources, that is simply not 
going to happen.
    Even if we become very efficient, very effective, very 
agile, all things we are working towards, at the end of the 
day, there is a gap.
    Mr. Perlmutter. Let me ask the gentleman from Boston 
Consulting, in preparing this report, I don't know whether we 
asked you to look at it, but do you consider the catastrophic 
losses? We are talking harm-benefit analysis, and I do think we 
asked for that in our study, but maybe not. Did you consider 
the catastrophic losses we saw in the fall of 2008 when I think 
the SEC hadn't been doing their job?
    Mr. Saumya. Our focus, Congressman, was on looking at the 
organization structure, people, technology, and how they 
interact with the SROs. We took the SEC as we found it when we 
arrived and then looked ahead as to what capabilities they need 
to have to deliver against their mandate and mission, and so 
our focus was forward looking.
    Mr. Perlmutter. Okay, thank you.
    Mr. Schweikert. Thank you, Mr. Perlmutter. Dr. Hayworth?
    Dr. Hayworth. Thank you, Mr. Chairman.
    Chairman Schapiro, I know that the SEC is forming an 
advisery committee on small and emerging companies, and I think 
that is an important step in the direction of facilitating 
enterprise. We want our small businesses to be able to acquire 
capital, we want investors to be able to engage in that 
marketplace ever more fully.
    One of the questions that proceeds or one of the challenges 
that proceeds from that beneficial action is that we do need a 
market for those stocks once they are issued. And as you know, 
right now we really lack that kind of a marketplace in the 
United States for various reasons. But a marketplace certainly 
helps investors to observe and to set a market value for these 
sorts of investments.
    So would you be willing to work--my office is taking a 
particular interest in trying to facilitate a United States-
based marketplace analogous to France's Alternext or London's 
AAM. Could we work with you to see what we can do to facilitate 
setting up that kind of a market?
    Ms. Schapiro. Absolutely. We would be happy to do that. You 
should know it is just getting started. NASDAQ has created a 
venture marketplace from the roots of the Boston Stock Exchange 
that they bought. And while I don't think it is fully up and 
running yet, the Commission did approve that. It was one of our 
efforts to try to create a better, more transparent trading 
market for lower-priced securities. But we would be happy to 
work with you.
    Dr. Hayworth. Great, I appreciate that. And we are eager to 
work with you, so our staff will get in touch with yours, and 
we will continue to move forward on that. I appreciate it.
    I do have another question regarding revisiting the 
Williams Act and Regulation 13(d). And, in specific, the SEC is 
looking to respond to a lawsuit by Wachtell that is requesting 
that the timeframe for disclosure be reduced substantially from 
10 days to 1 day. That could have, as you can imagine, a 
substantial effect on that sort of investor engagement, and 
many unintended consequences potentially because, of course, 
the Williams Act comprises a number of spheres of activity, so 
intervening in one place may indeed create an imbalance. So it 
does strike me that the division of risks, strategy, and 
financial innovation should be involved, and study the 
potential effects of these proposals. Are you planning on 
asking them to explore all the implications and the cost-
benefit of this kind of an intervention?
    Ms. Schapiro. Absolutely. This is, as you intimated, a very 
controversial proposal. The staff has not made any 
recommendations at all to the Commission about it, but they 
will be very involved.
    Dr. Hayworth. Great. I appreciate that, because clearly we 
are functioning in an environment in which everybody is 
exceedingly concerned about our being a destination for working 
capital in this country, and I know that you are dedicated to 
doing the right thing in that regard. So I appreciate hearing 
that. I think that is a great, thoughtful approach.
    Thank you, and I yield back, Mr. Chairman.
    Mr. Schweikert. Thank you, Doctor. Mr. Hurt?
    Mr. Hurt. Thank you, Mr. Chairman. I want to thank the 
chairman and all of the witnesses today for your being here. I 
am Robert Hurt from Virginia, and one of the things that 
concerns us the most in my rural southern Virginia district, of 
course, is jobs. I think it is on the top of everybody's mind. 
I was pleased that the President last week tipped his hat to 
capital formation as something that is very important to help 
get this economy going.
    One of the bills that has been passed out of this committee 
is a bill that would extend the same exemption to private 
equity that has been given to venture capital and would repeal 
that part of Dodd-Frank dealing with that issue. That is 
obviously, in my opinion, a Main Street issue. I know of 
thousands of jobs, hundreds if not thousands of jobs that are 
in Virginia's Fifth District as well as across the Commonwealth 
and across this country that have been created by the capital 
formation that is provided by private equity.
    I was wondering, Chairman Schapiro, if you could articulate 
for me any possible benefits? What are the benefits to 
requiring advisers to private equity to register with the SEC, 
and what could possibly be the benefits of the quarterly and 
sometimes monthly evaluation reports? What could SEC, with the 
strapped resources that you have, do to improve what private 
equity has done for the economy, especially at a time when our 
economy is failing, and private equity I think has proved again 
and again to be able to create jobs at a time when we are 
losing jobs?
    So in the context of cost-benefit, let's talk about the 
benefits first, and then we can talk about the costs. But what 
possible benefits can you see?
    Ms. Schapiro. Congressman, I think I am familiar with the 
bill that has been reported out that would basically exempt 
private equity levered less than 2 to 1.
    Mr. Hurt. Correct.
    Ms. Schapiro. Which I think is an interesting approach. 
With respect to private equity, when the Commission followed 
the requirements of Dodd-Frank, which during the course of the 
debate, considered actually exempting private equity along with 
venture capital, and ultimately the decision was not to. Our 
obligations there are with respect to reporting and 
registration only. There are not sort of substantive SEC 
requirements on that, and it is part of understanding the broad 
scope of participants in the financial services industry and in 
the economy who have the potential to impact other financial 
institutions and investors in a fundamental way.
    Mr. Hurt. And I guess the reason I ask is because--for a 
couple of reasons. I think most people agree and I think the 
view of this committee, a majority of this committee, was that 
private equity is different. It is not leveraged at the fund 
level. You have, of course, highly sophisticated investors, and 
then of course the portfolios by design are necessarily 
diversified, so there is no financial or no financial systemic 
risk, I think, to be concerned with.
    Let's talk about the costs because I am interested--and I 
appreciate the fact that you brought up the ``cost-benefit 
analysis,'' that phrase. Obviously the costs are, in my 
opinion, very significant. We had one witness who testified 
that it would cost their company almost a million dollars to 
register, and then an ongoing cost, of course, of hundreds of 
thousands of dollars to continue to file these reports. And my 
view, my Main Street view, southern Virginia view, is that is 
money that could be used to invest in another Dollar General or 
in another Ply Gem window manufacturer in the Fifth District. 
That creates jobs.
    So I am wondering, do you believe that what I would call 
unnecessary reporting and registration would negatively affect 
those private equity firms that would have to then comply with 
this?
    Ms. Schapiro. I guess I would have to go back and look at 
the analysis that was done when the rulemaking was promulgated 
to perhaps answer that more completely, and I am happy to do 
that. I do know that we met with a number of middle-market PE 
firms in the course of this, and one of the things they did ask 
for was a delay in their registration of a year, I believe; and 
so I think we have done a 9-month delay at this point.
    Mr. Hurt. Yes, you have.
    Ms. Schapiro. So we have some opportunities to continue to 
talk, and I would be happy to come up and have further 
conversations.
    Mr. Hurt. Thank you. And I wonder, following along these 
lines, it would appear to me that under the Investment Adviser 
Act, you all have the authority to exempt; and is that 
something that you would consider?
    Ms. Schapiro. We do. We were very conscious of the fact 
that the Congress made an explicit choice here. Sometimes 
things just don't happen, but here there seemed to be an 
explicit choice to require registration, which seems contrary 
to exercising exemptive authority, but again that is something 
we could talk about.
    Mr. Hurt. Okay. Thank you very much.
    Ms. Schapiro. Thank you.
    Mr. Hurt. I yield back.
    Mr. Schweikert. Thank you, Mr. Hurt. I know there is a vote 
that has been called, but I was hoping I could throw out a 
couple of questions, and then you get to abandon us. But 
speaking both for the chairman and everyone here, we really 
appreciate your time.
    Chairman Schapiro, you were kind enough earlier to mention 
the 500 shareholder rule, and I know the SEC has been looking 
at that for a while. I am also working on legislation in that 
subject area. What do you know about your rulemaking or your 
discussions internally? And if you have warm and fuzzy things 
to say about my legislation, we can talk about that.
    Ms. Schapiro. But only if I have--
    Mr. Schweikert. Only if they are warm and fuzzy.
    Ms. Schapiro. I am actually familiar with--I think you have 
two pieces of legislation in this arena, one with respect to 
the Reg A offering threshold?
    Mr. Schweikert. Yes.
    Ms. Schapiro. And that would require us to raise it, I 
guess, to $50 million, and then to consider in the future 
whether there are additional changes that ought to be made. And 
then secondly, the 500 shareholder limit and whether accredited 
investors ought to be excluded or the number of investors ought 
to be raised, or even employees could be excluded from the 
threshold.
    Mr. Schweikert. Yes, employees.
    Ms. Schapiro. Those are all exactly the issues that the 
staff is looking at right now, and I would say that I think the 
500 shareholder limit is probably the first item on the agenda 
that we hope to bring to the small business advisery committee 
to get their thoughts and perspectives on, and on the burdens 
of reporting, and whether there are any other alternatives. But 
we are moving very--``forcefully'' may be a little too strong 
of a word, but we are moving very deliberately forward to do 
the analysis that we need to do.
    When the 500 shareholder limit was put in place originally, 
there had been years of study, and it was carefully calibrated, 
and I think we don't want to just toss it out the window. We 
want to do an analysis, a cost-benefit analysis as well, but we 
are very committed to moving ahead on looking at this.
    Mr. Schweikert. And I appreciate that. Actually this is one 
of those moments where the Republican side, you have been very 
kind, or your staff has been kind working with our staff, 
particularly in the Reg A issue. And in regards to the 500, in 
many ways that environment is more about capital formation, 
particularly for small, upcoming businesses.
    Ms. Schapiro. Right.
    Mr. Schweikert. So in some ways, it is less about sort of 
modeling the cost; it is more modeling access to capital.
    Ms. Schapiro. Right.
    Mr. Schweikert. I had just sort of an offshoot, and you are 
going to have to help me a little bit on this one, municipal 
advisers. I hear a lot from my banking community saying, we are 
regulated by everyone. And there is this sort of sense of 
concern saying, are they about now just to get another layer, 
particularly when they are doing some of the advising practice 
within those banks?
    Ms. Schapiro. When we proposed the municipal adviser 
definition, my personal view is that we cast a bit too wide a 
net, and we brought into that definition otherwise regulated 
persons who probably ought not to be included at the end of the 
day. The staff has not made a final recommendation. I 
understand the term sheet will be coming to the Commission very 
soon. We have gotten, I want to say, 11,000 comment letters. 
That might be another rulemaking. We have gotten thousands of 
comment letters.
    Mr. Schweikert. In that case, have you heard from the other 
11,000?
    Ms. Schapiro. I think we have heard from almost every 
Member of Congress as well. So we understand the issue. We cast 
a very wide net, perhaps inappropriately wide, and we are 
working through those issues.
    Mr. Schweikert. I appreciate the wide net comment. It is 
one of those--we appreciate the struggle for resources in this 
particular environment. I am a fan of something Chairman Bachus 
is doing in trying to move forward with what was almost another 
100 million in IT and technology money, believing that your 
access to technology, as has been stated here, would be sort of 
a one-time expense, but would actually make your ability to do 
your job much easier, but for all of us to see what is being 
done in your job easier, but--and I had this great fear of 
taking on something that would actually in the banking sector 
be huge and almost untenable in the current budget situation, 
so--and I think with that, if there is any burning comment 
left--if not, thank you for spending time with us.
    Ms. Schapiro. Thank you.
    Mr. Schweikert. Thank you. We are in recess until the sound 
of the gavel, and I think at that point we will be moving to 
the second panel.
    [recess]
    Chairman Bachus. The Financial Services Committee will come 
to order for the purpose of hearing testimony from our esteemed 
second panel. First, we will hear from the Honorable Paul 
Atkins, visiting scholar of the American Enterprise Institute, 
and former Commissioner of the U.S. Securities and Exchange 
Commission. Paul, it is great to have you back. You are a good 
friend and I look forward to your testimony.
    Second, we will hear from Mr. Stephen J. Crimmins, partner 
at K&L Gates, and former Deputy Chief Litigation Counsel for 
the Division of Enforcement at the SEC.
    Mr. Crimmins. Thank you, Mr. Chairman.
    Chairman Bachus. I am glad to have you here. I have read 
all of your testimony and I believe all of it is of value as we 
try to determine with the SEC what the best approach and a 
collaborative effort will be.
    Third, Mr. Jonathan G. ``Jack'' Katz, former Secretary, 
U.S. Securities and Exchange Commission, on behalf of the U.S. 
Chamber of Commerce.
    Mr. Katz. Good afternoon Mr. Chairman. Thank you for 
inviting me.
    Chairman Bachus. Thank you. Welcome. And we have assembled 
this panel because we believe all of you have valuable insight 
into what direction both the Commission should go in and the 
Congress in addressing it.
    Fourth, the Honorable Harvey Pitt, chief executive officer, 
Kalorama Partners, and former Chairman of the SEC. It is great 
to have you back.
    Mr. Pitt. It is good to be here.
    Chairman Bachus. I always enjoy your testimony and your 
insight.
    And finally, Mr. J.W. Verret, assistant professor of law at 
Stanford University School of Law. And this is your first time 
to testify as a witness for the Majority.
    Mr. Verret. As a Majority witness, yes, sir. I have had a 
chance to testify nine times as a Minority witness.
    Chairman Bachus. It probably will be a very similar 
experience.
    So we welcome all of you. And this 5-minute clock--if you 
need to take 6 minutes or 7 minutes, feel free to do so. We are 
not going to limit you. If you get up to 8 or 9 minutes, we 
might suggest that you wrap up. Commissioner Atkins, former 
Commissioner, we will start with your testimony.
    Mr. Atkins. Thank you very much, Mr. Chairman.

 STATEMENT OF THE HONORABLE PAUL S. ATKINS, VISITING SCHOLAR, 
AMERICAN ENTERPRISE INSTITUTE, AND FORMER COMMISSIONER, UNITED 
           STATES SECURITIES AND EXCHANGE COMMISSION

    Mr. Atkins. Thank you very much, Chairman Bachus, Ranking 
Member Frank, and members of the committee for inviting me to 
appear today at your hearing. It is an honor and a privilege 
for me to be able to provide information for your deliberations 
regarding the organizational issues at the SEC. I would like to 
begin by congratulating this committee for taking up this issue 
of improving and enhancing the SEC. I have had the privilege of 
working there for a total of 10 years, first as a staffer in 
two Chairmen's offices, and then as Commissioner under three 
Chairmen, including Chairman Pitt, who is on the panel as well.
    Because the public sector lacks the crucible of competition 
to winnow out inefficiencies and promote better management 
systems, I think it is periodically necessary for Congress and 
the President to step in to do so. A good example of this 
approach was what Congress in the Truman Administration took 
with the reorganization plan number 10 of 1950. In about one 
page, it gave the Chairman of the SEC clear authority over 
executive and administrative functions and radically 
reconfigured the SEC's governance in the process. Now in 
contrast to reorg plan 10, Dodd-Frank's 2,319 pages haphazardly 
addressed too many things and I think not very well. It created 
a grab bag of ideas that, through micromanagement, has made the 
management of the SEC much more difficult.
    For example, Dodd-Frank added four statutorily mandated 
direct reports to the Chairman, the investor advocate, the 
Office of Minority and Women Affairs, the Office of Credit 
Ratings and the Office of Municipal Securities. Because these 
provisions are statutory, the chairman has little alternative 
to do things differently, especially since the chairman already 
has more direct reports than is practical. So these and other 
statutory provisions etched in stone one way of doing things to 
the exclusion of others.
    Under Dodd-Frank Section 967, the SEC commissioned BCG to 
do a supposedly independent review of its management and 
organization. Unfortunately, this review does not appear to be 
independent, and I don't think it was very well done. And Jack 
Katz will give you a much more detailed critique of the BCG 
report in his testimony, which I have read and I subscribe to. 
But suffice it to say, I believe the taxpayer ought to get a 
refund of the $5 million or so that the SEC spent on that 
report.
    I commend the committee for taking a fresh deliberate look 
at the organizational structure of the SEC with the draft 
legislation that is under discussion today. I also commend 
Chairman Bachus for proceeding in regular order, holding 
legislative hearings to gather commentary and consider openly 
the best approach before introduction of actual legislation. 
The committee correctly perceives that the SEC desperately 
needs organizational and management philosophy changes to 
increase efficiency and improve its regulation of the markets 
that it is tasked with of regulating, considering how 
dramatically the markets have evolved in the last decade or 
more.
    With that said, I would caution against being too 
prescriptive regarding the internal organization of the SEC. 
Times and circumstances change, and the example of reorg plan 
10 demonstrates that general guidelines, but with a firm sense 
of what the sense of Congress is, may be sufficient. But much 
depends on good managerial experience to lead the agency, 
which, of course, cannot be legislated.
    The draft bill contains many good ideas. For instance, 
recognizing the second-class status of economists at the SEC 
and seeking to enhance their participation in policymaking and 
promote them to first class status I think is badly needed. The 
endemic problem is that economic analysis at the SEC has been 
performed as a post hoc exercise. The policy for rulemaking is 
mostly determined first by lawyers and only near the end of the 
process are the economists brought in to justify the actions on 
a cost-benefit basis. In this vein, I think Chairman Garrett's 
proposed SEC Regulatory Accountability Act is a very good step 
forward. The bill directs the SEC to utilize economists to 
determine whether or not to propose or adopt a regulation and 
to do so only after considering the costs and the benefits. The 
criteria set out in the draft bill are in the main 
commonsensical, and an economist worth his salt should take 
those criteria or similar ones into account.
    The trouble is, at the SEC, cost-benefit analyses are 
usually done by lawyers in the rule-writing division and only 
shown to the economists at a much later stage. The SEC, after 
all, is an agency of, by, and for lawyers. Now this morning, 
Ms. Waters, Mr. Frank, and others raised the point regarding 
the applicability to enforcement cases of this draft 
legislation. That actually, I think, is a very good point. But 
it is an easy fix I think by carving out administrative orders 
and perhaps other things as we look at it. Even regulations 
mandated by Congress could benefit from such an analysis 
outlined in the draft legislation because the devil is always 
in the details, and the challenge is always to do the most for 
the least cost because the investor always pays for regulation 
through either higher prices or diminished choices.
    Another area of potential reform required by Dodd-Frank is 
the SEC's oversight and reliance on SROs, most notably FINRA 
and the possible delegation of investment adviser oversight to 
an SRO. The committee, in fact, held a hearing a couple of days 
ago regarding this issue. Although the subject of an SRO for 
advisers is not necessarily the subject of this hearing, in my 
written submission, I raised concerns regarding expanding 
FINRA's empire without a fundamental re-evaluation of its 
statutory functions and organization. The subject of SEC 
funding often comes up in the context of discussing management 
failures at the SEC. It is far from a problem that is easily 
addressed by money or by creating new offices, as Dodd-Frank 
has done.
    Madoff and Stanford did not result from parsimonious 
funding. Self-funding is certainly not a solution for these 
problems either. If the current leadership cannot handle 
leasing, as the chairman asserted in a hearing a couple of 
months ago, how in the world can it handle self-funding? There 
are many intelligent, competent, dedicated, hardworking people 
at the SEC. It is the management system and how it determined 
priorities over the past decade or more that has let them down. 
The system essentially is unchanged today. I salute this 
committee for taking on this issue and continuing a public 
discussion. In the past decade, the Securities and Exchange 
Commission's budget has increased threefold and the fundamental 
problems remain. Everyone in the current economic environment 
has to do more with less. And before the SEC gets any more 
money, I think it needs to show that it has garnered 
efficiencies and can use its billion-plus dollars well. So for 
the sake of investors who have lost billions in fraudulent 
schemes that should have been discovered earlier, it is high 
time that these organizational issues be addressed.
    So thank you again for the invitation to come here today 
and testify. Thank you very much.
    [The prepared statement of Mr. Atkins can be found on page 
68 of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Crimmins?

 STATEMENT OF STEPHEN J. CRIMMINS, PARTNER, K&L GATES LLP, AND 
      FORMER DEPUTY CHIEF LITIGATION COUNSEL, DIVISION OF 
 ENFORCEMENT, UNITED STATES SECURITIES AND EXCHANGE COMMISSION

    Mr. Crimmins. Thank you, Mr. Chairman. By last summer, most 
of the criticisms that are now being thrown by many at the SEC 
were already out on the table. All of this was long before we 
had heard of Bernie Madoff, before we had heard of Robert Allen 
Stanford, before we had heard of employees viewing Internet 
porn on company time, or the SEC lacking the same quality 
bookkeeping systems as the private sector. But Mr. Chairman, 
last summer we also heard that every year, through thick and 
thin, the SEC manages to file almost 700 complex securities 
cases against almost 2,000 defendants. How the SEC, with just 
3,700 employees, reviews tens of thousands of disclosure 
documents each year while riding herd over 11,000 investment 
advisers, 5,000 broker-dealers, 7,500 mutual funds, a large 
collection of transfer agents, securities exchanges, rating 
agencies, clearing agencies, SROs and a market trading 8.5 
billion shares a day.
    So having already heard most of the same criticisms we are 
hearing today, but facing the worst financial crisis in 80 
years, what did Congress decide to do? Congress last summer 
enacted legislation to double the SEC's budget in specified 
steps over 5 years. Now as you have noted, Mr. Chairman, and as 
Mr. Himes mentioned this morning, since 1996, the SEC has 
always been run entirely on noncontroversial Wall Street user 
fees, never spending a dime of taxpayer money. So the double 
budget would not have any deficit impact. After running the SEC 
on a shoestring, even with increases in recent years, still a 
shoestring for what they have to ride herd over, Congress 
wisely realized that to get out of the worst downturn since the 
1930s, to promote growth, to create jobs, we need a securities 
market overseer that has the resources to make a difference.
    Mr. Chairman, 12 months later, we still know pretty much 
what we knew last summer. But instead of actually moving 
forward getting that doubled SEC budget in place, we are 
hearing from consultants, albeit sophisticated talented 
consultants, about things like optimization initiatives, time-
phased multiyear implementations, cross-workstream integration 
points. And we are forgetting, Mr. Chairman, that a wall-to-
wall restructuring like this will effectively paralyze the SEC 
for a year, 2 years or longer. Endless meetings to plan and 
replan new reporting chains, job descriptions, reallocations of 
power and authority among SEC offices, staff members obsessing 
over resumes, and how to handle internal job interviews.
    Mr. Chairman, I suggest that you got it right when you said 
earlier this morning, ``heal thyself.'' Heal thyself, realize 
what you have to do, and do it. And Mr. Chairman, I would say, 
having heard Mary Schapiro this morning and others that we have 
heard in recent months, they get it. They get what has to be 
changed. And Mr. Chairman, you referred to some of the changes 
that Chairman Schapiro has effected. They get it. I say, Mr. 
Chairman, let's let them concentrate on their core missions and 
we know what those are: capital formation; market surveillance; 
and fraud detection. This is the worst of all possible times to 
do this kind of comprehensive reorganization.
    At the same time, we can't freeze things in time. And 
Chairman Schapiro this morning talked about her concerns that 
the Modernization Act, while very well-intentioned and focused, 
might have that effect, that it might freeze the org chart and 
would take an act of Congress to change things. Mr. Chairman 
you commented that certainly you are looking for flexibility 
and this is a discussion draft and this is something that you 
want to consider further, as does the committee. You and Mr. 
Frank have both commented this morning about the need for 
flexibility, and we all appreciate that.
    Another point, Mr. Chairman, in last week's Joint Session, 
the President urged us all to, as he put it, cut away the red 
tape. Cut away the red tape that prevents startup companies, 
those people in garages and warehouses and so forth, companies 
just in the starting phase from raising capital. We all want 
the SEC to write those rules, providing cheap and efficient 
procedures for America's small businesses to raise capital, to 
give us the growth we need and to give us the jobs we need. But 
procedures that still ensure that investors, obviously, get the 
information that they need on their own to make informed 
investment decisions.
    But Mr. Chairman, I have a concern. My concern is that we 
can forget about this kind of rulemaking to streamline capital 
formation or anything else if we keep handing rulemaking 
opponents of all the ideological persuasions more and more 
tools to block anything that the SEC tries to do. Now Mr. 
Garrett's bill is, again, very well-intentioned and very 
thoughtful. But as a proposal, the Regulatory Accountability 
Act would have an unintended consequence. It would let 
opponents file lawsuits to block any new rule by arguing that 
the SEC had failed to appropriately consider a whole laundry 
list of--and this is the key point, Mr. Chairman--vague factors 
that any plaintiff's lawyer can easily exploit. Things like, is 
it good for society? Sure, we want it to be good for society. 
Sure, we want a cost-benefit analysis. That is a given. 
Absolutely right. But do we want to give that to the 
plaintiff's bar as a tool? Regardless of what their particular 
persuasion is on a particular issue, do we want to give them 
that as a tool to just tie stuff up, and prevent these rules 
getting through that we actually do need?
    Mr. Chairman, I think what hasn't been mentioned is that if 
you look at any SEC rulemaking, the release, the second half of 
it, dozens of pages are all about cost-benefit. They have the 
Regulatory Flexibility Act, the Paperwork Reduction Act, a 
whole bunch of stuff which holds their feet to the fire and 
makes them do this kind of stuff. That Court of Appeals case we 
talked about this morning is unfortunate. Maybe the economic 
analysis should have been better, as the judges said. But the 
point is, the execution. It is not pile on more requirements. 
Cost-benefit is clearly a requirement. It is clearly something 
they do. If they need to do it better to execute better in 
particular instances, absolutely right.
    Mr. Chairman, a back-to-basics focus on the SEC's core 
missions of capital formation, market surveillance, and anti-
fraud enforcement is what these difficult times demand, not 
micromanaging the SEC, not paralyzing it by piling on mandated 
multi-year reorganization studies and new requirements and 
procedures. It is time to let the SEC get to work.
    In conclusion, Mr. Chairman, last summer, with all the 
recent criticisms already out on the table, Congress made a 
sound decision to double the SEC's budget. Again, using Wall 
Street user fees that are already available, that Wall Street 
is willing to supply. They are peanuts compared with the user 
fee that I pay to take my family on a relative basis into a 
national park, small user fees. Wall Street is okay with them, 
using those and no tax dollars--no tax dollars, no deficit 
impact to help get us out of this present crisis and do what we 
can to avoid future crises. Mr. Chairman, I would respectfully 
suggest to the committee that it is time to deliver on that 
promise and give the SEC that doubled budget. Thank you very 
much, Mr. Chairman.
    [The prepared statement of Mr. Crimmins can be found on 
page 81 of the appendix.]
    Chairman Bachus. Thank you, Mr. Crimmins.
    Mr. Katz?

   STATEMENT OF JONATHAN G. ``JACK'' KATZ, FORMER SECRETARY, 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION, ON BEHALF OF 
                  THE U.S. CHAMBER OF COMMERCE

    Mr. Katz. Thank you, Mr. Chairman. Good afternoon. Good 
afternoon, Congressman Schweikert. Thank you for giving me the 
opportunity to participate in this hearing. As you may know, I 
spent most of my professional career at the SEC until I retired 
in 2006. I believe very strongly in its mission and I care 
deeply about its future. Since my retirement, I have had an 
association with the Center for Capital Markets Competitiveness 
at the U.S. Chamber of Commerce, and it has provided me with an 
opportunity to continue to express my views and do what I can 
to support the agency.
    I believe that the SEC must change in many ways. And for 
this reason, I consider the BCG report has really been a missed 
opportunity. The analysis and findings in the report are 
conclusions. They lack insight. They lack empirical foundation. 
Simply put, I think the report ends with recommendations that 
should have been the starting point of the report. For example, 
it recommends that the agency should consider reorganization. 
It recommends that the agency should examine its priorities and 
then consider how to realign its staff with these priorities. 
These statements should have been the starting points for the 
study, not its findings. During the past 2 years under Chairman 
Schapiro, the SEC has actually initiated some really 
significant changes in its operation. The report, however, 
fails to assess what has been accomplished, if anything. It 
just restates the changes in a general and uncritical manner. 
It fails to conduct a meaningful assessment. And in doing so, I 
think it has done a disservice to the Commission and to the 
people at the Commission who have spearheaded these changes. If 
these changes have had a positive impact at the SEC, a report 
that documented the benefits of these changes would have been 
really useful in restoring the credibility of the Commission.
    Given the way I feel, I applaud you, Chairman Bachus for 
focusing attention on the need for reorganization in the SEC. 
It really is long overdue. The current structure is antiquated. 
It is cumbersome. It is largely based on a design to regulate 
the U.S. capital markets in the 1970s, not the markets of 
today. In addition to being antiquated, it places an 
unrealistic burden on the Chairman. The CEO of any organization 
should not have 20 direct reports. Reorganization by itself 
isn't going to solve any all of these problems. But an 
intelligent reorganization structured properly can really 
contribute measurably to a stronger agency. So while I support 
the objectives of your proposal, I believe that the focus of 
the legislation should be reoriented.
    I think Congress must be responsible for determining the 
authority and powers of a government agency. It should be 
responsible for monitoring agency performance, for holding the 
agency accountable for its actions. And it is the 
responsibility of the government agency for execution of those 
policies and implementation of its responsibilities. And this 
necessarily should encompass organizational structure and the 
assignment of duties, for the same reason I believe that the 
Dodd-Frank provisions requiring the creation of five new 
offices is a mistake that should be corrected.
    I have a second concern with reorganization through 
legislation. The reality is, no organization with charges are 
ever perfect. Agencies to be effective must change over time. 
If the structure of the SEC can only be changed by an act of 
Congress, we would be exacerbating the problem we already have. 
An agency that is already slow to adopt a change in markets 
would become even slower to change. And I have a similar 
perspective on Congressman Garrett's bill. I support his 
efforts to improve the quality of SEC rulemaking by clearly 
specifying the components of a careful analysis of a rule's 
costs and benefits. But I worry that a pre-adoption cost-
benefit analysis will always be fundamentally limited in what 
it can achieve. It requires the staff to estimate the impact of 
events that have not yet happened.
    A regulator rarely has the capacity to predict with 
certainty how individuals or firms will respond to a new rule. 
If the regulator can't predict the response, it is difficult to 
accurately quantify the cost of compliance or the value of 
benefits. For this reason, I believe in a different approach. I 
would combine the preadoption cost-benefit analysis with a 
post-adoption look-back requirement for the SEC. In my written 
statement, I have a detailed explanation of how I think this 
could be implemented. My written statement also has several 
other suggestions for how Congress could act to facilitate and 
contribute to an SEC turnaround.
    In closing, I just want to briefly mention two of them. The 
first is an amendment to the government in the Sunshine Act 
that would permit two or more Commissioners to meet informally 
with Commission staff to monitor staff activities and 
participate in the early discussions where the action really is 
concerning formulation of Commission rulemaking policy. In 20 
years as Commission Secretary, I had the privilege of working 
for seven Chairmen, four acting Chairmen, and almost 20 
Commissioners. Every one of them, at some point in time, 
expressed deep frustration with how the Sunshine Act was 
preventing them from really doing their job to the best of 
their ability.
    The second recommendation that I want to highlight is the 
need for creation of a special study team to engage in a 
systematic and comprehensive review of the U.S. capital markets 
and our regulatory system. The first special study was 
completed in 1963. In an 18-month span, it produced a 5-volume 
report that really was the basis of the development of our 
current national market system. And that study provided what I 
considered the intellectual touchstone for really the next 20 
years of enlightened, progressive, and dramatically changed SEC 
regulation. I think the time is right now for another special 
study. And thank you for this opportunity to speak today.
    [The prepared statement of Mr. Katz can be found on page 86 
of the appendix.]
    Chairman Bachus. Thank you, Mr. Katz.
    Mr. Pitt?

  STATEMENT OF THE HONORABLE HARVEY L. PITT, CHIEF EXECUTIVE 
 OFFICER, KALORAMA PARTNERS, LLC, AND FORMER CHAIRMAN, UNITED 
           STATES SECURITIES AND EXCHANGE COMMISSION

    Mr. Pitt. Chairman Bachus, thank you for your invitation to 
discuss the legislative proposals that are clearly intended to 
improve and enhance the performance of the Securities and 
Exchange Commission, and the performance needs to be enhanced. 
I commend you and the members of this committee for holding 
this kind of a hearing and for the important consideration this 
committee is giving to ways to improve the SEC's effectiveness. 
To assist the committee, yet stay within the time restraints 
that you have asked us to respect, I would like to briefly 
raise five overarching points for your consideration, and I 
will leave the details in my written statement.
    First, the SEC is vital to the proper functioning of this 
country's economy and capital markets and has been given an 
extraordinary and ever-increasing mandate over the past 77 
years. These days, the agency's mission is often overlooked and 
its successes are often ignored. Instead, the SEC has been 
converted into an institutional pinata, attacked whatever it 
does or what it doesn't do. The SEC has made some significant 
and serious mistakes. But it is taking steps to correct the 
perceived weaknesses. Second, enhancing the Commission's 
effectiveness is a proper and important goal. The agency must 
improve its organizational structure and efficacy, but it 
cannot and should not do so without the constructive assistance 
and oversight of this committee.
    And yet accountability, efficiency, and effectiveness, 
while concepts for which the agency must strive--and I 
encourage those efforts--can also be an effective euphemism for 
creating impediments to the agency's ability to meet these 
goals. Third, sustainable change in agencies as well as in 
individuals can only come about if the agency embraces the need 
for change and the proposed way in which change should be 
effected. This does not give the agency the right to thwart 
Congress' directives. But no amount of legislation can force a 
change in the agency's culture or performance unless the agency 
and its employees embrace both.
    Fourth, without ignoring the instances in which the agency 
failed to meet legitimate expectations, public attacks on the 
agency's bona fides, the potential failure to give it 
appropriate resources and the assumption that the agency can't 
even get wrong right can demoralize those whose participation 
in sustainable change is crucial and ultimately prevent this 
committee from achieving its very laudatory objectives. Fifth, 
the SEC must do better and change. It has too important a role 
to play.
    Principal among the requirements, I think, is for the 
agency to be creative in figuring out how to meet its new 
responsibilities, including those under the Dodd-Frank Act, 
without receiving any additional funding. One such way is 
effectively for the agency to improve its compliance 
examination function, the very function that did not capture 
the Madoff and Stanford Ponzi schemes. It could do this if 
Congress gives it the authority to require every money manager 
to be examined either yearly or, in the case of smaller firms, 
every other year at no cost to the taxpayer by an independent 
expert group that would do an examination pursuant to standards 
the SEC could create. We proposed this policy in February of 
2003 when I was Chairman, and it, I think, will offer some very 
valuable opportunities to get better examinations and perform 
what I would call compliance audits in the same way financial 
audits are performed.
    Of course, we have financial audits and that doesn't 
prevent financial frauds, and compliance audits won't prevent 
compliance frauds. But this will allow the agency, if it gets 
reports on all of these examinations, to focus its attention to 
see new trends as they are arising and effectively be able to 
do the kind of oversight it should do with no burden placed on 
the American taxpayer. That, it seems to me, is the kind of 
creativity that the agency has to now come up with and be in 
the forefront of efforts to achieve.
    I appreciate this opportunity to discuss these important 
issues, and I will try to respond to any questions you have. 
And I also offer, without meaning to sound presumptuous, to 
make myself available if there is any way in which I can assist 
this committee in its very important work. Thank you.
    [The prepared statement of Mr. Pitt can be found on page 
101 of the appendix.]
    Chairman Bachus. Thank you.
    Let me say this to all of the witnesses. We plan to give 
all of you an opportunity to not only give your testimony today 
but to continue to advise us, as we go forward. Professor 
Verret?

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, STANFORD 
UNIVERSITY SCHOOL OF LAW, AND SENIOR SCHOLAR, MERCATUS CENTER, 
                    GEORGE MASON UNIVERSITY

    Mr. Verret. Thank you, Chairman Bachus, and distinguished 
members of the committee. I appreciate the opportunity to 
testify. My testimony today will focus on two important and 
necessary reforms. First, I will argue that clarifying the 
SEC's legislative mandate to conduct economic analysis and a 
commitment of authority to economists on staff at the SEC are 
both vital to ensure that new rules work for investors rather 
than against them. Second, I will urge that the SEC be required 
to consider the impact of new rules, particularly corporate 
governance type rules, on the State-based system of business 
incorporation.
    Every President since Ronald Reagan, including Presidents 
Clinton, Obama, and Bush, have requested that independent 
agencies like the SEC commit to sincere economic cost-benefit 
analysis of new rules. Further, unlike many other independent 
agencies, the SEC is subject to a legislative mandate that it 
consider the effect of most new rules on investor protection, 
efficiency, competition, and capital formation. The latter 
three principles have been interpreted as requiring a sort of 
cost-benefit economic analysis using empirical evidence, 
economic theory, and compliance cost data. These tools help to 
determine the rule's impact on stock prices and stock exchange 
competitiveness and also measure the compliance costs that are 
passed on to investors. Three times, three times in the last 10 
years, private parties have successfully challenged SEC rules 
for failure to meet these requirements, for failure to make the 
grade. Over the three cases, no less than five distinguished 
judges on the D.C. Circuit appointed during Administrations of 
both Republican and Democratic Presidents found the SEC's 
economic analysis severely wanting and insufficient. One 
failure might have been an aberration. Three failures out of 
three total challenges is a dangerous pattern. Many SEC rules 
have treated the economic analysis requirements as a mere 
afterthought. This is in part or a consequence of the low 
priority the Commission places on economic analysis, evidenced 
by the fact that economists have no significant authority in 
their rulemaking process or the enforcement process. And I 
realize that rules have a section called cost-benefit analysis. 
But having it there is no substitute for having quality 
analysis.
    As an example of the level of analysis typically given to 
significant rulemaking, consider the SEC's final release of its 
implementation of a very controversial and often reviewed rule, 
Section 44(b) of the Sarbanes-Oxley Act. The SEC estimated that 
the rule would impose--this is at the time the rule was 
adapted--an annual cost of $91,000 for a publicly traded 
company on average, $91,000 was their best guess. In fact, a 
subsequent SEC study 5 years later found average costs of $2.87 
million per company. That is missing the mark in a big way. 
That error in judgment only applies to estimates of direct 
costs. The SEC gave no consideration to the more important 
category of indirect costs and the much larger category of 
indirect costs, like the impact of the rule on the volume of 
new offerings or IPOs on U.S. exchanges. In Business Roundtable 
v. SEC alone--this is the most recent challenge--the SEC 
estimates it dedicated over $2.5 million in staff hours to a 
rule that was struck down. That represents an estimate of about 
$100 an hour for SEC time. Now for securities lawyers of that 
experience, I think most would agree that $100 an hour is 
probably a very conservative estimate of the hourly opportunity 
costs of their time. But let's assume that estimate, $2.5 
million in staff hours. An honest commitment by the SEC to 
empower economists in the rulemaking process will be a vital 
first step to ensure the mistakes of the proxy access rules are 
not replicated in future rules.
    I also support the goal in H.R. 2308 to further elaborate 
on the economic analysis requirements. I would suggest in light 
of the importance and pervasiveness of the State-based system 
of corporate governance that the bill include a provision 
requiring the SEC consider the impact of new rules on the 
States when rulemaking touches on issues of corporate 
governance. The U.S. Supreme Court has noted that no principle 
of corporate law and practice is more firmly established than a 
State's authority to regulate domestic corporations. Delaware 
is one prominent example, and it is the State of incorporation 
for half of all publicly traded companies. Its code is so 
highly valued among shareholders that the mere fact of Delaware 
incorporation typically earns a publicly traded company a 2 to 
8 percent increase in value. Many other States also compete for 
incorporations, like New York, Massachusetts, California, and 
Texas.
    In order to fully appreciate this fundamental 
characteristic of our financial market system, I would urge 
adding the following language to H.R. 2308, ``The Commission 
shall consider the impact of new rules on the traditional role 
of States in governing the internal affairs of business 
entities and whether it can achieve its stated objective 
without preempting State law.''
    The SEC can comply with this requirement by taking into 
account commentary from State Governors and State Secretaries 
of State during the open comment period. It can minimize the 
preemptive effect of new rules by including references to State 
law where appropriate, similar to one already found in Section 
14(a)(8) promulgated under the Exchange Act. It can also commit 
to a process for seeking guidance on State corporate law issues 
by creating a mandatory State court certification procedure, 
similar to the one that was voluntarily used by the SEC in the 
AFSCME v. AIG case in 2008.
    Now we have heard a number of comments from some members 
about the importance of the financial crisis and the importance 
of tail risk. I would note that regardless of litigating the 
merit of items of the Dodd-Frank Act, a number of items in the 
Act were unrelated to the financial crisis and were unrelated 
to issues of systemic risk, particularly in the securities 
regulation area. The Dodd-Frank Act was a big bus coming 
through Congress and there were a lot of old ideas that had 
been germinating for 10 years, particularly with proxy access, 
that got on the bus.
    Proxy access was essentially a union-driven special 
interest item that managed to get tagged on. I have done some 
independent analysis with an econometrician at the economics 
department. We studied the impacts on a very small subset of 
firms, a few hundred firms, and found that proxy access caused 
actually $500 million in losses for just a few hundred firms, 
as of the event date of August 25th--and I will be happy to 
submit the full study to this committee. So I think this is a 
very important issue to consider, and I appreciate the 
opportunity to testify. I also want to clarify on a personal 
note and correct a very serious error in a prior testimony 
during the DFA hearing on this issue on proxy access, I 
represented to Congressman Frank that I was a Red Sox fan. And 
in the interim, I have been lucky enough to marry a Phillies 
fan. So I want to go on the record as saying I am a Phillies 
fan and correct that prior error in my testimony. Thank you.
    [The prepared statement of Professor Verret can be found on 
page 141 of the appendix.]
    Chairman Bachus. He would say you went over to the dark 
side. Thank you.
    I think most of your testimony was pretty clear, and I 
don't have any questions about what you testified. One thing 
that I do want to ask you--you have not testified about this, 
but I would like an answer to it. The Stanford case, we have 
talked about the SEC and the failures of the SEC in the 
Stanford case. As I understand it, it was a financial product, 
not a security, and that it was actually advertised as a 
foreign-based product. What effect did that have on the SEC? 
Their jurisdiction on it was somewhat clouded, I would think. 
And I am just trying to get a handle on that. Can anybody 
comment on that? I am not sure I articulated that right. But it 
was not a security. It was a financial instrument.
    Mr. Pitt. Yes. Certainly when the SIPC issues came up, the 
claim was that they were banking and financial entities, not 
brokerage firms; and therefore, there was no coverage. But if I 
am not mistaken, the SEC did file a lawsuit in which it alleged 
fraud on the part of an entity it claimed was acting as a 
broker-dealer. And so I think the SEC found jurisdiction. The 
real issue was what happened between the years when this Ponzi 
scheme was going and when it finally came to light and whether 
or not the process used was effective. But I think they came up 
with sufficient authority.
    Chairman Bachus. Right. And I think that they obviously did 
have jurisdiction. But I am saying, did that cloud some of the 
initial investigation or enforcement? If you look at the 
perspective--it has been some time. There was a representation 
that they were buying something foreign.
    Mr. Katz. Mr. Chairman, if I can add something. I have 
always believed that Stanford was actually, in the perspective 
of what happened in the SEC, a far more troubling instance than 
Madoff.
    Chairman Bachus. Okay.
    Mr. Katz. And if I could make a comparison. In Madoff, the 
staff were presented with information and they dropped the 
ball. They didn't see it, and they didn't figure it out. What 
troubles me with Stanford is, if you look at the facts as they 
have been made public, the examination staff in the Fort Worth 
regional office spotted it. They recognized it as a potential 
Ponzi scheme through their examination program, and they tried 
very hard to get the enforcement staff to follow up. And for a 
variety of reasons, the enforcement staff had no interest in 
it. This was not a legal issue. This was not a question of 
authority. This was a question of staff making a bad decision 
when other staff in the Commission were saying, this could be a 
very serious problem.
    Chairman Bachus. Right. In fact, some of that staff was 
then let go who made the recommendation to go forward. So I do 
believe there is something there that--
    Mr. Katz. If I could just tie it into a broader theme. 
Metrics count. Staff do what they are evaluated on. And I have 
written in a law review article a couple of years ago that one 
of the problems of the Enforcement Division was it used the 
most simplistic measure of performance, which is, how many 
cases did you bring? A nickel-and-dime case was one stat. A 
massive investigation was one stat. And that there were offices 
that knew how to game the system, and they realized, we can 
devote four or five people for several years to this really 
complex difficult case and have one case to show for it. Or we 
can bring 5, 10, 15, or 20 smaller cases and sort of really 
knock the ball out of the park when it comes to our evaluation.
    And that was what I think happened in Stanford. They looked 
at this. They saw, this is a huge complicated case. We are a 
small office. If we try to take this case on, we are just not 
going to bring as many cases. And to me, that is the management 
problem at the SEC that Stanford illuminates.
    Chairman Bachus. Right.
    Mr. Atkins. Just to chime in there too. I am not up to date 
on the Stanford case. It is obviously being litigated and 
everything else. So I wouldn't want to really weigh in on that. 
But I do agree with what Jack Katz was just saying, that the 
real problem which the BCG report didn't really address, the 
elephant in the room is, how does one gauge whether an 
enforcement attorney or the enforcement program or what have 
you, is successful, and what does success mean? How do you 
measure what the SEC does? When you look at the simple number 
of cases brought, that is not really a fair gauge. For all the 
reasons Jack said, it is easy to goose the numbers every year. 
There are cases called the 12(j) cases where the SEC brings 
accounts as a statistic, and that is simply where a company 
should no longer be listed. It is forcibly delisted.
    Every year, that is 100 or more cases that sort of add to 
the--it is a good way to make the numbers look better. So I 
think that is one real challenge with respect to how to run at 
least the enforcement program and to a lesser extent the 
examination program.
    Mr. Crimmins. Mr. Chairman, if I could weigh in also. I 
think you were exactly right in terms of overlapping 
jurisdiction. If you have a Stanford where maybe the securities 
jurisdiction, if you posture it the right way. But there were 
also the banking agencies and various other financial services 
agencies. Things can drop between the cracks. One agency can 
figure, well the other one--it is passing muster over the other 
agency. I think you hit the nail on the head, Mr. Chairman. 
When you have overlapping jurisdiction, there can be those 
issues. But also, the other short point I would make is the 
competing priorities. We had Madoff hit and Stanford hit. In 
the midst of other stuff, we had the Enron WorldCom crises; we 
had the market timing and late trading in mutual funds is a big 
deal; we had option back dating sweeping corporate America; we 
had all these things where they had to pile on all the troops, 
keep up with the New York attorney general, keep up with FINRA. 
And when somebody walks through the door, as diligent and 
hardworking and sincere as Mr. Markopolos absolutely is, and he 
walks in the door and says, hey, I have a hot one for you, it 
is the former Chairman of FINRA, the guy who also was the vice 
chairman of the industry, securities industry association, and 
he is a fraud.
    And meanwhile, that particular office of the SEC is in the 
midst of running to catch up with other regulators and to keep 
up with other regulators on late trading and market timing, it 
is a question, to wrap it up, Mr. Chairman, about competing 
priorities in an agency run literally on a shoestring, with 
half the budget it should have, especially post-1996 when we 
took it off the taxpayers' backs and made it Wall Street user-
fee-funded. It needs double the budget. It needs to deal with 
those competing priorities. That is how it will deal with the 
Madoff situations. That is how it will deal with the Stanford 
situations going forward. Thank you.
    Chairman Bachus. One thing--and I am going to give all 
questioners 10 minutes. Several of you had referred to them 
focusing on what their job is. One of my concerns has been that 
they and really all the Federal agencies have been papered and 
run to death. They are spending tremendous amounts of resources 
just reporting to Congress, which is a legitimate function of 
the Congress. But in the draft that I proposed, it would allow 
the Chairman--several of you indicated she ought to be free to 
do her job or his job, whomever it may be--and we reduce, I 
think, from 24 to 14 the number of people who report to her. 
But I think it is a problem. And you do see that the CEO or the 
Chairman ought to focus on fewer things and more important 
things and the vision.
    Let me ask each of you this: Does anyone disagree that 
because of the added jurisdiction, there is a need for more 
money? There is expanded jurisdiction. Would we all agree there 
is an expanded jurisdiction for--
    However it comes, through an appropriation or through user 
fees, can a reform happen without money, without additional 
funds? I would ask that. And I am saying that a condition to 
additional funds ought to be a reform, but just give me a 
comment there.
    Mr. Atkins. I do think that reform can happen without 
additional funds because it depends on what--we are talking 
about here managerial reforms, we are talking about how do you 
manage an agency to try to incentivize people to do the best.
    I remember sitting in a senior staff meeting one year where 
certain senior staffers from certain divisions asserted that 
everyone in their division ought to get a merit bonus, 
regardless of who they were, but it had to be equal throughout. 
An interesting concept that I don't think is duplicated in the 
private sector. So that is just one indication of how 
managerial attitudes probably need to change, and again things 
like that were not--
    Chairman Bachus. And I am sure the employees union and some 
of those present some challenges having to do with it.
    Mr. Atkins. Perhaps. But this was coming from senior staff 
people who were saying that in their division, they thought 
that it would be untenable to differentiate between people. 
Some other divisions disagreed, of course, but some were taking 
that tack.
    Chairman Bachus. Sure. And I disagree, too, with that 
thought, that they ought to all get a merit bonus.
    Mr. Verret. I would just express agreement with that, and 
also add that reform can also save money. And with respect to 
the debate over funding, I would just note also that the 
taxpayer, though taxpayers don't fund the SEC through taxes, 
they are the residual beneficiary of the user fees. So to that 
extent it certainly--it is a relevant discussion. And there is 
some debate over funding the SEC and how much and such, but 
part of the discussion ought to be the fact that the taxpayer 
is a residual beneficiary, and so the debt and deficit 
discussion does play in, at least tangentially, to that 
discussion.
    Chairman Bachus. Right. And obviously if they don't have 
the resource, there is often a cost from not doing something, 
which is--
    Mr. Pitt. Part of the difficulty, I think, is there is no 
agency that has ever been created that won't tell you that they 
could use more money.
    Chairman Bachus. Right.
    Mr. Pitt. They all want it. So one of the issues is, how do 
you manage what you have? I think, first, the SEC's increase in 
responsibilities has been so large that there is a huge gap; 
but, second, I think that there are ways in which the agency 
can save money, such as the one I mentioned on the examination 
process, that would actually do better for America's investors 
than what the SEC is able to do. And somebody has to be 
thinking creatively to try to come up with those ways. I think 
both things have to be done in order to make sure that the 
resources the agency does have are used appropriately.
    We are at $1.1 or $1.2 billion. When I took over, our 
budget was about $300 million, and it was a lot of money, 
although we needed more, of course.
    Mr. Katz. Excuse me, Mr. Chairman, if I can echo and expand 
on what Harvey just said. I was at the Commission for a long 
time, through the fat times and the lean times, and I remember 
after Boesky in 1986, the budget of the agency doubled. And 
then there was a period in the early 1990s, after the passage 
of the Remedies Act, where the Commission got a huge increase 
in its funding. Harvey mentioned when he was there, and there 
was also a similar increase.
    Economists have a phrase, they refer to something as being 
necessary but not sufficient. My problem with increased funding 
is I absolutely believe it is necessary, and I absolutely 
believe it is not sufficient. What I saw happen when the agency 
got these huge budget increases was it enabled them to avoid 
taking a hard look at what it was doing well, and what it was 
doing poorly. So that when the Enforcement Division got a 
massive increase in staff and everybody said, good, now they 
will have the resources to do more complex, difficult cases, 
and they will do them faster, sadly that is not what happened. 
More staff just meant they brought more cases, not necessarily 
better cases.
    Additional funding is absolutely essential, but it is 
absolutely essential that it be coupled with substantive 
internal change in what the agency does and how it does it 
creatively. Harvey's idea is just one of a number of examples 
of ways the agency could be imaginative in its use of 
resources.
    Chairman Bachus. Right. In fact, I will say this, and I 
think it is very important, I think that is an important point; 
that increased funding can actually mask the need for reform or 
retard reform. Sometimes you confront and decide what is the 
most important and prioritize. That is true not only of a 
government agency or a corporation, but also of a family.
    Mr. Pitt. I would say, Mr. Chairman, that is an area where 
I think the Commission would benefit from outside help. When we 
would look at the budget, the first thing that a Chairman is 
told is, that is sacred, we can't touch that. And if you start 
to ask questions about why it is sacred and why it can't be 
used, you don't always get great answers. I think that it is 
important to have somebody outside the agency look at how the 
agency can use its resources more efficiently, not change the 
resources, but use them more efficiently and determine whether 
or not subsequent increases are going to be necessary.
    Chairman Bachus. Thank you. Of course, you know that 
Congressman Frank indicated earlier in this hearing that he 
realizes that there needs to be some rollback on some of the 
charges or the responsibilities that have been assigned to the 
Commission by Dodd-Frank. He has acknowledged that could be 
reviewed.
    Mr. Crimmins. Mr. Chairman, if I could just add, it is 
certainly something to consider the new jurisdiction, the 
expanded jurisdiction, the new duties and burdens put on the 
SEC by Dodd-Frank, as you have indicated and as Mr. Frank has 
indicated. But I would also respectfully ask the committee to 
consider how the old stuff that the SEC has to deal with has 
radically changed in the last 10 years. And what I am talking 
about, Mr. Chairman, is high-speed computerized trading. We 
just didn't have that 10 or 20 years ago where computers, 
without consulting a human being, can put in huge orders, 
change them, test price, change--they get so far ahead of the 
average retail investor that it is a totally different market.
    That has to be--that costs a lot of money to get the 
sophistication and the people you need on top of it, to get the 
technology on top of it, so you can see the markets in real 
time; and not only that, volume is soaring through the roof 
where it is 8.5 billion shares daily, hugely bigger markets 
than we ever had before.
    And then lastly, Mr. Chairman, the complex new products 
that we have before--we talked about derivatives earlier today, 
all kinds of complex new products, complicated stuff that 
sometimes the people who create them don't even understand 
them. That is the old stuff and how it has radically changed.
    So, again, Mr. Chairman, thank you for being open to those 
additional resources that this Commission really needs.
    Chairman Bachus. Thank you. You are obviously right. We 
were dealing with products that it was hard for people who were 
trading them or constructing them to explain what they were.
    Mr. Frank, you have 20 minutes of questioning.
    Mr. Frank. Do I have to use it?
    Chairman Bachus. As much as you want.
    Mr. Frank. Thank you.
    Chairman Bachus. And then the two, Mr. Schweikert and Mr. 
Manzullo.
    Mr. Frank. Maybe I will take 6 or 7 minutes. I thank the 
witnesses for staying with us. I think this has been a very 
useful hearing. I am trying to go back and--Mr. Pitt, was it 
your statement? I am trying to find it again. One of the--I 
apologize, I read this, maybe it was Mr. Atkins had some 
concerns about FINRA. Was that Mr. Pitt or Mr. Atkins?
    Mr. Atkins. That was me.
    Mr. Frank. I am interested in your concerns about FINRA, 
and also obviously one of the key questions for us is what is 
the appropriate devolution and interrelationship between the 
public agency and self-regulatory agencies? There are great 
advantages to self-regulatory agencies, but there are some 
problems and limitations. Would you expand a little bit on your 
problems with FINRA and how you think we should be generally 
moving the structure of these relationships?
    Mr. Atkins. Yes, sir. Thank you. Yes, I put that in. I 
wasn't, obviously, at the last hearing, but we need to look now 
at, I think, how self-regulatory agencies operate in the 
current climate. You have SROs, historically were the NASD and 
then also the various markets. Now the markets are for-profit 
agencies, for-profit companies, and so I think a lot needs to 
be done to step back and really look at whether a for-profit 
company should still be categorized as an SRO with all the 
paraphernalia that goes with that as far as rule approvals and 
that sort of thing, especially when you compare to the CFTC and 
how on that side rules are approved or not.
    With respect to FINRA, it is now basically a monolithic, 
monopolistic regulator of broker-dealers. Everyone has to be a 
member of FINRA. In the old days, you could be an SEC-only 
registered broker. So, the world has really changed, and my 
point is, before you designate an SRO, like FINRA, it could 
still be an SRO, then, you need to take a step back and look at 
it.
    Mr. Frank. I appreciate that. Let's look at--would it be 
that you would find some of these, if they were for-profit, 
inherently inappropriate to be given these responsibilities, or 
would you write a code of conduct that was binding from the SEC 
that protected the rights? I mean, you have the State actor 
issue there. Which general direction would you go in?
    Mr. Atkins. For the most part, the for-profit agencies have 
bifurcated their enforcement arms, and a lot has gone over to 
FINRA. They still retain oversight over their market itself, 
but they still are subject to SRO-type of regulation with 
respect to rules and that sort of thing.
    Mr. Frank. Would you tighten them? Should we get more 
explicit when you talk about--
    Mr. Atkins. You could actually do the opposite of 
tightening them. You could still have the SEC oversee it, and 
then ultimately wield the regulatory hammer if things are 
noncompetitive or something like that, but you could take it--
to make things more streamlined, you could take a page from the 
futures industry. But with respect to the State action of 
FINRA, the closer that it gets to being the only--
    Mr. Frank. How close is it now, would you say?
    Mr. Atkins. If you look at the Quattrone case, I think that 
is an indication of where things could go.
    Mr. Frank. Do you think--I am trying to get your opinion, 
not your commentary on others.
    Mr. Atkins. Right. I won't say that it is a State actor. I 
think there have been some really good points that have been 
written, some articles, and I would be happy to forward them to 
you, but I think it is very dangerously close to becoming a 
State actor, and so that is why I think that--
    Mr. Frank. But not yet? I mean--
    Mr. Atkins. It probably depends on the case. It depends on 
how FINRA acts within, like Quattrone.
    Mr. Frank. Oh, okay, but then the answer is they are to 
some extent, they are a State actor, if--given that, they are a 
State actor. They may not act like one in a particular case, 
but given what you say, they should be treated as a State 
actor.
    Mr. Atkins. With the proper challenge, I think they could 
be found that.
    Mr. Frank. Mr. Atkins, you are surprisingly tentative for 
someone who is no longer in the job. Should we treat them as--
should they be treated as a State actor or not in their current 
form?
    Mr. Atkins. If they remain a monopolistic type of 
regulator--
    Mr. Frank. As of today.
    Mr. Atkins. I am sorry?
    Mr. Frank. If they are not--if a year from now, they look 
the same way they look today, should they be a State actor?
    Mr. Atkins. Again, I will just say, given the right case--I 
don't want to say yes or no.
    Mr. Frank. Obviously, you don't. I don't know why, though.
    Mr. Atkins. Sorry.
    Mr. Frank. Let me ask Mr. Verret, on the question of 
preemption, you say the Garrett bill should be changed to say 
the Commission shall consider the impact of new rules on the 
traditional role of States in governing the internal affairs of 
business entities and whether it could achieve its stated 
objective without preempting State law. But of course, the 
Garrett bill is not confined in its subject matter, only the 
matters of governance. Should we not, then, put that in there 
for all matters of preemption, or would you--should we worry 
about preemption only of State governance laws and not of other 
State laws preempting other things? Why not just say, ``shall 
consider the impact of new rules on States and whether it 
continues its stated objective without preempting State law?''
    Mr. Verret. I would answer with a very simple distinction 
that there are some types of preemption that are beneficial and 
some that are not. I think there was some bipartisan support, 
for example, for the National Securities Markets Improvement 
Act in 1996 because that tied--
    Mr. Frank. But you are cutting to a substantive--
    Mr. Verret. --to official. And I think just to answer your 
question about the reason why I focus on corporate governance 
is because that type of preemption deals with the type of 
regulation in which States internalize the cost of their--
    Mr. Frank. Mr. Verret, that is not what I asked you, and I 
understand. I am not asking you for the substantive view. 
People have different views, although I must say, I tell you, 
with a lot of my colleagues, a lot of us, people invoke States' 
rights versus national, preemption versus not. And my sense is 
that for many people, the decision on at what level of 
government a policy should be set depends on where they think 
they are likeliest to get the outcome they want, which by the 
way is perfectly reasonable. I don't think there is any kind of 
fundamental moral principle here. People should just 
acknowledge that. So I understand there will be differences.
    But you haven't answered the question I asked you. You have 
told me why you want to talk about governance, but would you 
object to broadening that, or would you have us consider the 
impact on preemption only of governance, or would you have a 
more general requirement in the list of things to be considered 
the impact on the State law?
    Mr. Verret. To the extent you want to generalize it, what I 
would--
    Mr. Frank. No, I don't--excuse me, I don't want to 
generalize it.
    Mr. Verret. I would object to generalization on the 
following grounds.
    Mr. Frank. At least two of you are an unusually deferential 
panel. It is okay to tell us what you think. I am asking you 
what you think. This is your language, you want to do it for 
State governance. Would you cover--would you have that cover 
preemption in general, not for or against it, and because this 
doesn't say for or against it, although it does have somewhat 
of a nonpreemption leveraging. It says, can you do it without 
State law? But would you agree that this should be a general 
position with regard to preemption?
    Mr. Verret. I would not agree on the grounds that I think 
that in some instances, some States internalize the cost of 
regulation better than others. For example, in the creation of 
business entities like in Massachusetts, the creation of 
investment trusts, I think that the State does a good job of 
internalizing the costs and benefits. If it becomes suddenly a 
bad signal to be a Massachusetts investment trust, I think that 
your Secretary of State will internalize that, your legislature 
will internalize that, and that is why--
    Mr. Frank. But that is not a matter of corporate 
governance.
    Mr. Verret. --corporate governance specifically. The 
governance of investment institutions is certainly--
    Mr. Frank. You would cover only corporate governance?
    Mr. Verret. I would cover the creation of business entities 
and their internal affairs, which would also apply to 
Massachusetts investment trusts--
    Mr. Frank. I'm sorry, but I--
    Mr. Verret. --as well as corporate--
    Mr. Frank. I am less parochial than you might think, but I 
still don't understand the answer. Would you think that is 
covered by corporate governance or would you expand it to cover 
that?
    Mr. Verret. I think it would be--the focus on business 
entities I would define very broadly.
    Mr. Frank. So you think that what you just said would be 
covered by your own language here?
    Mr. Verret. Yes, I think so, yes.
    Mr. Frank. All right. But you wouldn't broaden it beyond 
that? I guess I am somewhat troubled, not troubled, but I am 
concerned, that in other words, you force some preemptions and 
not others, so you--it is okay--
    Mr. Verret. --when it is efficient and not others along the 
line--
    Mr. Frank. I understand that.
    Mr. Verret. --cost-benefit analysis.
    Mr. Frank. And I can understand coming down in the end on 
that, but I don't understand saying that you should only 
consider it in some cases and not others.
    Mr. Verret. Because in some cases--
    Mr. Frank. I think you are putting--
    Mr. Verret. --it is sufficient and in some cases it is not.
    Mr. Frank. Excuse me. You are writing the conclusion into 
the procedure, and I am always troubled by that.
    Mr. Verret. I am just trying to write the conclusion based 
on sufficient economic analysis, and there is sufficient 
economic literature on the nature of corporate federalism and 
States.
    Mr. Frank. And there is no other preemption, you don't 
think there is any significant, any economic analysis anywhere 
else?
    Mr. Verret. That is a broad statement, ``no other,'' but I 
think that--
    Mr. Frank. That is what your language says.
    Mr. Verret. I would not--I would broaden it, keeping in 
mind that some types of preemption are beneficial and some 
types--
    Mr. Frank. I understand. But again you are merging--and I 
think people too often do this--the procedural and the 
substantive. I can understand people say, yes, this preemption 
is good and that one isn't, and there is no principle that says 
that is necessarily bad, but I am just surprised that--I am not 
surprised, but I think saying we will only look at preemption 
in those cases where I think preemption is going to be bad, and 
not look at it elsewhere, writes people's policy conclusions 
into procedures, which is not a good idea in the--
    Mr. Verret. I would start here, and if you have other ideas 
about--
    Mr. Frank. No, I don't have any ideas.
    Mr. Verret. I would be glad to discuss this with you as 
well.
    Mr. Frank. I thought that is what we were doing, Mr. 
Verret.
    Mr. Verret. So what other--
    Mr. Frank. My point is, my substantive point you resist, 
you are writing a procedure which embodies your policy 
preferences, and I think that is a bad idea in the law. I think 
if there is going to be a procedure, it should be policy 
neutral and should apply to the whole topic. That is what we 
prefer.
    Mr. Verret. My own policy preference is efficiency.
    Mr. Frank. That is all, Mr. Chairman.
    Mr. Schweikert. [presiding]. Thank you, Ranking Member 
Frank. It is always exciting when you come visit.
    Mr. Frank. You have to get a life, David.
    Mr. Schweikert. I hear that a lot. Actually--and this is 
something I just wanted to share quickly--on occasion, when you 
look out and you see not a lot of bodies in the room, 
understand there are a lot of eyeballs watching us, as you walk 
through some of the different rooms, we are up on the 
television cameras in lots of different places.
    I wanted to do a huge sort of back step and help me do 
something sort of conceptually, and I will start with the 
professor. Professor, if you were starting with a clean slate 
from a regulatory standpoint, and not just the SEC, but some of 
the other agencies that also dip their toe into this world, 
considering that the chairman is starting to put together a 
package that would have I think $100 million for additional 
technology, and living in the age of the Internet, if we were 
starting from scratch, what would a regulatory environment look 
like?
    Mr. Verret. I would start with the principle that 
government actors as well as individual actors are at their 
best when they compete; that when we compete for resources, 
that when we compete for people to join our group, whatever 
that might be, we are at our best. And so, I would look to the 
principles of regulatory competition. I would look to reform of 
SROs, reform of the SEC, potential creation of SROs, with all 
of that in mind. And I think that I am in agreement with former 
Commissioner Atkins on that issue, and I think that to the 
extent we consider creation of new SROs, we should consider 
making them, making membership voluntary and giving more 
deference to voluntary membership organizations rather than 
mandatory organizations, for instance exemptive relief based 
on--I know you asked me to start from a clean slate, but it is 
hard to think of that sort of state of nature.
    Mr. Schweikert. Part of the nature of the question is as we 
are moving, and the actual, Chairman Schapiro, as they start to 
move much more of their platform to Web-based access of 
information and those things, I am just trying to get my head 
around what would truly be the optimal, if we had started from 
scratch, and could we possibly move that direction.
    Mr. Verret. I hope so. That is a very broad question.
    Mr. Schweikert. Okay. And maybe it is just too far 
theoretical. Chairman Pitt, am I living in fantasy land? Which 
I get told often, as we just had mentioned.
    Mr. Pitt. No, I think it is an appropriate question. I am 
not sure whether you are asking just about the jurisdiction of, 
say, the SEC and self-regulatory bodies or all of financial 
regulation.
    Mr. Schweikert. I would actually go from almost all types 
of financial regulation.
    Mr. Pitt. Yes. I think we have a terrible system of 
regulation, and I think we missed an opportunity to create a 
better structure. The current structure is based on what you 
were born as or called at birth. It doesn't depend on what it 
is you, in fact, do. So we had banks that were doing securities 
work, but they are regulated as banks. We had securities firms 
that were doing banking, we had mutual funds that were doing 
all of that, and depending on what they were born as, that is 
how they got regulated. That is, in my view, not the kind of 
system that we ought to have.
    We should have a central regulatory system for financial 
services, and the only things that I would exempt out of that 
are: first, monetary policy; and second, systemic risk. Those 
two issues I would give to the Fed, but I would divorce the Fed 
from all of its banking regulation and put that in a central 
repository of all financial regulation. Then you can have 
functional regulation as well as prudential regulation. I don't 
think we will ever get there, but I think it would be great to 
imagine that, and it would be great to try and achieve it.
    Mr. Schweikert. Mr. Katz?
    Mr. Katz. Congressman, actually, unlike my brethren on this 
panel who have to work for a living, I am retired, so I 
actually have the freedom to think about some of these issues. 
And in the last 5 years--I actually do a fair amount of work 
for the World Bank and the IMF as a so-called technical 
adviser, which means I am working with people who are starting 
from a clean slate in many respects.
    Just two or three points that I think go toward this 
direction. The first one is what Harvey just mentioned about 
the regulatory philosophy. There is prudential regulation and 
there is business conduct regulation sales practices. The SEC 
has historically been pretty good at business conduct sales 
practices. As a prudential regulator doing examinations, it has 
never had the resources and it has never really done it very 
well. I think working on a clean slate--maybe the time is now 
to look at what is referred to internationally as the ``twin 
peaks'' model, separating out these two functions, point number 
one.
    Point number two, and I know this has been said, but it 
just has to be emphasized. We are the only country in the 
world, I think, that has a separate futures regulator and 
securities regulator, and I believe firmly that it is an 
enormous impediment to our capital market development and 
competition. It is a huge problem to the industry, not just the 
regulators.
    Another principle along the same lines is the heart, the 
core, of SEC regulation is corporate disclosure. It is founded 
on the basis of concept of materiality. And our system now has 
just become so bogged down in trivia, and it is still a paper-
based system 25 years after the development of EDGAR. We need 
to fundamentally change our disclosure system, get away from 
something built upon pieces of paper put in the mail every 90 
days, and get away from prescriptive trivial requirements for 
all companies and get back to the original concept of, tell us 
what is material about your company for your shareholders.
    Mr. Schweikert. I appreciate it. You have actually hit on 
two of my favorite fixations.
    Mr. Crimmins. Thank you, Mr. Chairman, and Congressman. Ten 
years ago, around the year 2000, the British decided that they 
were going to have a comprehensive regulator called the FSA. It 
was going to cover banking, securities, insurance, everything. 
Ten years down the road, how are they doing? They are breaking 
it up. It was a big organization. There may have been 
management problems--I am not familiar enough with it--in 
creating something that big and that comprehensive. There were 
obviously political issues, obviously the financial crisis. Can 
we create something that gigantic and make it actually work 
where we have that experiment of failure? Who knows, but--I am 
sorry?
    Mr. Schweikert. Mr. Crimmins, I want to sort of redefine 
the question. It was less about creating a superregulator.
    Mr. Crimmins. Right.
    Mr. Schweikert. It was, what would accomplish the goal of 
maximum of capital formation and velocity of wealth distributed 
throughout the country and keep those investors safe, and just 
conceptually what would that be?
    Mr. Crimmins. Right. No, I think that is true. If we could 
ever create a comprehensive regulator and make it work, or even 
focusing it on securities or what we can in the turf world that 
Congressman Frank referred to earlier, whatever we can do, even 
if it is just securities, I think we can make changes. And I 
think the risk is to try to do it all at once and just create a 
new agency from scratch. I don't think that is viable.
    But that said, I think we can morph the existing 
organizations in positive ways that effectively would achieve 
that over time. And what I am talking about are core focuses on 
core missions, capital formation first and foremost. As Mr. 
Katz said a moment ago, when you look at the reporting 
requirements, some of them are excellent, and some of them are 
just a waste. As far as capital formation, the procedures could 
be simplified and streamlined, without question. Capital 
formation, get it right, get it simple, get it protecting 
investors so there is full disclosure, but make it so that 
small businesses can raise capital. Capital formation, market 
surveillance with all this crazy stuff going on, this huge 
shoot-up in volume, computerized trading complex products, we 
have to be able to look at it in real time.
    Congressman, last year when we had the flash crash, they 
tried to deconstruct a few hours; and working on their old 
computers and old software, it took them 3 months just to 
decode what actually had happened in 3 hours. There are 
packages, software packages that Wall Street uses, that are 
able to tell them in real time what is going on. We need to get 
those to the SEC, and we need to enhance them and then link 
them, link them with other regulators, with the SROs, with the 
exchanges, so that in a market regulation, market surveillance 
issue, we see what is happening in real time in the markets. If 
there is a manipulation going on, stop it now before the 
traders get fleeced. And likewise when we do our rulemaking in 
the market, trading in markets area, we see what is actually 
happening in the markets, and our rules respond to that and not 
to what we imagine theoretically might be happening. So, 
efficient capital formation, real-time market surveillance, 
computer-based, technology-based real-time surveillance, and 
then lastly, Mr. Chairman, the enforcement tools, enforcement, 
beefing up enforcement with tools they need, tools to deal with 
the cross-border world we live in now where frauds are often 
perpetrated against Americans by entities offshore.
    The surveillance tools that they need and the enforcement 
tools they need and streamlining of their investigative and 
litigation processes, part of which have been done recently, 
nationwide service of trial subpoenas and Dodd-Frank, little 
technical things like that which sound picky and arcane but are 
really, really important to make the program run well and run 
efficiently. So, again, core missions, focus on what makes 
sense, I think go through the organization, but morphing over 
time with buy-in from all constituencies, I think we could 
really get there.
    Mr. Schweikert. Thanks, Mr. Crimmins.
    Mr. Atkins. Could I add just a couple of points?
    Mr. Schweikert. Mr. Atkins, you are going to be next. And 
then, we are going to bounce back, because I want to do a 
little more follow-up on the capital formation, and then there 
is only one other question. Mr. Atkins?
    Mr. Atkins. I think one thing we can't forget is that Dodd-
Frank has really changed a lot of the situation. I think it is 
a calamity, frankly, for the marketplace. The costs, the 
uncertainty that is weighing down on the economy, with 
regulators struggling to implement it in these unrealistic time 
limits that the statute sets vague directions to them; the huge 
missed opportunity, like Chairman Pitt was saying, to actually 
reorganize our broken financial services regulatory structure, 
and the SEC/CFTC thing is just one aspect of that.
    The constitution of this Financial Stability Oversight 
Council we are ascribing to bureaucrats sitting around a table 
that they can somehow peer into the future and predict the 
bubbles and prick them before they happen, because ultimately 
it is always one person's bubble is another person's 
livelihood. And that was the problem with the housing crisis 
and everything else that went on in the build-up there in the 
2000s. We have SROs who no longer really are self-regulatory 
organizations. They have lost the ``S'', they are now really 
regulatory organizations. So that has changed things 
significantly.
    And to the point of trying to beef up the SEC so that it 
somehow will be able to monitor things closely and in real 
time, I think maybe that is a good aspiration in the future, 
but we have to realize, is that the best thing for the 
government to replicate things that are already in the 
marketplace? The SEC has subpoena power, it has ability to--and 
it should be working very closely with market participants to 
get this information should the government have that 
separately. And other ways, on national security issues and 
things like that, we don't do everything always in the 
government realm. There is a lot of working together with 
people in the private sector as well, to make sure that things 
are kept up-to-date and, most importantly, that the expertise, 
which is always hard to get and very costly, that the 
government can tap into that when it needs it.
    Mr. Schweikert. Mr. Atkins, starting with your side, sort 
of bouncing back to something you actually touched on in your, 
I think, opening statement, and I would like to run this 
through the whole panel. If you were to call out one or two 
functions or actual activities the regulator engages in that 
slows down, is a barrier to smaller organizations gaining 
capital, gaining economic growth, producing jobs which we are 
all fixated on here, what is that activity and, as a 
policymaker, how would you change it?
    Mr. Atkins. I think the major one, frankly, is the threat 
of litigation. Now, we all know that it is important to have 
people out there, and the private securities litigation aspect 
in the United States is important because the government can't 
be everywhere, and you have to rely to a certain extent on 
people out there to police the markets. But on the other hand, 
in the United States, I think it is hard to find anybody who 
would say that we don't have a surfeit of these sorts of 
deleterious actions that, just through the threat, inhibits 
capital formation in the marketplace. So that, and then plus 
the red tape that is added through unnecessary filings and 
having to hire lawyers and other things, the costs in the 
marketplace, because of the threat of private litigation has 
increased for all sorts of market participants.
    Mr. Schweikert. Thank you, Mr. Atkins. Mr. Crimmins?
    Mr. Crimmins. Congressman, as the President said in the 
joint session last week, we have to cut the red tape, enable 
small businesses to raise capital and promote growth and create 
jobs, the problem is, Congressman, that we are putting Band-
Aids on a system that was created in the 1930s for capital 
raising. We have a 1933 Act providing for the registration of 
securities and marketing of securities that is a typewriter-
era, telegraph-and-telephone type of world that has been 
created.
    We have exemptions from registration, obviously, and we can 
talk about those and rulemaking that the SEC could do, but I 
think you hit on it a little earlier when you said we are in an 
Internet world. We are in a really different world right now 
where we communicate differently, and there are ways to check 
on things and check on the validity of things that didn't exist 
before.
    I would suggest that we at least consider, and I don't 
presume to be an expert on this, but those who are, at least 
consider whether we could create in the whole capital formation 
area an entirely electronic platform where people, small 
businesses could access it cheaply with some advisers, but 
nowhere near the crazy costs that they have now to raise 
capital. An electronic platform where the information could be 
available to everybody, it could be widely disseminated, but 
also where there could be electronic verification where outside 
professionals, whether it is financial or lawyers or 
accountants or whatever, could likewise contribute 
electronically to the filing, so you would have that immediate 
verification of kind of real-time electronic reporting. Just an 
entirely different way of thinking of things.
    I think rather than putting Band-Aids on our 1933 system, 
which we have right now--and that is what we are doing, we are 
putting Band-Aids on a 1933 system. It is like repairing a 1933 
car. I would suggest it is a very, very different era that we 
live in now, the electronic world; that those who are experts 
in this area tell us how we can create an electronic platform 
that will be safe and secure for investors but that will also 
let the small businesses, the little start-up companies, raise 
capital cheaply.
    Mr. Schweikert. Thank you, Mr. Crimmins. Mr. Katz?
    Mr. Katz. I have a slightly contrarian perspective on this. 
Again, over my years at the Commission, the Commission has 
tried on numerous occasions to create sort of so-called small 
markets, and they have never really worked that well. At some 
point, I sort of came to the sad conclusion that an IPO was not 
always the best way for a small company to raise the cash that 
it needs. And right now, given the problems in the banking 
industry, people are saying, maybe the IPO is the answer. And I 
keep thinking at various times, there have been these concepts 
of promoting venture capitalists, promoting business 
development companies, and I would suggest to you that--
    Mr. Schweikert. To that point, would that be raising the 
number of shareholders you can have before you have to--
    Mr. Katz. That becomes a piece of it. My problem with the 
500 shareholder rule, frankly, is I hate on-off switch 
regulation, and I keep looking for gradations so that it 
doesn't become such a dramatic shift from one to the other. And 
if there was some way to develop some sort of model where you 
had business development companies or some variation of that 
playing like lead shareholder or lead investor roles, with some 
potential for other investors to participate, that was an 
interim step before you become a fully listed company. 
Intellectually, it seems to me, something in the middle like 
that may be an interesting avenue.
    Mr. Schweikert. Okay, thank you. Mr. Pitt?
    Mr. Pitt. Yes, I think we have a couple of problems. The 
first is, as has been mentioned, we are dealing with an 
antiquated set of foundational statutes, and most of the 
innovations over time--and it is not just for the SEC, it is in 
the banking area as well--have been by jury-rigging existing 
statutes to sort of get around some of the restraints.
    There is not enough attention paid to the fact that 
government is a service business, and when people have new 
ideas and they want to get to market and they have ideas, if 
they run into the kinds of bureaucracy and red tape that they 
do, they can't get their ideas to market.
    So when I was in private practice, I saw people's money dry 
up when the staff couldn't get to those issues because they had 
other issues, and they didn't know how to juggle their efforts. 
And so one problem is clearly the fact that the statutes are 
antiquated.
    Second, we have a system that is predicated now on reverse 
logic. If you look at what the most sophisticated investors 
want when they choose to invest their capital, they want 
current and future information. They are smart enough to know 
that if you give them projections and so on, they are going to 
have to discount some of that, but what they want is what is 
available now and what you are anticipating a year from now and 
back it up. What we give the public is retrospective 
information. So all the public gets is what has already 
happened. There is this huge disconnect.
    And I think the issues that arose with Facebook and Goldman 
Sachs point out exactly why our system is so bad. You had a 
company that was extremely valuable, and it thought it could 
raise $50 billion, an unheard of amount for an IPO, without 
going through the SEC process, all because that process takes 
forever, it induces litigation, as Commissioner Atkins said, it 
requires red tape to get through the SEC and get your documents 
out, and it gives investors the most meaningless of disclosure; 
namely, what happened last year instead of what is happening 
today and tomorrow.
    Mr. Schweikert. That is actually helpful conceptually. And 
because I am out of time, the Chair is going to yield himself 
another, what do you think, 6 hours? Professor?
    Mr. Verret. Yes, I think on this point, I am largely in 
agreement with the rest of the panel, and I think--
    Mr. Schweikert. Forgive me, Professor, did you say 
``unfortunately'' or ``fortunately?''
    Mr. Verret. Fortunately, yes. I am in agreement with the 
panel I think on this, and I am particularly excited about the 
prospect of some of the bills that have been introduced on 
crowdfunding and reform of Reg A. And I would pay attention to, 
I think, what has been an unfortunate eventuality in most of 
the exemptions or reform of rules at the Commission, which is 
that an exemption is established and either at the beginning or 
as it is interpreted, it is eroded away. Either at the very 
beginning, an exemption is created, but to make use of the 
exemption you have to, for instance, in a number of regs, you 
have to issue reports that are maybe not audited but still have 
the same substance as the 10-Q or 10-K.
    In other words, I think we create exemptions sometimes in 
securities laws that aren't really exemptions at all. And also 
in part, I think this issue goes to erosion of the exemption 
through litigation by the agency, and I think part of that goes 
to the heart of the lawyer dominance of the agency. Lawyers 
have a vital role to play at the SEC, and lawyers are always 
going to be maybe at the head of the table, but I think 
economists should be part of the conversation.
    Mr. Schweikert. Professor, you had to break my heart there, 
didn't you?
    Mr. Verret. Yes, right. But I think economists need to be 
part of the conversation, and I think we can learn a lot from 
the FTC in this. The FTC has a very analogous, in many way 
analogous mission: protect consumers versus investor 
protection. Different types of law that are enforced by those 
agencies, but in many ways analogous. We look at the FTC: 1,000 
employees, almost 100 of whom are economists. At the SEC: 3,700 
employees, about 30 of them, counting very liberally, are 
economists, right? Ten percent at the FTC versus about 1 
percent at the SEC. I think that is a big--that is indicative 
of a problem.
    Mr. Schweikert. Gentlemen, why don't we call it quits. I 
want to thank you for spending this time with us. You actually 
all are grazing an issue that I think is going to be really 
important, because it is one of those few occasions where I 
think both on the right and the left we have a common agreement 
that is emerging, whether it be the Reg A, whether it be some 
of the discussions about the cloud funding. And with the use of 
the Internet, does that create better public exposure, faster 
timing, a more current look, and is that sort of a more 
honorable future for the regulatory body but also much more 
cost-effective? And our great hopes as we start to move into 
some of these more current discussions of capital formation, 
does that also provide us an opportunity to go to the next 
generation of regulatory?
    So if any of you ever come across articles or something you 
think we should read, please, send it to us. It is time we get 
our heads around this.
    The Chair notes that some Members may have additional 
questions for these witnesses that they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit questions to these witnesse 
and to place their responses in the record.
    With that, the hearing is adjourned.
    [Whereupon, at 3:10 p.m., the hearing was adjourned.]






                            A P P E N D I X



                           September 15, 2011





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